Elephants in the Room
Here’s How the U.S. Could Better Wield Its Economic Clout
What the United States needs is a national economic security strategy that draws on the range of U.S. economic power — beyond sanctions.
As the Trump administration settles into office, it inherits powerful tools of economic statecraft to safeguard U.S. national security. These include sophisticated economic sanctions, anti-money laundering measures, and tools to counter the financing of terrorism authorities. Perhaps the greatest strength of the United States is its ability to wield its unparalleled economic clout to ensure certain national security objectives. But all of this is increasingly under threat.
The Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance (full disclosure: where I am senior advisor) on Monday published a yearlong study, drawing from more than a dozen seasoned practitioners of financial statecraft. The result is a comprehensive report laying out the challenges and opportunities that lie ahead for the Trump administration. Here is what we found:
The challenges to U.S. national economic security are numerous. China continues to undermine U.S. interests, threatening sanctions against U.S. companies for doing business with Taiwan and banning charter flights from South Korea after it agreed to deploy U.S.-built Terminal High Altitude Area Defense missile defense systems on its soil. Beijing continues to strategically invest in U.S. and partner nation companies in ways that raise national security concerns, such as investments in high-tech startups and attempts to purchase critical infrastructure.
Moscow has followed suit, imposing economic sanctions on its neighbors and becoming increasingly aggressive in cyberspace, including attempts to influence the 2016 U.S. presidential election, according to the U.S. intelligence community.
These challenges are not limited to China and Russia, however. Rogue states have begun engaging in economic warfare in ways that directly threaten U.S. national security and the integrity of the international financial system. North Korea, for example, was recently implicated in using sophisticated cyber capabilities to steal more than $80 million from a number of banks, including the Central Bank of Bangladesh. North Korean hackers created false payment messages on the Society for Worldwide Interbank Financial Telecommunication system and, as a result, tricked unwitting financial institutions into transferring millions of dollars into fake accounts and state-sponsored cyber criminals’ coffers.
Nonstate actors are also corrupting the international financial system by using it to finance terrorism. For example, the Islamic State has solicited and received significant sums of money from supporters in Western Europe, often through prepaid credit cards, to augment its operations in Iraq, Libya, and Syria.
Despite nearly two decades of honing its economic national security statecraft, the United States remains ill prepared in many ways to address these threats. U.S. policymakers have focused on national economic security in a piecemeal fashion. Different agencies have responsibility for disparate elements of U.S. economic power. This lack of coordination has diminished the U.S. ability to leverage its economic influence. More broadly, the U.S. generally lacks the vocabulary, strategy, and organization to combat these threats and apply economic power.
What the United States needs is a national economic security strategy that draws on the range of U.S. economic power — beyond sanctions. Such a strategy should consider how Washington uses its positive economic power — such as strategic investment to eliminate illicit financing, corruption, and financial crimes — to complement more coercive tools.
Such a strategy should also incorporate elements of defensive economic power. A good start would be expanding the scope of the interagency Committee on Foreign Investment in the United States review to examine foreign investment (China, most prominently) in U.S. technology startups. But the right strategy should also include bolstering allies against China’s economic coercion in East Asia, and helping U.S. companies protect themselves from Chinese, Russian, and other states’ campaigns to deploy cyber-enabled economic warfare.
The way forward must also include efforts to improve the integrity of the international financial system. This is critical to the United States’ ability to impose biting sanctions and prevent illicit financial activities such as money laundering and terrorist financing. The United States, thanks to the strength of its economy and the relative safety of the dollar, has long been in the right position to lead the global campaign to counter terrorist financing and increase the transparency of the international financial system. But terrorists, drug kingpins, and sanctions evaders are constantly finding new ways to exploit the system.
The new administration can undertake structural reforms to ensure implementation of this strategy. These could include establishing an Office of Policy Planning at Treasury Department, which would develop strategies to deal with offensive and defensive economic and financial warfare. Likewise, the White House should consider establishing an economic sanctions advisory board, which would advise heads of relevant agencies and offices. Crafting effective sanctions frequently requires private sector buy-in, and insights from financial institutions can help calibrate them. The board would consist of relevant officials, as well as academics and private-sector leaders in finance, trade, and insurance who could provide insights into what is and is not working in U.S. sanctions policy and how Washington can sharpen its tools of economic statecraft while limiting unintended consequences.
These steps and reforms are necessary to safeguard U.S. national economic security. The president has his work cut out for him. Through our report, we thought we might give him a head start.
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