Policymaking Is All About Trade-Offs

Policymaking Is All About Trade-Offs

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In crafting a new international economic policy that works for Americans and advances U.S. interests, policymakers will have to weigh multiple trade-offs.

April 1, 2024 11:28 am (EST)

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Current political and economic issues succinctly explained.


A regular series on the choices faced by international economic policymakers

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Fly or drive? Buy or rent? Another degree or more work experience? Life is full of difficult choices, and they all have trade-offs. Option A may be faster but more expensive than option B; option X may be better over the long term than option Y but may impose more costs in the near term. 

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Government officials, too, are constantly weighing trade-offs as they consider the pros and cons of different policy options. Spending more in one area may leave fewer resources to invest in another, yet not spending on critical priorities may have harmful long-term consequences. Regulating a particular activity to reduce a risk to public health or safety could stifle private-sector innovation. Policies favoring domestic producers and workers could harm efficiency and competition or be at odds with international commitments.  

Whether in daily life or policymaking, it is not that one option is objectively better than the other; the final choice depends on which objective an individual or society values more at a given time, and how much they are willing to pay to pursue that goal and not others. (Economists have a term for that latter trade-off: opportunity cost.)  

Individuals can decide for themselves whether to pay a bit more to shop for locally grown produce at the farmer’s market or get the best deal at a wholesale supermarket. For policymakers, robust public debate is needed to inform governmental deliberations in which the trade-offs of various policy options are weighed. 

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When it comes to international economic policy, managing trade-offs is arguably becoming more complex. In the first few decades following World War II, the United States faced relatively few constraints on its international economic leadership, since it had by far the world’s largest economy, no significant competitors, and a high return—economically and diplomatically—on its investments in an open, rules-based system that produced broadly shared gains both at home and abroad. 

The landscape today is more challenging. The domestic consensus for American engagement in the global economy has eroded in recent decades. New disrupters, notably China and Russia, have appeared on the global stage. And the postwar institutions that the United States played a central role in creating, such as the World Bank and the World Trade Organization, are arguably no longer working as intended or able to adapt to new realities. Against this backdrop, U.S. policymakers face tougher choices in international economic policy and are weighing some of the trade-offs differently than their predecessors did. 

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Consider trade policy. Every U.S. president from Franklin D. Roosevelt to Barack Obama used the leverage of a large U.S. consumer market to negotiate the opening of other countries’ markets and, in recent decades, to promote higher labor, environmental, and other standards around the world. Those presidents concluded that the benefits brought by trade-liberalizing agreements—more export opportunities, greater competition, lower consumer prices, and a better strategic position in important regions of the world—outweighed the costs of disruption to certain domestic industries and workers from a more open U.S. market.  

However, the two most recent U.S. presidents, Donald Trump and Joe Biden, sensing a popular backlash against globalization, have come to a different conclusion: that the economic and strategic benefits of traditional trade agreements are outweighed by the costs to American workers or even national security. As a result, the Trump and Biden administrations’ trade policies have been marked by protection of the domestic market through tariffs and preferential industrial policies, as well as by withdrawal from traditional trade negotiations. But these policies also have costs, both economic and diplomatic. 

Development assistance has been another centerpiece of U.S. international economic policy since Washington created the World Bank and put forward the Marshall Plan to rebuild Europe after World War II. The notion that spending U.S. taxpayer dollars on foreign aid benefits Americans has long been controversial. But in recent years U.S. administrations have found it ever more difficult to win congressional funding for development initiatives.  

Yet, in addition to humanitarian considerations, there is a strong practical case for helping low-income countries develop in a way that promotes more stability and better governance, avoids unsustainable debt, and makes those countries less susceptible to influence by U.S. adversaries, notably China and Russia. The trade-offs here, too, are real. 

A third—and growing—area of international economic policy is economic security. The term means different things to different people, but one definition is any government intervention to mitigate perceived risks to the economy—whether from China, pandemics, or climate change—that could harm national security or long-term prosperity. U.S. economic-security policy tools include export controls, investment-screening mechanisms, cybersecurity measures, efforts to strengthen supply-chain resilience, and industrial policies to promote domestic manufacturing of technologies deemed critical, from advanced semiconductors to clean-energy solutions. 

Trade-offs are rife in economic security. Any government intervention in the market can impede efficiency and raise prices for both producers and downstream buyers. Export controls that limit U.S. companies’ sales in China can be justified on national security grounds, but they could also hamper those firms’ ability to reinvest profits in research and development and thereby maintain an innovative edge over Chinese competitors. In another kind of trade-off, subsidies for domestic production can create tensions with allies and partners, undermining their willingness to work with the United States. Just like a higher insurance premium, such costs could be the inevitable price of mitigating risk, but how much of a premium is worth paying is a matter for debate.  

Other areas of international economic policy also involve trade-offs. Will the growing use of sanctions by the U.S. government undermine the role of the dollar as a global reserve currency, a longstanding pillar of U.S. economic power? Will efforts to shift away from fossil fuels and address climate change come at the expense of economic growth? Will global tax harmonization bring production, jobs, and revenue back to the United States, or harm the competitiveness of U.S. companies? 

Weighing trade-offs like those will be at the heart of the conversation that CFR is hoping to prompt through its new initiative, RealEcon: Reimagining American Economic Leadership. The topic will be the focus of a regular series of brief essays written by CFR and outside experts and featured here. In each essay, the author will address a specific challenge for American economic leadership, why it matters, what some possible solutions are, and what trade-offs come with different policy options. Watch this space for the next installment of Trade-offs by CFR’s leading trade experts, Inu Manak, Ted Alden, and Jennifer Hillman.

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