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It’s Economic Strategy, Stupid

The Case for a Department of Economic Growth and Security

America’s international economic policy is in crisis. For decades, policymakers believed that liberalizing international trade would be a rising tide that lifted all boats. While some might lose out from competition with foreign trade in the short run, the economy would grow in ways that would allow those people to adapt and adjust, ultimately finding new and better employment. Policymakers also believed that by liberalizing international economics, autocracies around the world would become more democratic and more sensitive to human rights.

In recent years, both of these theories have proven wrong. Economists have the data to show that liberalizing trade has significant geographic consequences—and that the areas and people hit hardest never bounced back. The project of spreading democracy through economic integration also failed, nowhere more spectacularly than China, which has thrived in the global economy while retaining an illiberal government and rejecting market principles.

These beliefs, and the problems they created when they proved incorrect, are tightly intertwined. Such failures are at the core of problems as diverse as the ongoing economic dislocation in the American heartland and the diplomatic dustup over the arrest of the CFO of Huawei, the Chinese telecommunications giant. Yet, bizarrely, the U.S. government has no single institution—no office, department, or agency—charged with designing a strategy to respond to the sprawling effects of trade liberalization. And even if it had a strategy, there is no single office, department, or agency that could execute it. We think this is a colossal mistake. International economic issues are at the center of domestic inequality, foreign policy, and global power shifts. It is time for Congress to create a Department of Economic Growth and Security—a new federal department that will have the power to develop and execute a strategy for addressing these crucial economic issues.

The Failed Promises of Liberalization

Over the last generation, the cornerstone of international economic policy has been trade liberalization. At its core, trade liberalization involves a simple exchange. The United States obtains access to foreign markets for U.S. businesses. In exchange, the United States opens its own markets, which allows it to obtain cheaper imports for multinational companies at the end of the supply chain, and ultimately for U.S. consumers.

The consensus in favor of trade liberalization rested on two critical elements—one domestic and one foreign. Domestically, policymakers, academics, and pundits argued that trade liberalization would be beneficial for everyone in the long run. Only quietly did commentators concede that the distribution of that wealth might be uneven. Some groups, particularly industries that compete with newly cheap imports and the workers those industries employ, might suffer. But in the long run, they said, trade liberalization would create new export-contingent jobs and industries, and ultimately lead to a more dynamic, innovative economy. Even those who lost their livelihoods would be better off in the long run because they would transition into these new industries. At worst, the government stood by, able to compensate these “losers” from trade and help them adapt to the new economy. As a result, trade liberalization would leave no one significantly worse off.

Meanwhile, the foreign policy consensus held that all good things go together—democracy, human rights, and economic openness. As a result, trade liberalization would open up countries with closed economies. The prosperity and exposure to global norms would create pressure that would eventually lead countries to open up their political systems as well. In no place was this theory more central than in shaping American foreign policy towards China, particularly its entry into the World Trade Organization (WTO) in 2001.

That both of these beliefs turned out to be wrong has been disastrous for U.S. economic and foreign policy. A country without a strong, large middle class is at risk of political backlashes to international trade that destabilize the domestic and global economy, making everyone worse off. We are living through just such a backlash today. Economists David Autor, David Dorn, and Gordon Hanson have shown that trade liberalization with China has resulted in a “China Shock.” Some communities and people were hit hard—so hard, in fact, that they had not recovered from China’s WTO accession even after a decade.1 This dislocation contributed to a backlash to trade in the 2016 election, with candidates Trump, Clinton, and Sanders objecting to the Obama administration’s signature trade policy, the Trans-Pacific Partnership.

Nor did the government step in to address this dislocation effectively. Our fractured politics, combined with dispersed authority over trade policy within the executive branch, has made it difficult to design and execute a strategy that integrates international trade policy into domestic economic policy. Indeed, the structure of international economic policy itself makes it hard for the government to find resources to help those hurt by trade liberalization. Trade agreements have facilitated the freer flow of capital across borders, but without the simultaneous updating of tax rules. The result has been the creation of tax havens around the world—tax havens that deepen the distributional consequences of liberalization because they allow corporations and wealthy individuals to avoid paying the full measure of their tax obligations.

