The world is changing: 3 economic trends to watch in 2023
In 2022, we saw the latest evidence that large, authoritarian countries are fracturing the global balance of power. This brave new world requires U.S. legislators to integrate more geopolitics into international and financial economic policymaking.
Lawmakers and regulators must ensure that cryptocurrency and digital assets do not weaken the West and strengthen authoritarian regimes. But other policy areas require trade officials to actively map out how to pursue national security and domestic policy goals in the least trade-restrictive ways.
The merits of an open, competitive marketplace are inescapable. Walking this tightrope won’t be easy. Yet the balancing act is exactly what is needed to propel U.S. and global economic growth and innovation and strengthen America’s foothold as a global superpower.
Here are three big things U.S. policymakers need to watch:
First, national security will be a dominant theme in economic policy. The war on terror seems to be in the review mirror, and great power rivalries with China, Russia and Iran are taking center stage. Policymakers will need to discern legitimate national security concerns from rank protectionism. A Chinese company that reports to the Chinese Communist Party building a U.S. 5G network is a legitimate security concern. Domestic milk producers’ calls for putting import taxes back on infant formula (while there is still a shortage) is simple protectionism.
If Congress and the White House are unwilling or unable to make the distinction, the U.S. economy will suffer for it. Our trading partners (allies and rivals alike) will see a green light for their own worst instincts and domestic cronyism. We saw beggar-thy-neighbor protectionism spread several years ago, to the detriment of economic opportunities in the United States and around the world.
For instance, consider the protectionist rules in the Inflation Reduction Act (IRA) on consumer tax credits for electric vehicles. To be eligible for a tax credit, various critical minerals must be sourced from the United States, North America or a free-trade agreement partner. Battery components will eventually have to be sourced only from North America.
Given the president’s recent comments about “glitches” in the IRA that need to be worked out, it appears either that protectionism was not on the administration’s radar or that it looked the other way. Either is concerning. And it happened in the face of evidence of the economic harm that recent protectionist policies have caused, and evidence of the costly unintended consequences of local content requirements.
Second, be more concerned with growing the pie and less concerned about how to slice it. Growth and innovation in a relatively open international marketplace have delivered meaningful gains in buying power for all American households over the years.
We pay for things with money, but we pay for money with our time. When we compare ourselves to our parents’ or grandparents’ generations (and not to our next-door neighbor), we can see vast improvements in our wellbeing. It cost $239.95 in 1966, or about two working weeks, to buy a dishwasher. Today, a standard dishwasher costs about two working days of income. Economic growth, marketplace competition and innovation, fueled by free trade, have enabled these improvements.
Third, cryptocurrency and shadow banking can undermine the strength of the U.S. dollar. There is an economic freedom aspect to acknowledge here, not least that people living under repressive governments might benefit from blockchain assets beyond the reach of a secret police. But there is also a trade-off to be aware of for Western governments.
As with trade, national security ramifications may be in play. The regimes in Russia and China would love a robust and stable cryptocurrency independent from Western central banks. Russia has already been able to avoid some sanctions by using cryptocurrencies and digital assets. Beijing, if it invades Taiwan and gets hit by similar sanctions, would also be able to do so. Money beyond the West’s reach makes it easier for weapons to get into our enemies’ hands, hackers or ransomware to take down our companies and governments, and for Russian President Vladimir Putin’s regime to keep up atrocities against the Ukrainians. Make no mistake, we’ll need to find answers as cryptocurrencies upend the status quo.
Economic policy is increasingly geoeconomics. It will be messy and complicated. Calls for special treatment will grow. But the simple rules still apply: Protect the freedoms we hold dear and strive for national security and domestic policy goals in the least trade-restrictive ways.
Christine McDaniel is a senior research fellow with the Mercatus Center at George Mason University.
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