How Cities Navigate the New Economic Order

As CIA Director William Burns asserted in a speech earlier this summer (DCIA William Burns Remarks – Ditchley 59th Annual Lecture), we are living through a rare “plastic moment” in history, one which is fundamentally remaking assumptions and arrangements that have been settled for decades.

A new global economic order is emerging in the aftermath of the pandemic, powered by profound geo-political tensions, transnational threats, technological advances and, in the United States, unprecedented investments by our federal government. These and other disruptive dynamics, complex, chaotic and still in formation, are already shaping the fortunes of cities and metropolitan areas.

Macro forces have always had metro effects, for better or for worse. The second world war and the Cold War that followed, for example, helped shape the modern economies of California cities like San Diego, Los Angeles, Sacramento, San Jose and San Francisco and the global tech phenomenon that is Silicon Valley. The post war era, powered by federal financing of infrastructure and single-family housing, dissected cities, favored suburbs and decentralized sprawling metropolitan areas. The globalization of the 1980s, 1990s and 2000s shattered whole industrial sectors in the US and the manufacturing communities that grounded them.

Like these prior shocks, the new economic order will reward certain cities and metropolitan areas and punish others. It will uniformly demand that city and metropolitan leaders understand the dynamics as best they can and steer their communities through uncertain times in ways that leverage opportunities and mitigate harm.

Here is our view of what is happening, what it means, and, most importantly, what to do about it.

Decades after the fall of the Berlin Wall and the dissolution of the Soviet Union, the world has, once again, become a dangerous place. Russia’s invasion of Ukraine and rising tensions with China have made the reshoring of production, and the control of sensitive technologies and critical minerals, issues of national security. As Ed Luce recently wrote in the Financial Times, “The world is moving into a new type of great power rivalry.”[1] After decades of offshoring, outsourcing and globalization at any costs, the US is suddenly realizing it needs to make things again. As Alejo Czerwonko, chief investment officer for Latin America at UBS Wealth Management, has noted “Countries and companies are promoting resilience, security and safety over price and efficiency for the first time in over 30 years.”[2]

After decades of a “peace dividend,” the military-industrial complex, to use an evocative phrase coined by President Dwight Eisenhower, has returned at scale. Defense spending in the United States (and among its allies and enemies across the world) is on the rise. In FY 2023, Department of Defense Appropriations totaled $797 billion, an almost 10 percent increase over FY 2022. Remarkably, Congress provided $45 billion over what the Biden Administration had initially requested, a product of growing national security concerns as tensions with China worsened during the fiscal year.

A series of transnational challenges, including climate change and the COVID 19 pandemic, are likewise, forcing radical changes in how societies re-design complex systems. As CIA Director William Burns opined in his recent talk, “Climate change is the quintessential ‘threat multiplier’ – fueling energy, health, water and food insecurities, setting back our progress on economic and human development, turbocharging what is already the worst period of forced displacement and migration in history, and further exacerbating instability and geopolitical tensions and flashpoints.” As with other macro forces, climate change is requiring an industrial transformation of monumental proportions – in the electrification of our automobiles, the design, operations and location of our buildings and the source and transmission of our energy.

These changes are catalyzed by unprecedented federal policies and investments which set the frame for restructuring the national economy but require cities and metropolitan areas to deliver what comes next.  Federal funding measures include the $1.9 trillion American Rescue Plan, the $1.2 trillion Investments in Infrastructure and Jobs Act, the $280 billion CHIPS and Science Act, the $411 billion Inflation Reduction Act and the soon to be $800 billion+ annual Department of Defense Appropriations.

As Anne-Sylvain Chassany wrote in the Financial Times earlier this year, “The CHIPS Act, along with the Inflation Reduction Act … are the most significant attempts to revive industrial policy in the capitalist world since the aftermath of the second world war.”[3] Investments are being purposefully used to cement US leadership around such economy shaping technologies as artificial intelligence, semiconductors, robotics, quantum computing and advanced energy.