The foreign policy foundations of trade liberalization have been equally discredited. Liberalization did not lead countries around the world to become more democratic. In fact, the opposite has happened. Despite an era of trade liberalization, commentators have concluded that we are in the midst of a global “democratic recession.”2 Countries around the world are becoming less democratic, not more democratic.

Far from coupling economic openness with democratic governance around the world, an increasing number of authoritarian regimes blur economic and political power. At home, they use their domestic laws to advance their economies at the expense of foreign companies, while abroad they deploy their economic power for political purposes. China’s form of state capitalism is perhaps the most notable. China engages in an aggressive form of industrial policy in which banks affiliated with the government offer massive subsidies to Chinese businesses. Chinese rules also require foreign companies hoping to access the Chinese market to partner with and transfer their technology to Chinese companies. And China is investing expansively in countries around the world—including along the Pacific Rim and within the United States—while simultaneously protecting its domestic technological base from dependence on foreign producers.3 Trade liberalization did not change this trajectory. In their important article reckoning with U.S.-China policy, Kurt Campbell and Ely Ratner conclude that the “free traders and financiers” and the “integrationists” were wrong to think that greater commercial ties would reshape the Chinese government and its policies.4

As economic interdependence with such regimes increases, the potential for economic malfeasance also increases. The vectors for economic cooperation can also be vectors for hackers and spies, or can be used as leverage points during high-stakes negotiations. These concerns also spill over to diplomatic and political matters. The recent arrest of the chief financial officer of Huawei, on suspicion that she covered up violations of economic sanctions against Iran, illustrates the point. President Trump has openly discussed exchanging the Chinese business executive for trade concessions, at the same time that Senators Marco Rubio and Tom Cotton have introduced legislation to ban Huawei and several other Chinese companies from doing business in the United States.

The Incoherence of American Economic Strategy

What America needs now is a new, coherent strategy for addressing the collapse of the trade liberalization consensus—a new approach to addressing trade’s distributional consequences at home and to addressing the increasing geostrategic and economic security consequences of international commerce. The answer to both of these challenges should not be to turn inward with some kind of neo-protectionist approach to trade and international economics. It should be to build a coherent strategy that coordinates trade, domestic economic development, and economic security.

But so far, no such strategy has emerged. Economic strategy is one of the areas that often falls through the cracks in the policymaking process. Few domestic economic policy experts spend much of their time on international economic issues. With a handful of exceptions—most prominently Jennifer Harris and Robert Blackwill, who have argued for making “geoeconomics” central to foreign policy—economic issues rarely feature in the mainstream of foreign and national security policy. Nor should we expect them to. Foreign policy wonks or defense experts who seek to ascend the commanding heights of government are unlikely to make it there focusing on economic issues. Nor are economic policymakers likely to make it beyond the U.S. Trade Representative’s office if they focus on international economic policy. And those who try to combine international economics with either domestic policy or foreign policy confront the common challenge of spreading themselves too thin.

The Trump administration illustrates both the difficulty with producing a strategy and the need for one. President Trump has rightly attacked both prongs of the liberalization consensus, arguing against trade agreements on domestic grounds and targeting China internationally. Nor can anyone doubt the administration’s willingness to engage in conflict. The Trump administration has begun a trade war with China; raised tariffs on steel and aluminum on the grounds of protecting national security; engaged in a hardball renegotiation of the United States-Korea Free Trade Agreement (korus) and nafta, though on terms that do not obviously help working-class Americans; and broadly called for increased protectionism. But what the administration hopes to gain from these actions (let alone the administration’s grand strategy) is a mystery. After over a year of negotiations and repeated presidential threats to terminate nafta entirely, the new nafta (the so-called usmca) is mostly the same as the original nafta, updated to include a variety of provisions that the United States, Canada, and Mexico already agreed to in the TPP under President Obama. The changes to korus are even more modest, so insignificant that apparently neither the administration nor Congress think that Congress needs to sign off on them. The administration has imposed its national security tariffs on steel and aluminum on allies and rivals alike, with no apparent strategy for what the administration hopes to achieve and little to show for it to date. China is a harder problem, but so far the Trump administration seems to be following the same pattern. After imposing tariffs on $200 billion worth of Chinese goods, China predictably retaliated. Although negotiations are ongoing, the administration appears to be claiming a Chinese reduction in tariffs on U.S. autos from 40 percent to 15 percent as a huge victory—even though China already had a 15 percent tariff on autos (whatever the origin) before the administration began its campaign against China! Even odder, only about 5 percent of autos sold in China originate in the United States. To the extent these actions reveal a strategy at all, it appears to call for starting trade conflicts—creating uncertainty and economic pain for domestic constituencies of all kinds—and then settling the conflicts by reverting to the status quo ante and claiming victory.

