Strengthening Economic Statecraft with USAID Reform
With USAID now folded into the State Department, the Trump administration should focus on realigning U.S. global development aid toward strategic competition with China.
With USAID now folded into the State Department, the Trump administration should focus on realigning U.S. global development aid toward strategic competition with China.
President Donald Trump has announced a sweeping set of reforms to USAID, America’s international assistance agency. While simply eliminating the agency would undercut U.S. influence abroad and hurt American power, the Trump administration is right that USAID and American assistance more generally are ripe for change. However, smart reforms should in no way disparage the agency’s rank and file who have demonstrated extraordinary professionalism and patriotism, including those who have given their lives in service to the nation. USAID’s legacy represents the best of America and should be built upon, not terminated.
USAID was set up during the early days of the Cold War to serve America’s strategic interests. In concept, it was born of President Truman’s 1949 Four Point inaugural address, which called for “embark[ing] on a bold new program for making the benefits of our scientific advances and industrial progress available” to the developing world.
President Kennedy established USAID in its modern form in 1961 as an independent agency. In the following decades, USAID played a critical role in addressing the development needs of nations across all major continents and winning hearts and minds throughout the Cold War.
After the end of the Cold War, USAID pivoted to pursue a more development-oriented mission while also providing valuable humanitarian assistance. USAID aligned with the strategic priorities of the Global War on Terrorism. For example, it supported economic development initiatives in Iraq and Afghanistan. The George W. Bush administration, the Obama administration, and the first Trump administration also promoted other complementary development agencies, including the Millenium Challenge Corporation (MCC), the U.S. Trade Development Agency (USTDA), the International Development Finance Corporation (DFC) and the U.S. Export-Import Bank (EXIM).
Today, America faces a new geopolitical reality, one marked by competition and potentially outright military conflict with China. It’s time to reposition America’s development agencies to advance our security interests more effectively.
To prevail in the generational economic contest with China, the United States must marshal the power of free markets, private capital, and innovation to supersede Beijing’s state capitalism and state planning. This calls for the United States to deploy private capital in theaters of high national interest strategically. Government direction of private capital is fraught with risks and inefficiencies. Effectiveness requires extraordinary realism, tact, as well as a complementary and coordinated approach from multiple development agencies.
The DFC offers a suite of financial assistance tools to American and allied businesses to invest in underdeveloped and emerging economies. The EXIM Bank is the United States’ official export credit agency. These two entities are inherently demand-driven rather than subject to economic planners. While policymakers can provide strategic priorities, American businesses are responsible for finding specific deals with developing nations—like an agreement to secure critical minerals or build a telecom network, which the DFC and EXIM can then finance. Consequently, their ability to direct investments to priority areas and sectors is augmented by auxiliary and preparatory services offered by sister agencies.
USTDA specializes in conducting feasibility studies and may undertake associated environmental, cultural, and land surveys and studies. USTDA also leads an effective Global Procurement Initiative to harmonize procurement policies to high standards across national jurisdictions. MCC offers grants—not loans—for public infrastructure in return for demonstratable good governance to poor nations that cannot afford commercial loans. USAID is arguably the world’s foremost agency to build regulatory and institutional capacity in improving the business environment and financial resilience of targeted nations of interest—paving the field for free markets and greater American private investments. If they act in unison, these five agencies could offer a redoubtable armory for economic statecraft that advances American interests.
President Trump, in his first term, signed the “BUILD Act,” which created the DFC while expanding and overhauling the Overseas Private Investment Corporation (OPIC). Congress established the OPIC to support private U.S. investments abroad in 1971. Both DFC and EXIM are up for Congressional reauthorization this year, and the House Foreign Affairs Committee has just announced a hearing for the former’s reauthorization. President Trump—like Presidents Truman and Kennedy before—has a historic opportunity to modernize institutions with greater efficacy for economic statecraft while reducing bureaucratic waste.
First, Congress should promptly reauthorize DFC and EXIM with improvements to critical provisions. DFC needs an increase in its investment authority to $100 billion, with no arbitrary limits on how to invest the funds, and Congress should pass technical fixes to make it easier for DFC to make equity investments as well as loans. EXIM needs reforms to make it easier to lend to higher-risk projects where the United States is competing directly with China while still supporting U.S. exports.
Second, greater coordination is needed among these different agencies. In addition to being given oversight of USAID—something Trump has already accomplished—State could be given greater oversight over the other agencies as well. In turn, a more robust economic statecraft capacity at the State Department would enable it to leverage similar institutional capacities among America’s closest allies like G7 and Quad nations. It would also enable better leverage of U.S. and allied contributions to the World Bank, IFC, and regional banks in addressing the economic aspirations of emerging nations.
While President Trump was often criticized as an isolationist during his first term, his actual record on development was quite strong between the establishment of the DFC, EXIM’s reauthorization, and efforts to boost USAID. Trump should seize the opportunity to build on that legacy and embolden American institutional capabilities to employ economic statecraft with effect rather than follow the advice of some who would diminish them further.
Kaush Arha is the President of the Free & Open Indo-Pacific Forum and a nonresident senior fellow at the Atlantic Council and the Krach Institute for Tech Diplomacy at Purdue. He previously served as the senior advisor for global strategic engagement at USAID and the G7 Sherpa for the Blue Dot Network during the Trump administration.
Peter Harrell is a Nonresident Senior Fellow at the Carnegie Endowment for International Peace and previously served as senior director for international economics, with a joint appointment to the National Security Council and National Economic Council during the Biden administration.
Image: Tom Wang / Shutterstock.com.