Five Things to Watch in 2021

Anyone who experienced 2020 should know better than to make predictions. But in think tanks as elsewhere, looking ahead is unavoidable. The CSIS Economics Program is pondering possible developments over the next year in the policy areas we cover, as a new administration takes office in Washington and—if all goes well—the world starts to tame the Covid-19 pandemic. Here, then, are five things we will be watching in 2021:

Global recovery and debt overhang: The Biden-Harris transition team lists Covid-19 and economic recovery among its top four priorities, alongside racial equity and climate change. While effective Covid-19 vaccine distribution and administration can set the stage for a strong and sustained economic recovery, the pandemic and its economic fallout have exposed preexisting economic vulnerabilities and created new ones that will have to be addressed by the incoming administration. High—in some cases unsustainable—debt burdens in a number of low- and middle-income countries are among such vulnerabilities.

To date, official efforts to assist low-income countries include a G20 Debt Service Suspension Initiative (DSSI) to temporarily suspend debt service on official bilateral debt and agreement among G20 countries—including non-traditional creditors like China, India and Russia—on a “Common Framework for Debt Treatments beyond the DSSI.” Both represent positive, incremental steps to update the international financial architecture and help countries deal with the economic fallout from the pandemic but are too limited in coverage and depth to adequately support the global recovery.

Efforts to mobilize additional resources will need to address the debt overhang in some countries, prioritize spending on global health and other public goods, and support efforts to address long-standing structural issues—for example, domestic resource mobilization and transparency—that are essential to sustainability over the medium term. It’s a tall order. Given China’s role as a large creditor to many of the most vulnerable countries, dealing with the debt overhang may be one of the first tests of the new administration when it comes to choosing between cooperation, competition, or confrontation with China. (SS)

U.S. approach to China: The incoming Biden team clearly shares the Trump administration’s view that China is a strategic rival of the United States and a generational challenge for U.S. policymakers. The question is how the new administration will balance its impulses to confront, compete, and cooperate with Beijing.

President-elect Biden has made a few things clear about how he intends to manage the China challenge. He will put the priority on rebuilding at home and making the United States more resilient and competitive. He will work with allies and partners to confront Beijing where it undermines democratic, diplomatic, or economic norms of behavior. Biden will no doubt maintain a tough stance on technological and financial ties with China but is likely to eschew broad decoupling and use more of a rifle-shot approach rather than a blunderbuss to protect critical U.S. technologies.

On trade, Biden says he will maintain President Trump’s tariffs on China and the “phase one” trade deal for now. Beyond that, the picture is less clear. How aggressively will the new administration pursue market opening and structural reform in China, given the intractability of those issues and Biden’s commitment to put more focus on U.S. workers than corporate interests? And will the new administration make an exception to its general aversion to trade negotiations and signal an intention to return to the Trans-Pacific Partnership (TPP), a powerful tool in crafting U.S.-preferred rules and enlisting Asian allies in a concerted response to China?

Another dilemma for the Biden team will be how and when to reestablish channels of bilateral dialogue with China, which have withered during the Trump era. This is necessary both to enable tough conversations about Beijing’s bad behavior and to elicit Chinese cooperation on health security, climate change, and other global challenges. However, the new administration will not want to be seen as too eager to talk to Beijing. (MPG)

Climate policy: Not surprisingly, economists have long framed climate change as an economic and financial stability issue, but that perspective historically has had limited appeal among U.S. policymakers. That looks to change under the Biden-Harris administration. Climate change will be a top priority, and it’s clear that climate considerations will be prioritized across a range of initiatives, including support for green infrastructure and clean energy research in an economic stimulus package.

International engagements under the Biden administration will also prioritize climate. In addition to rejoining the Paris Agreement “on day one,” the president-elect’s transition team also announced its commitment “to lead an effort to get every major country to ramp up the ambition of their domestic climate targets.” While it can be a long way from ambition to action, the administration is likely to find partners—especially in Europe—that are keen to work with the United States on climate. Italy, which assumed the G20 presidency on December 1, has made the “planet” one of three pillars of its G20 agenda. Similarly, the United Kingdom is expected to make “green recovery” a priority during its G7 presidency in 2021. (Both countries will also serve as co-hosts of the 26th Conference of the Parties of the United Nations Framework Convention on Climate Change, or COP26.)