This failure cannot be laid entirely at the feet of the Trump administration, however. Despite the enormous importance of economic growth, security, and inequality, the fact is that the U.S. government is currently not designed either to develop or to execute a coherent, coordinated strategy that addresses these three issues. First, the central programs in these areas are split across different parts of the government. The U.S. Trade Representative (USTR), charged with negotiating trade agreements and representing the United States in international trade disputes, has primarily pursued trade liberalization and is located within the Executive Office of the President. The Commerce Department houses the International Trade Administration—charged with administering “fair trade” laws like antidumping and anti-subsidy laws—and, bizarrely, also has responsibility for Section 232 of the Trade Expansion Act of 1962, the law under which the administration imposed the national security tariffs on steel and aluminum. Indeed, this disconnect prompted U.S. Trade Representative Robert Lighthizer to tell the Senate Finance Committee that he could not speak to whether the Commerce Department had vetted its national security determinations through the National Security Council.

Apart from international trade policy as such, a variety of trade promotion agencies are independent, including the Export-Import Bank (Ex-Im Bank), U.S. Trade and Development Agency (ustda), and the Overseas Private Investment Corporation (OPIC), which under the terms of the recently passed build Act will be replaced by the International Development Finance Corporation (IDFC). Domestic economic development offices—the Economic Development Administration, Small Business Administration, and Minority Business Development Agency, among others—are split across the Commerce Department or are independent. Economic security efforts, particularly related to export controls, are split across the State, Defense, Energy, Commerce, Justice, Treasury, and Homeland Security Departments. Each of these departments and agencies, of course, has a different culture and different set of incentives. This makes coordination difficult, especially if some priorities have to take a back seat to others. This fragmented organization also works to the advantage of well-funded interest groups (and correspondingly to the disadvantage of less well-resourced groups and of the general public) by offering multiple entry points through which such groups can capture public policy.

The fracturing of responsibility for trade policy makes it difficult for the government to develop a coherent long-term strategy. This absence of long-term planning stands in stark contrast to other areas of foreign policy. The Departments of Defense and State, for example, produce quadrennial reviews of defense, as well as of diplomacy and development. The process leading to these reviews allows the agencies not only to assess the current posture of the United States but also to look forward to emerging threats and challenges. In the economic growth and security sector, however, there are no such strategic efforts.5 Nor is it clear what agency would be able to undertake such a task. With the intersection of domestic and international economic issues rising in importance, it is essential that the government become better able to assess threats, develop a strategy, and coordinate efforts to execute on that strategy.6 In a global context in which some countries use their economic power for geopolitical purposes, international trade and economic security need to be considered in a unified system.

The Department of Economic Growth and Security

We propose restructuring the Department of Commerce, the United States Trade Representative, and a variety of other agencies and offices into a single Department of Economic Growth and Security (DEGS). The Department of Economic Growth and Security would have five primary cones, each headed by an undersecretary: International Trade, Trade Promotion, Economic Development and Industrial Policy, Statistics, and Economic Security.7 The International Trade cone would include the USTR, which would be moved into the department but whose head would retain ambassadorial status, and the International Trade Administration (ITA). At the same time, the secretary and deputy secretary of DEGS would become the chief U.S. economic diplomats, a role currently played by the U.S. Trade Representative. The Trade Promotion cone would unite all of the government’s efforts to promote American businesses abroad: the Ex-Im Bank, the U.S. Trade and Development Agency, and the newly created International Development Finance Corporation.

