In 2022, we have seen the latest evidence of major autocracies disrupting the global balance of power. This brave new world requires US policymakers to integrate geopolitics into international economic and financial policy.
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 plan to implement national security and domestic policy goals in the least trade-restrictive ways.
The benefits of an open and competitive market are inescapable. It will not be easy to pass this rope. However, the balancing act is exactly what is needed to drive US and global economic growth and innovation and strengthen America’s position as a global superpower.
Here are three big things US policymakers need to watch:
First, national security will be the main theme of economic policy. The war on terror appears to be in the rearview mirror and the great power rivalry with China, Russia and Iran taking center stage. Policymakers must distinguish legitimate national security concerns from rank protectionism. A Chinese company that reports to the Chinese Communist Party building the US 5G network is a legitimate security concern. Calls by domestic milk producers to roll back import taxes on baby formula (while shortages still exist) are plain protectionism.
If Congress and the White House are unwilling or unable to tell the difference, the US economy will suffer. Our business partners (both allies and rivals) will see the green light for their worst instincts and domestic nepotism. We saw beggar-neighbor protectionism rampant a few years ago, to the detriment of economic opportunity in the United States and around the world.
Consider, for example, the protectionist rules in the Inflationary Reduction Act (IRA) on consumer tax credits for electric vehicles. To receive the tax credit, various essential minerals must be sourced from the United States, North America, or a free trade agreement partner. Battery parts must ultimately be sourced exclusively from North America.
Given the president’s recent comments about the “flaws” in the IRA that need to be fixed, it seems that either protectionism was not on the administration’s radar, or it seemed otherwise. or concerned. And it comes alongside evidence of the economic damage caused by recent protectionist policies and evidence of the costly unintended consequences of local content demand.
Second, worry more about growing the pie and less about cutting it. Growth and innovation in a relatively open international market have made significant gains over the years in the purchasing power of all American households.
We pay for things with money, but we give money with our time. When we compare ourselves to the generations of our parents or grandparents (rather than our next-door neighbor), we can see improvements in our well-being. In 1966, it cost $239.95, or about two business weeks, to buy a dishwasher. Today, a typical washing machine earns about two business days. Economic growth, market competition, and innovation driven by free trade have made these improvements possible.
Third, cryptocurrency and shadow banking can undermine the strength of the US dollar. There is an aspect of economic freedom to be recognized here, not least because people living in repressive governments can benefit from blockchain assets beyond the reach of the secret police. But there is also a trade-off for Western governments.
As with business, national security implications may be at play. Regimes in Russia and China would like a strong and stable cryptocurrency independent of Western central banks. Russia has already managed to evade some sanctions by using cryptocurrencies and digital assets. Beijing could do the same if it attacked Taiwan and faced similar sanctions. Money not made available by the West makes it easier for weapons to get into the hands of our enemies, hackers or ransomware to take down our companies and governments, and for the regime of Russian President Vladimir Putin to continue brutalizing Ukrainians. Make no mistake, we need to find answers because cryptocurrencies are upending the status quo.
Economic policy is increasingly geo-economic. It will be messy and complicated. Calls for special treatment will increase. But the simple rules still apply: protect the freedoms we hold dear and pursue national security and domestic policy goals in the least restrictive ways of doing business.
Christine McDaniel is a senior research fellow at the Mercatus Center at George Mason University.