Matthew P. Goodman, Erin Murphy, Stephanie Segal, Matthew Reynolds
After another tumultuous year in 2022 that upended some of our predictions this time last year, the CSIS Economics Program is ready to try again to make sense of the year ahead. Here are five things we will be watching in 2023:
Global Economy: Global economic growth is likely to slow next year amid persistent, albeit probably moderating, inflation. The economic boost from loosening Covid-19 restrictions will fade in major economies except perhaps China. Governments are not planning major stimulus measures, and key central banks will continue tightening to address inflation. The International Monetary Fund in October estimated that global GDP growth would decline to 2.7 percent in 2023, down from 3.2 percent in 2022 and the slowest rate in the past 20 years apart from the global financial crisis in 2009 and initial Covid-19 shock in 2020.In the United States, the key question is whether the Federal Reserve can engineer a “soft landing” or if a recession is the only way to get the rate of inflation down from 40-year highs to something approaching the 2 percent target. Many investors foresee a recession, and markets are in the odd position of reacting negatively to signs of sustained wage or job growth because they suggest the Fed might have to raise benchmark rates above 5 percent next year.In China, the government’s “Zero Covid” policy has ended abruptly, and Beijing has pivoted to economic stabilization. After the wave of widespread infections passes, reopening will probably boost consumption, which otherwise has received little direct policy support. China’s real estate sector could stabilize in response to recent support measures. Exports are unlikely to offer much support to economic growth given weakening demand elsewhere. The annual growth target announced in March will be a key indicator, with a target above 5 percent suggesting either a return to investment-oriented stimulus or optimistic assumptions about how much consumption will improve.In Europe, the energy crisis and supply-side inflation could lead to a regional recession. The European Central Bank will probably continue to raise rates, although less so than the Fed, while national governments balance fiscal consolidation with the need to help consumers and firms manage high energy prices.The world will continue to grapple with the effects of higher rates and a strong dollar. Many developing countries could default on their foreign currency debts next year. Monetary tightening in the United States has contributed to a decline in the liquidity of U.S. Treasury securities, which could make this vital market vulnerable to shocks. (GD)
U.S. Economic Statecraft in Asia: Progress over the coming year in the Biden administration’s Indo-Pacific Economic Framework for Prosperity (IPEF) will be a test of the White House’s broader Asia and economic strategies. After the first full round of negotiations in Brisbane this month, the pace of IPEF talks is likely to pick up in 2023 as the administration hopes to harvest at least some tangible outcomes before mid-November, when President Biden will welcome other leaders of the Asia-Pacific Economic Cooperation (APEC) forum in San Francisco for their annual summit.
The most promising elements of IPEF appear to be the pillars led by the U.S. Department of Commerce, especially on supply chain resilience and on clean energy and sustainable infrastructure. Some progress may also be seen on elements of the trade pillar, including on trade facilitation and agriculture. However, the Office of the U.S. Trade Representative seems less enthusiastic about pushing for a digital trade agreement, despite the stakes for both U.S. firms—large and small—and workers in seeing U.S.-preferred digital rules advanced. The CSIS Economics Program and Scholl Chair will release another IPEF briefing paper in early 2023 summarizing views of domestic stakeholders on the digital component of the framework.
The lingering question is whether all of this will reassure Indo-Pacific allies and partners that the United States is committed to durable engagement in the region’s economic affairs. With the Biden administration so far unwilling to seek congressional approval for a formal trade agreement that includes offers of greater access to the U.S. market, partners will be looking for other tangible and enduring benefits from Washington through IPEF or other initiatives.
Meanwhile, regional partners will also be keeping a wary eye on U.S. economic ties with China. While encouraged by the agreement of Presidents Biden and Xi Jinping at their November meeting in Bali to reestablish bilateral working groups on a range of issues from climate change to debt, many partners are troubled by the still-hawkish sentiment on both sides and efforts by both Beijing and Washington to decouple their economies in targeted areas such as critical technologies. (MPG).
Technology Export Controls: The next year will bring an expansion in the use of export controls as the Biden administration increasingly focuses on protecting and promoting critical technologies against the backdrop of intensifying strategic competition with China.