The Economic Development and Industrial Policy cone would include government’s efforts to promote economic development at home, particularly its efforts to help domestic businesses. These efforts are a critical part of any trade policy. Domestic development efforts should work hand in glove with international trade policy. This cone would therefore include the Economic Development Administration, Small Business Administration, and Minority Business Development Agency, among other entities. The Economic Development Administration, in particular, would have principal responsibility for administering the entire Trade Adjustment Assistance (TAA) program, the program that currently provides financial assistance to firms, workers, and farmers adversely affected by trade liberalization. TAA’s administration is currently scattered across the Economic Development Administration (which sits within the Commerce Department), as well as the Labor and Agriculture Departments. In addition, some commentators have called for the creation of a U.S. Office for Industrial Policy that would engage in targeted geographic and technological investments; such an office would be included in this cone.8 The fourth cone would be Statistics, which would include the Department of Commerce’s various statistical agencies, including the Census Bureau and National Institute for Standards and Technology.

The Economic Security cone would consist of a new Economic Security Agency (ESA), which would combine the government’s fractured efforts at export controls, technology transfer, investment controls, and other economic security policies. The ESA would build on a 2010 proposal from then secretary of Defense Robert Gates to create a single licensing agency for export controls, a single list of controlled items, a single coordinator for enforcement, and a single technology system and portal for businesses.9 In addition, the coordinator for the Committee on Foreign Investment in the United States (cfius) would move from the Treasury Department to ESA, as would the State Department’s Directorate of Defense Trade Controls. The Department of Commerce’s Bureau of Industry and Security would also be folded into the ESA.

A Department of Economic Growth and Security would have significant benefits. First, the department would be able to develop a strategy to advance international trade while simultaneously addressing domestic economic dislocations and economic security issues that arise from increased global economic interconnectedness, particularly with countries like Russia and China. The department would, for instance, be able to internally resolve dissonance like that evident between the Trump administration’s Commerce Department and USTR with respect to the national security tariffs. It might seem that resolving such issues within a single department, rather than through a top-down directive from the White House or interagency coordination, shouldn’t matter. But the earlier in the policy process that a conflict can be resolved, the more likely it is that the conflict actually will be resolved, rather than manifesting as two competing policies from two different agencies. The department would have a policy planning staff, reporting directly to the secretary, that should be headed by a senior economic policy official (akin to the State Department’s policy planning staff). The policy planning staff should be required to produce a quadrennial economic growth and security review, akin to the reviews of defense, diplomacy, and development.

Second, the department would have increased status and authority within the federal government. Combining these critical economic domains and having the authority to both produce a strategy and execute upon it, the department would be elevated in policymaking vis-à-vis its component parts, akin to the elevation of the Department of Homeland Security after its creation. This also means that policymakers, think tanks, experts, and others would have an interest in developing policies and skills necessary to helping the department succeed. Its higher profile would make the department a more attractive destination for the best and brightest of both civil servants and political appointees. Its existence would both spur and legitimize efforts inside and outside the government to think seriously about international economic policy in all of its manifestations.

Third, the department would also play an important informational function. Because it includes international trade policy, trade promotion, economic development, economic security, and statistical elements, the department will be better situated to warn Congress and the country of emerging economic dangers, globally or domestically, than is the current, fragmented system of offices that work on these issues. This reorganization thus furthers the information-sharing goal Congress has already pursued in the intelligence and homeland security contexts, with the creation of the Director of National Intelligence and DHS, respectively. Further, it should afford Congress the opportunity to allocate resources more efficiently than under our current, fragmented system.

Fourth, the creation of a single department would reduce the influence of well-connected but unrepresentative industry interest groups over international economic policymaking. A fractured policymaking structure offers multiple avenues for such interest groups to capture public policy. If an interest group loses a policy fight within one agency, it can shift the fight to another agency. Prevailing within the second (or third, or fourth) agency gives the interest group a champion within the interagency process and a potential veto on changes to public policy. Critically, though, not all interest groups are able to take advantage of this fractured environment. Fragmentation favors well-connected interest groups that can afford multiple expensive lobbying campaigns, and often disadvantages public interest groups, small businesses, and the general public.10 Members of the general public are already at a disadvantage when it comes to having influence in government; when industry can lobby multiple agencies, it becomes even more difficult to develop a whole-of-government policy that is in the broad public interest, rather than one that favors those particular groups. A single department would include a greater variety of interests, reducing the likelihood that any single one would capture the department’s policymaking agenda—and limiting the ability of industry to play different agencies against each other in the interagency process.

