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The Crossroads of Inflation and National Security

Image: Creative Commons.
Image: Creative Commons.

The topic of inflation is red hot, not just here in the United States, but across the European Union and the globe. U.S. inflation reached an annual rate of 8.5% in March, a 40-year high. Globally, over 60% of the so-called advanced economies have inflation rates above 5%, with the EU reaching 7.8%.

Optimistically, we entered 2022 with signs of a resilient global economy with trade largely recovered to pre-pandemic levels and the manufacturing and services sectors experiencing moderate expansion. Unfortunately, four months into 2022 and we are facing record inflation. Here in the United States, with GDP shrinking at an annual rate of 1.4%, Americans are looking for leadership in addressing what has rapidly become one of their largest concerns.

Finding agreement among economists on the root causes of inflation or whether it is transitory versus structural can be equated to obtaining agreement from Congress on whether the sun came up on a particular day. However, the effect inflation is having on working-class voters is clear, as recent polls highlight an overwhelming number of Americans list inflation as a top concern. While the U.S. Federal Reserve will focus on stabilizing inflation through monetary policy, for policymakers it is time to address long-term risks affecting inflation.

There are three risk areas contributing to inflation that are ripe for policy solutions with defined goals and accountability for outcomes. We need the proper leadership to address these risks: record-high energy-price increases, soaring shipping costs, and an abusive use of trade policy – all of which contribute to increased costs for Americans, weakened economic security, and need to be addressed holistically.

A key driver of the surge in inflation across advanced economies is the continued rise in energy costs. Most discernibly playing out across Europe where energy costs are contributing 3 percentage points to the annual inflation rate. Compared to adding 2 percentage points to the annual inflation rate in the United States. What we see playing out in Europe is the cost of energy dependence from an authoritarian regime and a reckless transition to non-fossil energy sources to achieve climate targets.

The problem has been presented as one with binary solutions–fossil fuels versus clean, renewable energy–instead of a problem with a spectrum of solutions. Policymakers must balance economic security with concerns over global warming and recognize the strategic, progressive nature of evolving from fossil fuels to cleaner renewable energy sources. The change will not occur overnight, however, as we move towards emerging cleaner energy technologies, it is important to not sacrifice national and economic security. Advances in technology need to be fostered, prioritizing investments in innovation such as hydrogen technologies and advanced small modular reactors. While technologies are developed and brought online, we must keep our economy strong through energy independence and not allow ourselves to be manipulated by authoritarian regimes.

Another important driver of inflation and one which is often overlooked is the cost of transporting everyday commodities. As a result of increased demand and dogged supply chains, the cost of eastbound Trans-Pacific shipping rates has increased by 150% in the past year and over 350% from pre-COVID-19. According to the International Monetary Fund, inflation picks up by about 0.7% when freight rates double, and the effects typically last over 18 months. The impact on inflation this year is already estimated to be 1.5%.

From a national security perspective, consider the following maritime commerce statistics: 23 million U.S. jobs, $4.6 trillion in economic activity, and over 90% of U.S. imports enter and exports exit by ship. It is no wonder our economic resilience and national security are tied to the health of our ports, the U.S. Navy and Coast Guard, and the U.S. Merchant Marine. Given the importance of shipping to the economy and national security, it is disturbing that less than 2% of the nation’s waterborne imports and exports are transported on ships flying the U.S. flag and less than 200 of the current 44,000+ ocean-going cargo ships are American. While the People’s Republic of China has both the largest military and the largest fleet of ocean-going cargo ships.

Ensuring open trade routes requires a viable Navy, a commercial fleet, and merchant marines. The debate should not be whether we need the Jones Act, the Maritime Security Program, or Cargo Preferences—which are the law and policies that aim to ensure the continued existence of American shipping—but how they should be implemented moving forward. One approach to addressing our risks in shipping commodities in a global economy is to expand cargo preferences in a phased approach. Initially, we should require all U.S. Government cargoes to be carried on U.S.-owned and manned vessels and, over time, further expand to requiring the same for a certain percentage of U.S. trade. This would encourage sustained growth in the U.S. commercial fleet and ranks of commercial mariners while reducing disruptions to shipping and mitigating volatility in the international shipping market.

Abusive use of trade policy, specifically in administering antidumping law, is likely the least obvious contributing factor to inflation. Yet these abuses not only contribute to inflation but also weaken domestic competition and erode international relationships with allies and partner nations. Each year the U.S. judicial system generates dozens of remands instructing the U.S. Department of Commerce to change its assumptions, methodologies, or calculations. These serve as evidence of routine abuse of the discretion provided to Commerce, who carries out the role of judge, jury, and executioner – all while serving as a consultant to the domestic industries filing petitions.

Under the antidumping law, dumping is defined as the sale of a commodity by a foreign company in the United States at a price that is less than market value to win contracts, create vendor lock, or even drive competitors out of business. The origins of modern antidumping laws and agreements can be traced back to post-World War II and the General Agreement on Tariffs and Trade negotiations where U.S. negotiators insisted that antidumping be included to encourage more holistic trade liberalization. Over the years, U.S. antidumping policy has evolved to become more accessible and rewarding to U.S. import-competing industries, culminating in the “Particular Market Situation” practice and the latest trade remedy law reform language found in the House Bill “America COMPETES Act” which allows successive rounds of antidumping based on a flawed Department of Commerce process and an unsustainably low bar of “causing material injury.”

In the case of antidumping, the law itself, not unfair trade, creates an unlevel playing field. The law has become a commercial weapon used by U.S. companies against other U.S. companies and is partly responsible for driving up costs. Awaiting action by the judiciary has proven futile as its standards of administrative deference prevent action. Instead, it is left to Congress who should feel compelled to provide a fix or intelligible principle limiting the executive branch’s exercise of discretion in this case. Otherwise, the current trajectory will only erode domestic competition, harm our overall economy, and weaken our national security. Congress should reject the trade remedy law reform found in the America COMPETES Act and seek to strengthen the intelligible principle by which Commerce exercises anti-dumping regulation.

Addressing inflation through monetary policy is a short-term solution requiring periodic corrections, however, this approach does not address underlying vulnerabilities in the U.S. economy. Taking action to address these national security challenges today will provide the foundation for a stronger economy tomorrow. Peace through strength in today’s global economy must include a plan to enhance economic resilience and is a policy that resonates with everyday Americans.

Brian Cavanaugh is a senior vice president at American Global Strategies LLC. He served as Special Assistant to the President and Senior Director on the U.S. National Security Council, 2018-2021.

Written By

Brian J. Cavanaugh is the Senior Vice President at American Global Strategies LLC, an international strategic advisory firm co-founded by former National Security Advisor Robert C. O’Brien and Alexander B. Gray. Mr. Cavanaugh focuses on critical infrastructure security and resilience, crisis management planning, continuity of operations, and disaster response and recovery operations. Prior to joining American Global Strategies, Mr. Cavanaugh served as the Executive Director for Strategic Planning and Integration for the Department of Homeland Security’s Countering Weapons of Mass Destruction Office (CWMD). In this capacity he was responsible for the oversight of policy development, integrated execution, and whole-of-government coordination for the Department’s health security and resilience mission.