On October 7, the Biden administration unveiled export controls aimed at denying China access to leading-edge semiconductors and the equipment required to produce them. The move represented a paradigm shift in U.S. export control strategy: no longer would adversaries be allowed to move up the technology ladder at a safe distance behind the United States; instead, controls would be used to ensure the United States maintains “as large of a lead as possible.”
Looking ahead, the Biden administration is trying to multilateralize the semiconductor controls. Although the United States is dominant in some key semiconductor manufacturing equipment subsectors, Japanese and Dutch firms are also important players in the space. If the Dutch and the Japanese do not go along willingly, the Biden administration could threaten to take extraterritorial measures as the United States has increasingly done through something called the Foreign Direct Product Rule. However, this would require the administration to expend diplomatic capital and also could incentivize foreign firms to de-Americanize their supply chains.
Over the next year, the Biden administration will likely also look to implement similarly comprehensive export controls aimed at other critical technologies. The September executive order on investment screening provides a useful clue as to what those sectors may be. Specifically, the executive order identified “microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, and climate adaptation technologies” all as “fundamental to United States technological leadership and therefore national security.” The sweeping nature of the October 7 semiconductor controls suggests that the administration may likewise look to leverage strategic chokepoints—to the extent they exist—in these sectors to slow or, as in the case of the semiconductor controls, degrade China’s capabilities. Despite rhetoric around working with allies and partners, the Biden administration may not wait to form consensus before moving forward with new controls. (MR)
Infrastructure and Development Finance Policy: Global infrastructure will remain a core element of the Biden administration’s foreign policy in 2023 as it looks to add credibility to a plethora of infrastructure-related initiatives, including the Partnership for Global Infrastructure and Investment (PGII), IPEF, the Blue Dot Network (BDN), the Trilateral Infrastructure Partnership (TIP), and the Quadrilateral Security Forum (Quad). These efforts are designed to compete with China’s Belt and Road Initiative while also setting standards on quality infrastructure.
There have been few projects done under these rubrics to date. The TIP, made up of the United States, Japan, and Australia, announced in October 2020 a project to connect an undersea fiber optic cable to Palau, and in November 2022, support of Australian telecom firm Telstra’s acquisition of Digicel’s network in the Pacific Islands. Both projects reflect moves to compete with China in a sector and a region where it so far has had the upper hand. The Quad, involving the TIP countries plus India, also has had a few successes, most notably the Covid-19 vaccine manufacturing and distribution project announced in March 2021.
The PGII and IPEF remain ambitious, with the former aiming to find and mobilize $600 billion over five years for infrastructure project financing and the latter in ongoing negotiations. The BDN is also taking steps to establish a framework to certify infrastructure as high quality and sustainable but still has a long way to go.
Developing countries need infrastructure investments, but almost 60 percent of low-income countries are now in debt distress or at high risk and can’t wait for these initiatives to flail about. Most infrastructure projects aren’t profitable, limiting their attractiveness to the private sector, which the United States hopes to tap in a substantial way to address financing gaps. The United States and its partners must contend with these various challenges by identifying appropriate financing, including local currency lending and concessional loans, and having a greater risk appetite. (EM)
Climate Finance: With passage of the Inflation Reduction Act mobilizing investment in clean energy domestically, expect strengthened efforts in 2023 to boost investment in climate mitigation and adaptation globally. Big questions remain around the funding and mechanics for the “loss and damage fund” announced last month at the UN Climate Change Conference (COP27), the fund’s relationship to climate finance commitments in the Paris Agreement, and the role of the international financial institutions in financing for climate and other “global public goods.” Many shareholders and outside experts are urging the multilateral development banks to boost lending and support more private investment, including in the context of Just Energy Transition Partnerships (JETPs). JETPs have already been announced with South Africa and Indonesia and are under discussion with Vietnam, India, and Senegal, as announced by G7 leaders this month. These JETPs are expected to result in investment in the tens of billions of dollars, an impressive amount but still only a drop in the bucket of the trillions of dollars needed over the next few decades to deliver on climate and related development goals. Over the long run, pricing that reflects spillovers from greenhouse gas emissions will be key to sustainably shifting behavior and directing both trade and capital flows. (SS)
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