Economic Reorganization and Its Discontents

There are a number of criticisms to this proposed reorganization, but in the end we think they are unpersuasive given the significant benefits of this approach. Some critics might suggest that the proposal is politically unfeasible given that the Obama administration proposed something similar in 2012.11 The Obama administration suggested merging the Department of Commerce, Small Business Administration, USTR, Ex-Im Bank, OPIC, and ustda, while moving National Oceanic and Atmospheric Administration (NOAA) to the Department of the Interior.12 But this proposal had a number shortcomings in both conception and execution.

First, the Obama’s administration’s proposal did not include a serious effort to unify economic security operations (one of the five cones we propose creating within DEGS) into a single place. Second, the administration asked Congress for legislative authorization to restructure these agencies via executive order, which created concerns about the extent of the authority given to the executive branch. In contrast, we propose that the creation of this new department be done via statute, with Congress leading the way. Third, the Obama administration recommendation was justified primarily on the grounds of cost savings (they predicted $3 billion a year over ten years) and on creating a “one-stop shop” for businesses to interface with the government. While these are important justifications that apply to our proposal as well, the reorganization we suggest is grounded on a far more pressing imperative: our domestic and international economic security is at risk from the combination of the unaddressed domestic effects of trade liberalization and international economic threats. The United States government must have a better way to address these critical challenges.

Critics might also argue that this approach will reduce the USTR’s status and effectiveness, and as a result will hamstring its mission to liberalize trade.13 This concern is misplaced. While it is true that USTR will no longer be located in the Executive Office of the President, the new undersecretary for international trade would retain ambassadorial status, in order to preserve the Trade Representative’s (now the undersecretary’s) status in international negotiations. More importantly, the new secretary of DEGS would become the most senior figure on these issues, and would be fully devoted to them at the level of strategy, leaving the undersecretary to conduct the actual negotiations and day-to-day operations. This organization would actually elevate the role of trade negotiators within the government and with other countries, by placing the senior economic diplomat at the head of a full cabinet agency able to speak to a wider range of international economic policy issues.

At the same time, part of the problem today is that the USTR has engaged for decades in an aggressive trade liberalization agenda with insufficient regard for the domestic distributional and economic security consequences of those efforts. The USTR’s work must be balanced with other goals related to trade promotion, domestic economic development, and economic security. Placing USTR alongside these other activities will help balance USTR’s approach—and in the process lead to better trade policies that have greater public support and thus resilience. Trade liberalization that leads to adverse economic consequences, political backlash, and either irrational protectionism or erratic trade wars are worse for everyone.

Another possible criticism is that the new department will make its component agencies less nimble, flexible, and efficient.14 In other words, it will expand bureaucracy with little benefit. We disagree. In some cases, agencies located within the department will still be comparatively independent. For example, OPIC is a self-sustaining agency that does not require regular appropriations. Its independent funding stream will continue to keep its newly created successor, the IFDC, comparatively independent, even as it acts in a more coordinated fashion with other agencies within the department. Moreover, any loss in the speed of an agency’s action must be compared with the gains from coordination and the benefits to the public interest of reducing the kind of agency capture that occurs with fragmentation. The fact that the department will now be able to engage in strategic planning and align policies with that strategy far outweighs the possibility of minor delays in response time arising from the need to clear responses through a larger bureaucracy.

Indeed, consolidation will likely cut down on response time by allowing all the same information to flow without the need to trigger the sometimes cumbersome interagency process. By shifting these major elements into a single department, coordination will now take place within the department, rather than across disparate departments with different hierarchies. Many decisions might thus be resolved within the department without needing to be elevated to an interagency process or to the White House. Of course, some might argue that shifting USTR to the new department will require creating a new interagency coordination office at the White House, thereby adding to the White House bureaucracy.15 This concern is also misplaced. The White House already has a deputy assistant to the president and deputy national security advisor who covers international economic issues and is situated in both the National Economic Council and National Security Council. This team already works on these issues with USTR, from within the Executive Office of the President, and will continue to do so.

