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Financial Times: America Must Step Up to Retain Its Economic Might

US needs to leverage its potential in global power struggle

This post originally appeared in the Financial Times on May 17, 2020. These themes are explored in more detail in Texas National Security Review.

The coronavirus crisis has taken a tragic toll on US society and its economy, and is heightening longstanding concerns about the nation’s future. Policymakers confronted similar conditions when I was under-secretary of the Treasury during the 2008 financial crisis. Then, as now, the economy was laid low, the nation in debt, and confidence on the wane. The economy recovered, but America did not take the steps it needed to secure its global primacy.

We should not make the same mistake again. Bringing the US economy back to pre-coronavirus levels is critical but it is not enough. The country needs a policy agenda to renew, sustain and leverage its economic power.

The economy has become the primary arena for great power competition given the integration of global markets, the emergence of transformational technologies and the pervasiveness of cyber space. Russia and China have recognised this reality and effectively integrated their economic and security strategies, but the US has been slow to adapt over the past two decades.

Donald Trump’s administration took an important first step by recognising the country is engaged in great power competition and that China is the key strategic competitor. Now America must do more to strengthen the building blocks of its economic might.

For a start, American scientific and technological leadership cannot be taken for granted. To sustain it, we need a national innovation policy, guided by five core principles: support US companies in sectors with winner-take-all structures or big first-mover advantages; fund and promote the development of promising technologies; support domestic development of sectors or technologies where overseas companies are highly subsidised by US competitors; prioritise strategic technologies or capabilities; and harness the private sector and market forces.

Government-led innovation creates risks of cronyism and inefficient capital allocation, but these principles would help mitigate them. New technologies often blur the line between military and civilian use. High-tech sectors are often winner-take-all on a global scale. Some countries wield anti-competitive policies to secure market position for their national champions. China provides extensive subsidies and research and development funding, and has been known to use espionage to help its companies. Meanwhile, the US federal share of R&D spending hit a 60-year low in 2018.

The Trump administration’s budget request provides a necessary R&D boost, but it should do more to foster innovation. It should identify priorities of national importance, then provide funding with the dedication that drove the early space programme. It should at least double R&D funding and encourage private investment in key areas. The government should also work to streamline research across academia and the private sector, and expand access to data and cloud computing.

To attract private investment, policymakers should consider creating investment funds where the government bears the first loss to develop and back strategic technologies, including artificial intelligence and quantum sciences. They should raise R&D tax credits and continue the administration’s efforts to remove regulatory barriers, including occupational licensing requirements.

The US should not go it alone. It should explore multinational initiatives with allies such as Japan and the Five Eyes countries — Australia, Canada, New Zealand and the UK. These initiatives could promote alternatives to Huawei’s 5G equipment and support semiconductor production. These countries can also promote innovation through standard-setting bodies, such as the International Telecommunication Union.

None of this will be cheap. But lawmakers should recognise that the cost of losing America’s innovative edge far exceeds the investment required to keep it. However, an innovation policy is only part of what we need to stay competitive. Modernised economic statecraft and strategic international collaboration are complementary building blocks — as is investing in homegrown talent. Washington should also continue policies to attract overseas talent while guarding against intellectual property theft and security threats from a minority of foreign students and scientists.

No matter who wins in the presidential election in November, rebuilding America’s economic strength will dominate the agenda. Recovering from Covid-19 is only the first step. A robust national innovation policy must follow to help ensure US economic might and national security in an era of great power competition.

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