2020 Foresight: What’s Ahead in Global Economics

csis.org/analysis/2020-foresight-whats-ahead-global-economics

December 19, 2019

As one eventful year ends and another looms, we highlight five issues in international
economic affairs that the Simon Chair will be tracking in 2020. As we did at the start of this
year, we discuss both the “known knowns” about these issues and the “known unknowns”—
that is, the questions we have today that will only be answered as the year unfolds.

Trade: The final months of 2019 saw a flurry of international activity in trade policy. Two
major regional trade agreements were concluded: the United States-Mexico-Canada
Agreement (USMCA) and the Regional Comprehensive Economic Partnership (RCEP)
among 15 Asian economies. The United States reached “phase-one” trade deals with the
world’s second- and third-largest economies, China and Japan. At least temporarily, these
developments brought a welcome reduction of uncertainty to the global economy.

But there is plenty of room for trade surprises in 2020. One big question is how long the
mini-deal with China will hold in the face of criticism that it leaves most of the deeper
differences between Washington and Beijing unresolved. Moreover, while details remain
sketchy, the enforcement mechanism appears to depend on sustained uncertainty, with
the United States able to “unilaterally, basically, retaliate if the Chinese violate the
agreement,” according to White House trade adviser Peter Navarro. Meanwhile, the
World Trade Organization (WTO) faces an existential crisis after its appellate body lost a
quorum this month due to U.S. refusal to approve new members; this will roil the global
trading system ahead of the biennial meeting of trade ministers in Kazakhstan in June.

With the USMCA passed and the mini-deals with China and Japan done, will U.S. Trade
Representative Robert Lighthizer have much gas left in the tank for an activist trade
policy in 2020? Probably not. It seems likely that “phase-two” deals with China and Japan
—both needed, both highly challenging—will have to await a new presidential term
beginning in 2021. And a bilateral deal with the United Kingdom remains pie in the sky
for now until London works out its new relationship with the European Union. (MPG)

Technology competition: We flagged technology as a theme last year, and it did not
disappoint. Developments in 2019—from congressional proposals to fund ambitious
technology strategies to government rules aimed at securing technology supply chains—
underscore the high-stake nature of technology competition and also the challenge of
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developing effective policy responses. At issue is how certain technological innovations—
for instance, in artificial intelligence, quantum computing, and biotechnology—may
create vulnerabilities as well as advantages for countries in economic and security terms.

Technology competition will undoubtedly remain a key theme in the year ahead. A few
questions can help frame the issue for policymakers: First, what technologies will be
foundational to innovation leadership in the future? Second, what role should
government play in fostering the development of such technologies? And third, how
should the United States take such considerations into account when engaging with
allies and partners, as well as competitors?

To date, technology competition has been framed mostly in a U.S-China context;

however, an increasingly assertive stance on the part of the European Union, including a
call for “technological sovereignty” in some critical technology areas by the new president
of the European Commission makes clear that it is not simply a two-way contest.
Developing a strategy to work with countries in areas of shared interests and common
beliefs—for instance, ethical standards for certain new technologies—should be high on
the agenda of the U.S. administration. (SS)

Digital currency: Technological advances are foundational to developments on another

topic worth watching in the year ahead: digital currency. It has been widely reported that
China will introduce—at least on a pilot basis—its own digital currency in 2020. China’s
central bank, the People’s Bank of China (PBOC), has been working on its “digital currency
electronic payment” (DCEP) program since 2014. PBOC governor Yi Gang has said the
aim is not to create a new currency but to “partially digitize” China’s existing monetary
base; instead of physical renminbi (RMB) notes, anyone transacting in Chinese currency
could use digital RMB. Such a step would be significant, boosting efficiency (good) and
data collection (mixed).

As a sovereign fiat currency, a digital RMB is a less radical innovation than others in this
space. This past year the world was introduced to Libra, envisioned by its backers and
led by Facebook as “a stable currency built on a secure and stable open-source
blockchain, backed by a reserve of real assets, and governed by an independent
association.” Like China’s DCEP, there is a long way to go from idea to implementation;
but unlike DCEP, the Libra would not be a sovereign currency, which raises a distinct set
of issues, particularly for the official sector.