But federal action is not just about investment. As Ana Swanson summarized in a recent article: “While China remains an important economic partner, American officials have increasingly viewed the country as a security threat and have imposed a raft of new restrictions aimed at crippling Beijing’s access to technology that could be used to strengthen the Chinese military or security services.”[4]

These changes alter the pre-COVID world of trade and investment. Decoupling or de-risking doesn’t mean de-globalization; it just changes the flow. Multiple factors have caused China’s share of US imports to fall as the share of imports from such low-cost countries as Vietnam and Mexico have increased. Foreign direct investment in the US computer and electronic sectors have ballooned, rising from $17 million in 2021 to $54 billion in 2022. As the recent BRICS Summit in Johannesburg showed, middle-weight powers are now weighing relationships with both China and the United States as an “a la carte”[5] world emerges.

These changes create a world of intense competition and necessary collaboration.  As CIA Director Burns noted: “[These] singular challenges sometimes conflict with one another, with cooperation on shared global problems both more vital and more difficult, too often the victim of strategic competition. And the revolution in technology is both a main arena for that competition, and a phenomenon in which some basic partnership is crucial toset rules of the road, to maximize the benefits of emerging technologies and minimize their dangers.”

Where Macro Meets Metro

These macro forces have profound metro effects, which are only beginning to play out. Pre pandemic, the hierarchy of US cities metros was driven by service and financial sectors and consumer- and communications-related technologies. That hierarchy is being reshuffled in an economy driven by national security concerns, sensitive technologies, critical minerals, a redrawing of domestic and global supply chains and, remarkably, a re-shoring of advanced production.

The full spatial implications of this version of economic restructuring are still to be determined. In many respects, it has been easier to discern the implications of the new global order in German cities and metros, which have been forced to adjust quickly given their excessive dependence on Russia for cheap energy and on China for industrial trade. But it is still possible to spot early signals in the US, based on the confluence of metro position, market dynamics and public and private investments.  A group of metros are staking a strong position in the changing economy, either because their assets are directly aligned with shifting market and security dynamics or because they are taking deliberate action to do so.

Here are our observations about some early metro winners.

Military Metros: Defense spending is rapidly rising and will disproportionately benefit communities that have distinctive military assets developed over decades if not centuries. If history is any guide, there will be a sizable defense dividend for those cities, metros and states smart enough to leverage it.

St. Louis will be one of those metropolitan areas. The bi-state metro is home to Scott Air Force Base and the National Geo-Spatial Intelligence Agency. In addition, Boeing, one of the nation’s largest defense manufacturers, has a substantial presence in the region. As a result, the St. Louis metropolis received $11.4 billion in defense related contract and personnel spending in FY 2021.

The economic benefits of this spending radiate far and wide: to small and medium sized enterprises in the aerospace and logistics supply chain, to skilled workers who have access to quality jobs, to local-serving businesses which have increased demand for their goods and services, and to local universities and community colleges which have a stronger base for their offerings in applied research and workforce development. As described below St. Louis is not resting on its defense laurels; it is purposefully seeking to use its enviable position to regenerate disadvantaged parts of the core city and invent or apply technological breakthroughs that have tradeable possibilities.

New Technology Hubs: The reshoring of production is happening fast in advanced industrial sectors that deploy sensitive technologies that the US must dominate for national security purposes. Metropolitan areas like Columbus (OH) and Phoenix are already successfully attracting large semiconductor companies and the domestic and global supply chain firms that serve these advanced industries.  As with defense spending, these industrial wins are setting a new, multi-decade platform for economic growth that could be innovative, inclusive and sustainable. These early metropolitan winners illustrate not only the catalytic role of federal industrial policy but the powerful rewards of having state and local governments, metropolitan business organizations and anchor institutions and utilities that collaborate to compete.

Climate First Movers: The national media reports weekly on the “battery belt” of next generation automotive production that stretches from the Midwest to the Southeast and beyond. The speed of this manufacturing boom is dizzying, and its spatial implications are disparate, simultaneously regenerating older industrial sites in core cities like Detroit while developing new factories at the periphery of such metropolitan areas as Greensboro, NC, Savannah, GA and Spartanburg, SC.