Rising to the Challenge

International economic policy is not usually at the center of the domestic economic policy agenda or the foreign policy agenda. This has been a long-standing mistake. In a global economy, international economic issues have a significant impact on domestic economic growth and inequality. In a global context, economic success and technological innovation, as well as military prowess, contribute to national power. America’s continued prosperity at home and leadership internationally depend upon recognizing that these policy areas are inextricably bound together. America needs to think about and act upon economic policy in a coherent, strategic way—and that starts with creating a new Department of Economic Growth and Security.

This article originally appeared in American Affairs Volume III, Number 1 (Spring 2019): 3–16.

Notes
This essay is adapted from “A Blueprint for a New American Trade Policy,” Great Democracy Initiative, December 2018.

David H. Autor, David Dorn, and Gordon H. Hanson, “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade,” Annual Review of Economics 8 (2016): 205–40.

Larry Diamond, “Facing Up to the Democratic Recession,” Journal of Democracy 26, no. 1 (January 2015): 141–55.

See Adam Segal, “When China Rules the Web: Technology in Service of the State,” Foreign Affairs 97, no. 5 (September/October 2018): 10–18.

Kurt M. Campbell and Ely Ratner, “The China Reckoning: How Beijing Defied American Expectations,” Foreign Affairs 97, no. 2 (March/April 2018): 60–70.

The president is required to submit an annual national trade policy agenda and accompanying report, but that document’s scope is considerably narrower and less forward-looking than the longer-term strategic documents produced in other areas of foreign affairs. See Trade Act of 1974, section 163. The Trade Policy Review Group and Trade Policy Staff Committee, established by the Trade Expansion Act of 1962, consist of twenty agencies, highlighting the problem rather than solving it.

Cf. John Podesta, Sarah Rosen Wartell, and Jitinder Kohli, “A Focus on Competitiveness: Restructuring Policymaking for Results,” Center for American Progress, December 2010.

The National Oceanic and Atmospheric Administration (NOAA) would move to the Department of the Interior.

Noah Smith, “How to Fill the Gaps in the U.S. Economy,” Bloomberg, September 27, 2018.

Overview at Ian F. Ferguson and Paul K. Kerr, “The U.S. Export Control System and the Export Control Reform Initiative,” Congressional Research Services, October 30, 2018; see also Robert M. Gates, Speech to Business Executives for National Security, April 20, 2010.

10 The classic work in economics is Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge: Harvard University Press, 1965); in public law, Bruce Ackerman, “Beyond Carolene Products,” Harvard Law Review 98, no. 4 (February 1985): 713–46.

11 White House, “President Obama Announces Proposal to Reform, Reorganize, and Consolidate Government,” January 13, 2012.

12 In October 2018, Congress passed the Better Utilization of Investment Leading to Development (build) Act, which creates the U.S. International Development Finance Corporation (IDFC). IDFC combines OPIC and certain development financing elements of the U.S. Agency for International Development to create a new development finance corporation. While a step in the right direction, and one that shows that Congress can indeed lead, the build Act’s reorganization does not address the need for an overarching international economic policy. See Daniel F. Runde and Romina Bandura, “The build Act Has Passed: What’s Next?,” Center for Strategic and International Studies, October 12, 2018.

13 John Murphy, “Urge to Merge: Why Combining the U.S. Trade Representative with Other Trade Agencies Is a Bad Idea” (American Enterprise Institute, February 22, 2012).

14 Shayerah Ilias, “Trade Reorganization: Overview and Issues for Congress,” Congressional Research Service, May 31, 2012; Daniel F. Runde and Meredith Broadbent, “President’s Proposed Reorganization of Trade Agencies,” Center for Strategic and International Studies, January 18, 2012; Murphy, “Urge to Merge.”

15 Runde and Broadbent, “President’s Proposed Reorganization.”

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