What will happen to U.S. economic power under Trump?

Economic statecraft needs, like, a state

I have a review essay on economic statecraft in the forthcoming issue of Foreign Affairs - it’s free to access right now, but will likely be going behind the paywall in a few days. Economic statecraft - the use of sanctions, export controls and such - has become one of America’s most important levers of power. But, while America’s use of these tools has grown precipitously, its ability to think strategically about them has not.

The article is an implicit follow-up to another piece that Abe Newman and I wrote a year ago, proposing that the U.S needed a fundamentally different approach to economic security policy. That didn’t happen in the Biden administration. Officials devoted real time and attention to trying to make the various pieces work together, but did not introduce the serious institutional reforms that we thought were needed, or, a shorter stretch, the doctrine that far better connected people than Abe and myself thought was necessary. The Trump administration … well, it pretty well absolutely won’t happen now either. Instead, we’re in for a wild ride.

The essay’s thesis statement:

Washington’s ability to surveil vast troves of financial data and keep money and technology out of the hands of its rivals could be hamstrung by infighting and by Trump’s tendency to change his mind on a whim. U.S. economic security policy is primed to become a battleground in which China hawks, tariff warriors, Wall Streeters, and Bitcoin bros compete to sway a president who comes up with policy based on the advice of whoever he last talked to.

This essay is built around a discussion of two very interesting books - one of which argues that U.S. economic statecraft has laid out the blueprints of a new world order, the other (in my possibly imperfect reading - it is a history book rather than a statement of theses) that economic statecraft is less about order building than muddling through, with lashings of confusion and self-interested behavior. It is likely unsurprising that I think the second provides by far the more plausible account of U.S. economic statecraft for the foreseeable future. Of course, we saw a lot of crazy in Trump I, but there are reasons to believe that the chaos will go much deeper in Trump II.

First, the kind of people in Trump I, who wanted more orderly foreign policy decision making (including, perhaps surprisingly, John Bolton) are not around any more. We can expect a lot more chaos, and a lot more unpredictability, as many of the processes that damped down Trump’s unique style of decision making disappear. Instead, we will see a lot more knife-fights between different factions trying to control policy, and disorder as Trump lurches from one position to another, depending on who he has last talked to.

Second, it will be harder to administer what policy there is well. The Trump administration is profoundly hostile to what it calls the “deep state,” and is eager to dismember what other people might call state capacity, because they believe it gets in the way of what they want to do. That is a problem for economic security making, which can’t work well without orderly process and skilled bureaucrats. Even if they fail in their ambitions, a lot of people are going to want to get out, or will be too worried about displeasing one or another faction to take real decisions.

The Trump administration furthermore wants to get rid of a lot of domestic rule making, which its adherents view as a further encumbrance to American greatness. Actually, such domestic regulatory authority is one of the mainsprings of US international power. Losing the power to shape domestic markets entails a much weaker ability to shape international ones too.

Third - and most genuinely new - there is a faction that wasn’t important in Trump I and is very important indeed in Trump II. Crypto. Important Trumpworld people like David Sacks, the incoming “crypto czar,” and Elon Musk, were made men in the “PayPal mafia” – the quarrelsome group who founded the payments platform. And PayPal had a core goal in its early days - to displace the U.S. dollar.

As Peter Thiel later described it, their collective ambition was “to create a new Internet currency that would replace the U.S. dollar.” All of the founders were “obsessed with creating a digital currency that would be controlled by individuals instead of governments.” Many years later, when Bitcoin came along, Sacks anticipated that it might fulfil PayPal’s “original vision to create ‘the new world currency.’”

Now, those people, together with less ideological crypto boosters like Howard Lutnick, the incoming Commerce secretary, will be key players in setting U.S. policy, and in shaping regulations or getting rid of them. Lutnick has deep financial ties, for example, with Tether, a crypto “stablecoin,” which provides an “incognito dollar” that is widely used for sanctions evasion. The Biden administration wanted to take action against Tether - the Trump administration, likely not so much. So too for a variety of other means of sanctions evasion, including the Tornado Cash bitcoin ‘mixer’ service, which Republican appointed judges on the Fifth Circuit have just declared off limits to U.S. sanctions authority.

In January, we are about to start discovering what the U.S. economic security state looks like, when it is run by the seat-of-the-pants, likely stripped of a lot of the state capacity it needs to actually get things done, and influenced by people who have a long standing aversion to the power of the U.S. dollar. As I said, it’s going to be a wild ride. For more, read the piece.