But that is just the tip of the iceberg, so to speak. The energy transition touches every aspect of the modern economy, driving transformative changes in the nature and location of the energy we use, the buildings we occupy, the consumer products we buy, the infrastructure we depend upon, the materials we employ and the very means of mobility and design of our communities. The potential for first mover positions in these disparate sectors, for domestic adoption and global consumption, is limitless. With regard to renewable energies, metros like New Orleans are already striving to lead on hydrogen while city-states like Rhode Island are building on early successes in offshore wind. Innovations in the transportation, logistics and housing sectors are also up for grabs: San Bernadino, CA could be a hub for sustainable logistics, New York City for energy-efficient housing and coastal resilience, San Francisco for multiple forms of clean tech.

Trading Powerhouses: Geo-political tensions are already altering global supply chains and driving a new intricate web of nearshoring and friend shoring. As the Latinos and Society Program at the Aspen Institute has emphasized, nowhere is this more apparent than in the Borderplex region that encompasses Juarez, Mexico, El Paso, Texas and Las Cruces, New Mexico. According to the Borderplex Alliance, the bi-national region harbored the manufacturing hub with the fifth highest employment in North America and accounted for 17% of all trade with Mexico. And this powerful position is slated to grow, as the bi-national metropolis graduates from resource extraction to food and clothing production to the manufacturing of sophisticated electronic and medical equipment and aerospace- and defense-related products.

But trading relationships and investment patterns extend far beyond the favored metropolitan areas that conveniently locate on national borders. As Columbus, OH and Phoenix have already discovered, for example, attracting major semi-conductor facilities brings with it new relationships with the Korean, Taiwanese, Indian, Israeli and other foreign companies that supply the large manufacturers. The same will be true of countless other sectors in the economy, stretching from agriculture to life sciences to aerospace to automotive and energy. Reshoring advanced production doesn’t diminish globalization; it just remixes the network of trading cities in the world.

These early metro winners are winning for a reason. In many cases, legacy assets (e.g., major defense installations, longstanding clusters, large companies, advanced research institutions) are being revalued. But winning is also a reward for radical collaboration across sectors and purposeful action to knit together investments in transport and digital infrastructure, applied research, energy, workforce and housing, the core elements of modern competitiveness.

How Metros Adjust

Cities and metropolitan areas face a stark choice as the new global economic order takes hold.  Let disruptive dynamics work their will, for better or for worse. Or act deliberately to seize the moment.

For cities and metropolitan areas that choose the latter path, three early moves are of the utmost importance.

Understand your starting point in the new economic order. The impact of the new economic order will not be uniform across communities; cities and metros have radically distinct assets and advantages. Thus, there is a compelling need for each city and metro to situate itself in the shifting economy. This will require a different kind of economic analysis that takes account of new driving forces and local assets that may have been hidden or undervalued by the prior economy.

Capturing the defense dividend, for example, will necessitate assessments of the current state of defense procurement, on both the contract and personnel side, across the vast continuum of military bases, universities and research institutions and manufacturing hubs.

Staking a position around key sensitive technologies (e.g., artificial intelligence, robotics, quantum computing, biotechnology) or around different elements of the energy transition (e.g., renewables, building and transportation sectors) will require a focus not only on long standing economic clusters but on the innovative firms and advanced skills that will drive next generation growth.

Becoming a new vehicle for global trade and a magnet for foreign direct investment will demand an understanding not only of local strengths but of shifting global supply chains and investment patterns.

And mastering federal resources will require the unified mapping of investments in, among other things, manufacturing, infrastructure, climate, energy, workforce and housing. Here again, St. Louis is leading the pack with a new website (Home – STL 2030 Progress) that tracks disparate federal investments and collaborative initiatives.

These new assessments should be based on objective evidence and unbiased conclusions. Their geographic focus should start with metropolitan areas, which continue to be the organizing units of the global economy. But the US definition of metropolitan statistical areas, which reflects commuting patterns and commuter sheds, may be too narrowly drawn. In many parts of the country, the simultaneous occurrence of reshoring, remilitarization and decarbonization may require new metro-region analyses that examine broader supply chains and energy relationships and, ultimately, collaboration between universities, energy labs, military facilities, utilities and beyond.