The International Monetary Fund, Bank for International Settlements, and individual
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central banks and finance ministries are busy evaluating the possible implications of
digital currencies. Adoption of these innovations will depend on consumer and investor
preferences as well as future regulations, which in turn are linked to policies around
money laundering, data collection and privacy, and critical (financial) infrastructure.
Digital currency developments will impact the international monetary system and
possibly the currency at its center, the U.S. dollar. (SS)

China’s economic statecraft: China’s Belt and Road Initiative (BRI) may have reached
peak velocity and could change gears in the year ahead. Spending for 2019 is likely to be
the lowest since the BRI’s announcement in late 2013. The underlying constraints are
both domestic and foreign. Chinese policymakers have less cash on hand, growth is
slowing at home, and there is less appetite for going even deeper into risky markets
where the BRI made its initial mark. At the same time, some of China’s partners have
already taken on too much debt and are hesitant to borrow further.

These dynamics reinforce two trends. The first is China’s desire to “multilateralize” the
BRI. China’s normal preference for bilateral dealmaking makes it the strongest party in
most negotiations but also incurs greater financial and reputational costs when projects
go wrong. A “multilateral cooperation center” could provide one avenue for raising
resources and sharing risk. The second trend is China’s doubling-down on digital
infrastructure, which often costs less for recipient countries than other infrastructure
types and provides China with significant commercial and strategic value. As Huawei and
China’s other tech champions face increased scrutiny in Western markets, they will ride
the BRI deeper into developing and emerging markets.

Expect more cracks to come to the surface in 2020. Promises about “game-changing”
projects made years ago are wearing thin. Rather than cancel troubled projects, which
would be economically wise, Chinese officials are pressuring debt-ridden partners like
Pakistan to restart them. This reflects a strong desire to make the BRI successful but also
indicates that the low-hanging fruit has been harvested. In time, and especially if there is
a global economic downturn, we will learn how much was rotten. (JH)

Global economic governance: Two annual summits mark the global economic calendar
in 2020. President Trump is scheduled to host fellow leaders of the Group of 7 (G7)
advanced democracies at Camp David in mid-June. There is no shortage of pressing
issues for the group of nominally “like-minded” countries to discuss, including conflicts in
the Middle East, Iranian and North Korean nuclear concerns, and the challenges of an
assertive China. President Trump has been a disruptive force at previous G7 summits but

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may have an incentive as host, just months before his reelection bid, to burnish his
global leadership credentials. One point to watch is whether Trump will follow through
on his insistence at last year’s summit in France that Russia be readmitted to the group.

On December 1, Saudi Arabia took over the presidency of the other major forum of
global economic governance, the Group of 20 (G20). Riyadh is scheduled to host the
summit of leaders representing over 80 percent of the global economy in late November
2020. One question is whether the G20 will help de facto Saudi ruler Prince Mohammed
bin Salman regain international credibility after last year’s brutal slaying of journalist
Jamal Khashoggi, or whether that issue, as well as the Saudi role in the calamitous war in
Yemen, will overshadow the summit.

Making progress on the G20’s substantive agenda has been challenging in recent years,
even under the most capable of hosts. Nevertheless, at Osaka last summer, Japan was
able to advance some useful initiatives in areas such as data governance and high-quality
infrastructure investment; follow-through in these and other areas will be worth
watching. And if a global economic crisis were to erupt in 2020— whether sparked by
renewed trade conflict or financial strains in China or Latin America—the G20 may have
an opportunity to rebuild the cohesion that marked its early summits following the 2008
financial crisis. (MPG)

Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economy
at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Stephanie Segal
is senior fellow of the CSIS Simon Chair. Jonathan E. Hillman is senior fellow with the CSIS
Simon Chair and director of the Reconnecting Asia Project.

Commentaryis produced by the Center for Strategic and International Studies

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