Kim Ruhl urges a strategic rethink of free trade

Kim Ruhl, a former member of the Council of Economic Advisers and an economics professor at the University of Wisconsin-Madison, has argued that free-trade policy should be reassessed as governments put greater weight on supply-chain security and geopolitical risk. In an essay for the IMF’s Finance & Development, Ruhl says the central economic trade-off is now between efficiency and resilience.

Ruhl writes that the global economy is reconsidering how economic interdependence affects international relations. Greater cross-border integration can lower costs and expand markets, but it can also create dependencies that hostile states may use for political or strategic leverage, according to her argument.

Her case for resilience focuses on access to essential goods during crises. Ruhl says a country must be able to secure the inputs needed for a long conflict, maintain supplies of medicines, semiconductors, critical minerals and other vital goods, and expand production quickly during emergencies such as the COVID-19 pandemic.

Ruhl links that shift to current US policy. She says President Donald Trump’s administration is seeking to reduce supply-chain risk and increase domestic capacity in selected industries as part of a broader effort to strengthen economic resilience. In her view, that marks a move away from the broad openness that shaped earlier trade policy.

The economic cost is part of the point. Ruhl says some resilience measures will reduce efficiency compared with a model that does not account for geopolitical danger. She characterizes those costs as the price of resilience, while arguing that economic models can help officials limit waste and prevent ordinary protectionism from being justified as national security policy.

Policy tools beyond tariffs

Ruhl’s essay also broadens the set of instruments that economists and policymakers should examine. She identifies tariffs and sanctions as well-studied tools, while pointing to price floors, stockpiles, export restrictions and investment agreements as other instruments that can shape strategic economic outcomes.

Those tools work through different channels. Tariffs raise the cost of imported goods. Sanctions restrict access to markets, finance or technology. Stockpiles can provide a buffer when supply is interrupted. Export controls limit the flow of sensitive goods abroad. Investment agreements can influence where capital, capacity and technology are placed. Ruhl’s argument is that these measures should be assessed not only for their market effects, but also for their strategic consequences.

She also says policies usually treated as domestic, including tax policy, industrial policy and regulatory infrastructure, can function as instruments of economic statecraft. In that framing, a subsidy, rule or tax provision may affect national capacity, dependence on foreign suppliers or leverage over other governments.

Ruhl warns that state direction, subsidies, financial repression, protectionism and regulatory arbitrage are political forces rather than economic fundamentals. She says they are especially risky when used by large adversarial countries, and argues that economic analysis should account more directly for such pressures.

For policymakers, Ruhl sets out a series of practical questions: whether a policy creates leverage or vulnerability for the United States, which goods should be controlled on national-security grounds, which inputs must be sourced domestically and which can come from allies, and how a domestic industry can be restarted at the lowest feasible cost.

Her broader conclusion is that economists already have many of the tools needed to assess these choices. The task, she argues, is to make the trade-offs between economic efficiency and strategic objectives clearer for decision-makers.

This story draws on original reporting from Econbrowser.