Toward a Smarter Economic Statecraft
October 29, 2020
In an Election 2020 graphic comparing Donald Trump and Joe Biden’s policy positions, the Washington Post grouped China tariffs, the U.S.-Mexico-Canada Agreement, and other trade issues with domestic economic concerns such as minimum wages and independence of the Federal Reserve. My first reaction was that trade should have been in its own category, or at least listed under “Foreign Policy,” since opening markets and negotiating the rules of global commerce are surely tools of U.S. influence in the world. But on reflection, I realized that the Post had made a reasonable choice; after all, trade policy both affects and is affected by the success of the U.S. economy.
For most of the postwar period, international economic policy experts like me didn’t pay much attention to the domestic underpinnings or consequences of trade. The U.S. economy was by far the largest and most sophisticated in the world, and other countries’ desire to access our huge market gave us enormous leverage in trade negotiations. As for trade’s impact on the domestic economy, it was widely agreed in Washington that the benefits of international commerce for U.S. consumers far outweighed the transitional costs to some workers; that technology was a more disruptive economic force than trade; and that dislocated Americans would either find new work or be compensated by government assistance programs.
The rise of China has challenged the first part of that “old think”; the United States now faces a competitor with a huge market and growing technological capabilities. Meanwhile, academic research and the rise of populism have made clear that we underestimated both the economic and political impact at home of globalization.
All of this has caused some overdue rethinking of the relationship between domestic and international economic policy. For those of us focused primarily on advancing U.S. interests globally, we can no longer assume an unrivaled economic position for the United States, nor can we give short shrift to the economic consequences at home of U.S. policies abroad. We need to do a better job of integrating and balancing the international and domestic strands of economic policy.
This is why the CSIS Trade Commission on Affirming American Leadership—an effort aimed at strengthening the U.S. position in the world—started with two domestic priorities: preparing the U.S. workforce for the economy of 2030 and sharpening America’s innovative edge. The Commission’s recommendations on the first topic include doing more to support dislocated workers, encouraging lifelong learning, and sustaining immigration. On innovation, the Commission calls for more federal spending on research and development, protecting critical technologies, and stepping up our game in setting rules and standards for the digital economy.
Investments like these in domestic competitiveness and resilience are the starting point for what I call “smart economic statecraft.” What is this and why does it matter? Economic statecraft is the use of both offensive and defensive policy tools—from trade negotiations to technology controls—to advance a country’s commercial and strategic interests. The United States needs to be smarter about how it does this work today than it did 20 or 30 years ago, both because new challengers—China, Russia, and others—are playing more aggressively in this area, and because we are more constrained at home by politics, limited budgets, and overstretched government capacity.
Economic statecraft is smart when it is balanced along three dimensions. The first is between domestic and international policies, as discussed above. The United States clearly needs to invest more in economic strength at home. But this can’t come at the expense of engaging abroad; we need to do both. In their campaign rhetoric, both presidential candidates suggest a zero-sum choice. President Trump’s fervor for “America first” policies is well known and unlikely to diminish in a second term. Former vice president Biden’s economic plan calls for trillions of dollars of domestic investments but says little about international policies; in fact, his campaign has made clear that a Biden administration will have no interest in pursuing early trade agreements.
Domestic rebuilding in the wake of Covid-19 is the right priority. But turning away from the international economy is not sustainable and will not advance U.S. commercial or strategic interests. As is frequently pointed out, 95 percent of the world’s consumers live outside the United States, and we need a trade policy that both helps U.S. exporters sell to them and brings cheaper imported products and a healthy dose of competition into the U.S. market. Moreover, other countries, from Europe to China, are moving ahead to set the rules and standards of the global economy; will the United States really be better off as a rule taker in critical areas like digital trade? Finally, strategic interests compel us to work with allies and partners on mutually beneficial economic initiatives like regional trade agreements—as a President Biden will discover on his first trip to the Asia-Pacific region in the fall of 2021.
A second dimension of balance in smart economic statecraft is between defensive and offensive efforts. Economic statecraft is often defined to encompass only coercive policy tools designed to deter bad behavior, such as sanctions, or protective measures like investment screening and export controls. In recent years, U.S. international economic policy has been dominated by these defensive measures. In a world full of risks and threats, these tools are without a doubt essential. But again, there needs to be balance. No toolkit contains only hammers; it also needs chisels and sandpaper. Washington should be spending as much time opening markets and setting new rules and standards in the global economy—and inducing others to follow us—as fending off threats.
Third, smart economic statecraft is mindful of the balance between costs and benefits. No international endeavor worth pursuing comes without a price, but there needs to be thoughtful weighing of costs and benefits to a broad range of U.S. interests before a controversial policy is launched. In recent years, use of international sanctions has soared, with little apparent consideration of their costs to U.S. commercial, financial, and diplomatic interests, or of their effectiveness in shaping bad actors’ behavior. The Trump administration’s use of broad-based tariffs against China has arguably done little to change Beijing’s objectionable policies but has raised prices for U.S. consumers, denied markets to U.S. agriculture exporters, and done damage to the rules-based international system.
In addition to being balanced, smart economic statecraft needs to be leveraged. That is, it needs to take limited U.S. government resources and deploy them in ways that extract maximal gains for U.S. interests. Washington will never be able to match the financial firepower of Beijing’s massive infrastructure plan, the Belt and Road Initiative, for example. But working with the United States brings a number of benefits for countries receiving investment: a commitment to rule of law and transparency in contracting; to social, environment, and financial sustainability of projects; to local developmental impact. The United States also has trillions of dollars of pension and insurance funds looking for attractive, long-term investments. Deployed well, these assets can win the United States contracts and influence.
Leverage has another meaning in economic statecraft: Washington’s ability to work with allies and partners, and through international institutions it helped create, to multiply its influence in global economic affairs. The International Monetary Fund (IMF), for example, leverages every dollar committed to provide multiples of that amount in support to countries in need. Combating Chinese intellectual-property theft or setting new global rules on digital trade is likely to be far more effective if the United States works with allies and partners than if Washington goes at it alone.
After World War II, when there were no real challengers to U.S. economic preeminence, Washington delivered the Marshall Plan and institutions of global governance like the IMF and World Bank. That was a golden era of U.S. economic statecraft. Today, like an aging pitcher who has lost some speed on his fastball and faces more powerful hitters, Washington has to play smarter, using a broader arsenal of pitches and putting more spin on the ball. I will have more to say on smart economic statecraft—including on how to organize the U.S. government effectively in this area—in future writings.
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 in Washington, D.C.
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).
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