Biden’s personnel picks also appear to support dealing with climate change as an economic and financial issue. In 1998, congressional testimony from Janet Yellen, then head of the Council of Economic Advisers and Biden’s pick for treasury secretary, framed international agreement to reduce greenhouse gas emissions in economic terms. More recently, she co-chaired the Group of Thirty’s Working Group on Climate Change and Finance, whose October 2020 report calls for immediate action on “public policies . . . to shape the incentives for the transition to net zero,” starting with the phase out of fossil fuel subsidies and “meaningful carbon prices as a cornerstone of any effective policy package.” Similarly, Biden’s pick to head the National Economic Council (NEC), Brian Deese, led the sustainable investing team at BlackRock after serving as President Obama’s senior adviser for climate and energy policy. Given the close balance of power in Congress, the new administration may have to rely on executive orders and regulation, including of the financial sector, rather than major climate legislation to move the needle on climate policy. (SS)

Biden process and personnel: As important as its policy choices, the way an administration organizes itself and the people it puts in key roles can determine its effectiveness. Three broad questions interest us in this regard as the Biden administration gets underway.

First, how well will the White House integrate domestic and international policy, something the Biden team has made clear they see as essential? By appointing former national security adviser Susan Rice head of the Domestic Policy Council, the president-elect sent a powerful signal of his seriousness in this regard. The question is how the formidable group of relevant White House officials will work together: Rice, national security adviser Jake Sullivan, NEC director Deese, and chair of the Council of Economic Advisers Cecilia Rouse. With the right chemistry, this powerful team could ensure that domestic rebuilding and international engagement reinforce each other. But there is certainly a risk that the arrangement could get bogged down in turf battles and clashes of egos.

A related question is how economics will be integrated into national security work at the White House. The Trump administration—mistakenly, in this author’s view—moved the office of international economic policy from the National Security Council to the NEC. “Intecon,” as the office is known inside the White House, covers a wide swath of issues—including trade, development, health, and energy—that are at the heart of today’s leading global challenges. Sullivan will need his own expert advice on these issues and an ability to direct the use of tools of economic statecraft in carrying out the president’s national security strategy.

A third important personnel question is who will fill senior roles as “economic deputies” in key agencies. This is the group of officials at deputy- and under-secretary level who implement an administration’s economic policy. Wally Adeyemo will be a steady hand as deputy secretary at Janet Yellen’s Treasury Department. Other key posts include under secretary for international affairs at Treasury, under secretary for economics at the State Department, and deputy U.S. trade representative. How these people work together on issues from China economic strategy to U.S. engagement in multilateral institutions such as the World Trade Organization (WTO) and G20 will shape the success of the Biden administration’s international economic policy. (MPG)

China’s Belt and Road: renegotiation and digitalization: The “Great Renegotiation” is underway along China’s Belt and Road Initiative (BRI), Chinese leader Xi Jinping’s signature foreign policy vision. Flying the BRI banner, China went boldly into risky markets that are now struggling to repay their debts. Chinese officials are trying to salvage projects, mostly by deferring payments. Standing in the way of effective relief is the BRI’s lack of transparency and its fragmented approach. Recipient countries are dealing not with a unitary China, but a set of competing actors—China Development Bank, the Export-Import Bank of China, Chinese state-owned enterprises, and others—each with their own interests and policies. Unless transparency or coordination improves, expect more renegotiations in the year ahead.

This cycle of renegotiations presents several risks. Because China is the world’s largest official bilateral creditor, its failure to provide sufficient relief makes an emerging market crisis more likely. Every renegotiation also provides opportunities for China to pursue additional objectives. The risk to worry about is not necessarily asset seizures, which are publicly visible and would confirm the worst fears about the BRI, but rather concessions for which there is no smoking gun. China could pressure borrowers to provide preferred access to natural resources, award future contracts, or support Beijing’s diplomatic positions, for example. Breaking the cycle will require recipient countries to have these discussions in multilateral fora rather than bilaterally behind closed doors. China’s participation in the G20’s Common Framework is a potentially positive, but still unproven, step.

While the BRI writ large has been slowing, a trend that predates the pandemic, its digital dimension is accelerating. The pandemic has only underscored the grave costs of being on the losing side of the digital divide. Chinese tech companies see an opportunity to meet this demand in developing and emerging markets, particularly as many of those companies face greater scrutiny in advanced economies. On the ground, China’s “digital silk road” will continue to take shape in the form of wired and wireless networks, surveillance equipment and other “safe city” systems in foreign capitals, data centers and cloud service agreements, subsea cables on the ocean floor, the financial sector, and even satellite constellations in space. These efforts dovetail with Xi’s call for building “new infrastructure” at home and will require more attention from U.S. policymakers. (JEH)

Matthew P. Goodman is senior vice president for economics and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Stephanie Segal is senior fellow with the CSIS Economics Program. Jonathan E. Hillman is senior fellow with the CSIS Economics Program and director of the Reconnecting Asia Project.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2020 by the Center for Strategic and International Studies. All rights reserved.

Jonathan E. Hillman