As the new year gets underway, many companies doing business internationally may be feeling whipsawed by titanic forces. New and old risks are on display on diverse fronts, including Russia’s ongoing war in Ukraine, a surge of inflation afflicting many economies, and continuing tensions in U.S.-China commerce relating to trade, technology, and Taiwan. The mix of challenges and opportunities is intense.
U.S. Chamber of Commerce President and CEO Suzanne P. Clark highlighted some of these issues in her State of American Business address earlier this year. In response, she made the case for American leadership, observing: “Our nation’s future depends on our engagement in the world — it’s how we protect our national security, promote our values, unlock economic growth for American businesses, and lower prices for American families.”
Understanding the global environment is imperative for the U.S. business community—and a precondition for the American leadership required to shape that environment. For that reason, the U.S. Chamber team carefully tracks the biggest global trends. Here are some of the major ones on our dashboard in 2023:
1. Geopolitical risk is driving up defense spending worldwide.
Russia’s invasion of Ukraine slammed food and energy markets, but it has also led governments to boost defense spending. Western defense and aerospace firms are now scrambling to increase production, including of items such as ammunition, artillery shells, and anti-tank weapons such as Javelins. The U.S. boosted defense spending considerably in late 2022 legislation, and European countries are promising what the Germans call a Zeitenwende (turning point) under which countries say they will finally meet their NATO goal of spending 2% of GDP on defense. However, Germany and France only expect to do so in another five years. Meanwhile, countries such as Poland and the Baltic and Nordic countries are already acting, including as they replace kits donated to Ukraine. One knock-on effect of Russia’s disastrous performance in the war is that countries such as India and others in the Middle East are much less interested in Moscow’s military sales. U.S., Nordic, and Korean defense manufacturers seem poised to do well in the years ahead in foreign sales.
2. China’s economy has bumped up against hard realities.
As it has abandoned its Zero Covid policy, China’s citizens have suffered because of its poor vaccines, low vaccination rates (especially among the elderly), and an immunologically naïve population. It is estimated that more than 1 million Chinese people have died from Covid-19 in the past few months, but the pandemic surge may now be fading. Some analysts expect an economic rebound as the year unfolds. However, from a medium-term perspective, a sharp property downturn may slow China’s economy even more – as the U.S. saw after the Global Financial Crisis, recovery from a property crunch takes many years. Finally, the export boom that China enjoyed in recent years may be finally ending as global firms make capital spending decisions that spread risk across other geographies, though CAPEX numbers will take time to appear in merchandise trade data. In Washington, bipartisan support has risen for further action to respond to Beijing’s civil-military fusion and harmful industrial policies. Look for mounting pressure on the administration to take further action on export controls and investment restrictions (both inbound and outbound).
3. Supply chains are healing, but most aren’t shifting (yet).
More broadly, global merchandise trade has continued to grow, belying claims that globalization is over (U.S. trade topped $7 trillion for the first time in 2022). The biggest change companies have made to their supply chains in the wake of the pandemic and trade war has been to increase inventory — the simplest and cheapest step they can take to reduce dependency on China or any other single source. A slowing global economy, brought about in part by 2022’s energy price spike, has finally allowed U.S. ports the breathing room they needed to work through backlogs at ports, so firms are mostly able to move goods from factories to retailers at prices and speeds comparable to pre-pandemic conditions. The outlook varies dramatically from sector to sector. For example, the transition to electric vehicles is attracting massive investment (and subsidies), but it’s almost impossible to generalize from that sector to, say, solar components or pharmaceuticals. As for “friendshoring,” it’s real, if by that you mean Southeast Asia and Mexico are drawing lots of new investment.
4. Tech policy really is at an inflection point.
The advent of ChatGPT is a step change for AI, laying bare for casual observers AI’s potential to enhance productivity but also raising questions about whether it will render large numbers of white-collar jobs redundant. The reality that most AI research and development is in the U.S. may only add impetus to other governments’ drive for “tech sovereignty,” a term heard often but not only in Europe. Digital protectionism is spreading as U.S. firms are being singled out for extra layers of regulation because they are big and because they are American. Should this trend be fully realized, the costs for U.S. business will be high, but the slower growth, reduced investment, and suppressed dynamism for the economies where these rules are imposed will cause them to fall further and further behind in the global competition for innovation and growth.
5. Inflation persists, and the debt ceiling looms.
Driven by the past several years’ trillions in federal spending, an aggressive monetary easing, and supply shocks stemming from war and Covid-19 shocks, inflation surged to 9% in 2022. The Federal Reserve has responded by raising interest rates, which has slowed economic growth somewhat. The consensus among the U.S. Chamber’s Chief Economists Committee is that the U.S. will experience a mild but short recession in the middle of 2023 caused by consumer and business spending falling because of rising interest rates. However, an impasse over the debt ceiling is the chief policy risk facing the U.S. economy. It is estimated that Congress must pass legislation raising the debt ceiling by July, when it will be reached, or the U.S. will be unable to service its debt and will enter default. In the U.S. Chamber’s view and that of most economists, this would trigger a financial crisis, cause interest rates for families and businesses to spike, and put at risk the market’s conviction that the full faith and credit of the United States is inviolable. The Biden Administration is publicly insisting on a “clean” bill to raise the debt ceiling, while Republicans in the House insist that it must be coupled with spending cuts. There are bipartisan proposals in Congress to begin the work of putting the nation’s fiscal house in order, but it remains to be seen whether this looming deadline helps bring about a meeting of minds.
6. U.S. leadership is back, except where it isn’t.
The U.S. response to Russia’s invasion of Ukraine has been swift and sure, and allies from East Asia to Europe have unified on sanctions, export controls, and financial aid for Kyiv. NATO is expanding, and Russia’s military has lost perhaps half its offensive capabilities. On China, the Biden administration has taken unprecedented steps to use export controls and take related actions jointly with allies. However, Washington has lagged on soft power: U.S. international economic policy is rife with initiatives that are long on rhetoric but leave market-opening, growth-inducing, job-supporting trade deals by the wayside. The U.S. hasn’t added to the list of 20 countries with which it has a trade agreement in place in a decade; in that same span, other countries have inked more than 100. Add to this unfilled ambassadorships and years-long queues for visa interview appointments, and America’s economic statecraft at times looks threadbare.
In sum, the challenges are many, and the need for U.S. global leadership to address them is obvious. The U.S. Chamber will be working with partners in the administration, Congress, and overseas to advance a pro-growth agenda that mitigates risks and seizes the many opportunities of the day.