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Five Things to Watch in 2022

CSIS Economics Program is ready to try again to make sense of the year ahead. Here are five things we will be watching in 2022

  • Center for Strategic & International Studies | 04/01/2022

Center for Strategic & International Studies

Covid-19 Economics: The trajectory of Covid-19 is likely to remain the largest determinant of the global economic recovery in 2022. The Omicron variant appears to spread more rapidly than previous variants. The International Monetary Fund (IMF) estimates that a prolonged pandemic could reduce global gross domestic product (GDP) by $5.3 trillion over the next five years, in addition to the $12.5 trillion in output already lost. For governments seeking to contain Covid-19 outbreaks—especially “zero Covid” policies such as in China—more transmissible variants will compound the tradeoffs between protecting public health and allowing unrestricted activities.

The IMF expects to downgrade its world GDP forecast for next year—from the 4.9 percent predicted in October—because of the Omicron variant. The U.S. economy is likely to sustain the remaining recovery among advanced economies. Other advanced economies more politically willing to enact new lockdowns could see larger negative economic impacts. China’s economy is unlikely to drive global growth. Beijing has promised more tax cuts but remains reluctant to support domestic consumers, as the Chinese government tries to rein in corporate debt and the property sector. Emerging market and developing economies will remain more vulnerable to new variants in part because of lower access to vaccines.

Inflation during the pandemic has exceeded early expectations, increasing pressure on the U.S. Federal Reserve and other central banks to tighten monetary policy. Major economies with higher inflation face an unprecedented combination of a demand shift from services to goods, strong demand in part from fiscal support, and supply-chain limitations. These factors will be slower to adjust amid new Covid-19 variants. To date, inflationary pressures have been strongest in the United States, where consumer prices have increased more than the average for G7 and G20 economies. While overall inflation is lower in most developing and emerging market economies, food and energy price increases pose a greater risk for economies where such goods account for a larger share of household budgets.

Policy tightening in advanced economies could lead to higher global interest rates, including for developing countries’ foreign currency-denominated debts. The G20 Debt Service Suspension Initiative will expire this month, and the IMF’s Catastrophe Containment and Relief Trust will likely end early next year. The IMF managing director has warned that some low-income countries could face “economic collapse” unless G20 creditors provide more debt relief. (GD)

U.S. Strategy in the Indo-Pacific: The new year will test whether the Biden administration can advance U.S. economic interests in the vital Indo-Pacific region—and persuade skeptical Asian allies and partners that it has a credible plan to do so. Not yet ready to signal U.S. interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or a similar trade agreement, President Biden announced a new “Indo-Pacific economic framework” (IPEF) during his meetings with regional leaders in the fall of this year. The IPEF listed six topics of interest for discussion with regional partners, including digital standards, supply chain resiliency, and clean energy.

All good topics, but the details under each will be important. A critical question is whether the new framework will balance U.S. insistence on high-standard rules and Asian partners’ desire for tangible benefits. The latter will be more difficult if the administration is unwilling to ask Congress for legal changes to give trading partners more access to the U.S. market. Another big question is whether the White House can coordinate a sprawling initiative with multiple agencies and lines of effort involved.

Meanwhile, two related questions will be in the spotlight in 2022: First, whether China makes progress on its application to join CPTPP; Japan, Australia, and other existing members will likely slow-walk the application, but Beijing’s pressure may be hard to resist, especially if Washington keeps its distance. The second question is whether the Biden administration can overcome Russian obstructionism and get an endorsement of its offer to host the Asia-Pacific Economic Cooperation (APEC) forum in 2023; APEC is an important—if underappreciated—tool of U.S. economic strategy in the region. (MPG) 

U.S.-China Competition: As Washington and capitals around the world seek to respond to Beijing’s increasing assertiveness over the next year, expect the distinction between economic security and national security to continue to blur.

Although the Biden administration has yet to release a comprehensive China strategy, some broad contours are coming into focus, indicating a priority on economic security. The president has continued the processes to strengthen investment screening and export controls initiated under the previous administration. In addition, the White House and Congress have both signaled an interest in establishing an outbound investment screening mechanism.