Design and deliver transformative projects. With its relevant economic position established, a city and metro must take steps to leverage its distinctive offer to the max. This follows the oft-quoted Dolly Parton guidance “Figure out who you are and do it on purpose.” To that end, St. Louis, Missouri is not just securing large defense contracts; it is establishing an Advanced Manufacturing Innovation Center to give Boeing and its suppliers in the defense aerospace sector the applied research and skilled workforce they need. In El Paso, a coalition led by the city government and the University of Texas at Paso was awarded $40 million by the US Department of Commerce to develop a regional advanced manufacturing cluster supporting the aerospace and defense industries and the concentration of such national security assets as Ft. Bliss, White Sands Missile Range and Holloman Air Force Base.

Transformative projects are transformative precisely because their impact radiates far beyond the narrow economic realm. The St. Louis Advanced Manufacturing Innovation Center is transformative in part because it is locating on the historically disadvantaged north side of the city, to ensure that the benefits of industrial transition accrue to a place and a population left behind by the prior economy. The El Paso effort is transformative because it aims to build up the capacity and capability of locally owned firms that can participate in advanced industries, creating a foundation for future growth and wealth building. Various university-backed “tech hubs” or expanded investments in military research facilities will be transformative not just because they are supporting the evolution of next generation technologies but because they are located in downtowns and central business districts devastated by remote work and the unsustainable decline in commercial real estate values, small business vibrancy, transit ridership and municipal tax revenues.

As this newsletter has proselytized, the confluence of market dynamics and federal investments makes this a “project decade” and requires new Investment Playbook tools to concretize project ideas and provide specificity on costs, capital stacks and potential resources.  Such tools make it more likely that sound ideas will move from concept to fruition and become the catalyst for substantial multi-sectoral investment and commitment. To the greatest extent practicable, cities and metros need a portfolio of actionable projects that realize the full potential of their competitive position.

Practice and institutionalize radical collaboration. Building the next economy requires an ecosystem of public, private and civic players that can provide the supports advanced industries need to succeed. This ecosystem naturally includes universities providing the applied researchers who can continuously assist with product and process innovation; community colleges providing a steady stream of qualified workers who can master the complex nature of advanced manufacturing; transportation agencies, ports and airports enabling the efficient movement of goods and services; and public and private utilities ensuring reliable, renewable and affordable water and energy. Places like Columbus, OH are winning economy shaping industries because they understand that economic development is not a singular transaction but rather an integrated amalgam of investments.

Radical collaboration is best achieved when it is embodied in an intermediary that is governed and capitalized by a network of public, private and civic institutions.  It is not an accident that winning metros have entities — Central Indiana Corporate Partnership, Columbus First, Greater STL — that are built to leverage opportunities and solve challenges on a constant, regular basis.  These intermediaries understand that navigating the new economic order is a game of multi-level chess, with actions needed across all levels of government and sectors of society.

Conclusion

Our world is changing. A new global economic order is emerging that will determine the future competitiveness and prosperity of the United States. Since the US economy is, in essence, a network of metropolitan economies, it is axiomatic that metros will rise or fall depending on their alignment with and furtherance of the changing economy.

Navigating through this disruptive period will not be easy. For the past several decades, US cities and their metropolitan areas were told to plan for a post-manufacturing future, driven by service rather than production economies. Now, almost overnight, they are being compelled to implement an industrial transition of major consequence.

Cities and metropolitan areas also have their own wicked challenges (e.g., remote work, homelessness, unaffordable housing) which demand constant attention. City and metropolitan leaders are trained to master local issues and policies; understanding macro forces can feel intimidating, even overwhelming.

In the end, however, there is no choice. Given the vagaries of partisan gridlock and ideological polarization at the national and state levels in the US and beyond, cities and metropolitan leaders have long understood that they must be lead protagonists rather than bit players in the shaping of their own destinies. The future of urban and metropolitan America is to be seized, not observed.