The administration’s economic security policies may come into conflict with its stated aim of working more closely with allies and partners. Both the phase one trade agreement and proposed domestic investments have raised concerns over potential WTO violations, while ongoing supply chain reviews and calls to “Buy American” foreshadow efforts to encourage reshoring. The newly established U.S.-EU Trade and Technology Council between the United States and European Union and the nascent Indo-Pacific economic framework seek to assuage allies’ concerns.

At the same time, Beijing has also prioritized economic security. In the past year, the Chinese government has announced regulations aimed at reining in the consumer technology sector. The drive towards greater self-sufficiency and resilience through the “dual circulation strategy” portends increased global trade tensions and continued regulatory uncertainty. Beijing has also been refining its economic coercion toolkit, unveiling new tactics against Lithuania.

Middle powers, too, have begun implementing their own economic security policies. U.S. allies including Japan and the United Kingdom have strengthened their investment screening regimes, while the European Union has recently adopted a novel “anti-coercion instrument.” Watch for developing countries to follow suit, potentially rolling out policies aimed as much at protecting domestic industries as advancing legitimate national security interests. Striking the proper balance between security and openness will be an increasingly difficult challenge for supporters of free trade and markets. (MR)

Digital Currencies: Next year will bring further adoption of official central bank digital currencies (CBDCs) and private cryptocurrencies.

In 2020, the Bahamas became the first government to establish a CBDC. Fourteen CBDC pilots are underway, and most major central banks are researching CBDCs. China’s pilot of its CBDC—the e-CNY—has gone the farthest of any other major economy. While an official launch date has yet to be announced, Beijing likely will encourage foreign visitors to use e-CNY at the Winter Olympics. The U.S. Federal Reserve is researching a potential digital dollar, and the Boston Fed—in collaboration with the Massachusetts Institute of Technology—plans to publish their early design research soon.

For private cryptocurrencies, increased regulatory clarity in major economies could spur greater adoption. The European Union is working to finalize its Markets in Crypto Assets (MiCA) framework, while the U.S. Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have pledged to provide more legal clarity for crypto activities in 2022. The U.S. Senate held hearings this month on stablecoins, and some senators have proposed regulatory frameworks. Crackdowns on cryptocurrencies in other jurisdictions—especially China and possibly India—are forcing crypto mining and development to move elsewhere.

Some governments, financial service providers, and retailers—including PayPalVenmoVisa, and Mastercard—will continue integrating cryptocurrencies into their banking systems or platforms. In September, El Salvador became the first country to adopt Bitcoin as legal tender. The IMF says this is unwise in part because of Bitcoin’s high price volatility. However, the popularity of Bitcoin in that country and the financial sustainability of El Salvador’s Bitcoin trust fund could encourage other governments to endorse cryptocurrencies.

More technically, the transition from proof-of-work (PoW) to proof-of-stake (PoS) transaction validation—especially on the Ethereum blockchain—will improve energy efficiency, lower barriers to entry for small investors, and increase network throughput, which will further encourage the adoption of related coins, tokens, and smart contracts. (GD)

Orbital Infrastructure: The global connectivity competition is intensifying in outer space, where new constellations of satellites in low-earth orbit (LEO) could take big steps forward in 2022. SpaceX’s Starlink will be expanding its global coverageOneWeb plans to make global service available, and Amazon’s Project Kuiper will be launching two test satellites. Several factors are driving these efforts forward, including declining launch costs, advances in satellite and receiver technology, and growing demand. I used a beta version of one of these systems while writing The Digital Silk Road and was impressed with the ease of installation and performance.

Looking ahead, U.S. policymakers could harness these developments to advance U.S. interests and help close the global digital divide. Key questions include how to remove barriers in foreign markets and how to reduce costs for lower-income consumers. The race to secure landing rights in major markets is already underway, and the window of opportunity to lead in this commercially and strategically important area will not last forever. China is lagging behind, but it has made satellite internet a national priority. Few details are known about the plans for its alternative, China SatNet, but of course, state control will be paramount. (JEH)


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