An alternative perspective

14 August 2015

The Future of US Foreign Policy and its Global Economic Implications

As the 2016 US presidential election race heats up, we will hear more, particularly from Republican candidates, about President Obama’s failure to assert US international leadership. Even Hillary Clinton, the likely Democratic Party nominee to replace him, will offer voters traditional ideas about the world’s demand for a more forceful US role in the global order. It is true that only the US can combine military muscle, economic clout and cultural appeal to exert power in every region of today’s world. The US will remain the world’s sole superpower for the foreseeable future. But a quarter of a century after the end of the Cold War, this advantage comes with diminished global influence, the result of changes both inside and outside the US: developments that cannot be blamed on President Obama.

At home, there is now an entire generation of young people not old enough to remember the Cold War, many of whom do not share the assumptions of their parents and grandparents about the value of US leadership – for America or for the world. And after the long, costly wars in Iraq and Afghanistan, which did not make the US safer or more prosperous, a majority of Americans will not support US military action that might require a long-term commitment of US troops and taxpayer dollars. This will limit the range of options available to the next president.

Furthermore, there is now a lengthening list of emerging powers able to challenge the US-led order. China and others cannot undermine America’s global pre-eminence anytime soon, but each has the political self-confidence and economic heft to resist specific sets of US plans and demands. Even traditional US allies have begun to hedge their bets on American staying power. Republican or Democrat, the next president must accept these realities and the limitations they impose on his or her choices. The field of credible contenders represents significantly different assumptions about the US and its historic role, but it is these structural factors, not the next president’s ideology or temperament, that will define the parameters of what is possible to accomplish.

Regions

For the next president, Asia will offer the most important trade, investment, and security opportunities and risks. Passage of the Trans-Pacific Partnership (‘TPP’) later this year or in early 2016 will strengthen US commercial ties with many of China’s neighbours. Others, like South Korea, will move to join. The advent of TPP will add momentum behind US-Chinese negotiations on an important bilateral investment treaty.

As President Obama’s chief diplomat, Hillary Clinton was a crucial player in the Obama administration’s ‘pivot to Asia’ and in the development of ‘economic statecraft’; the use of economic power and deeper trade and investment ties to exert greater international influence. Yet, given limitations imposed on US regional influence by China’s economic strength, a Republican president is as likely as Clinton to develop these tools. Inevitable tensions with China will recur periodically, but the next president is more likely to push for expanded commercial ties with China than for political liberalisation or respect for human rights inside that country.

For Europe, Russia’s newly aggressive behaviour has its neighbours on edge, but President Putin remains unlikely to try to significantly destabilise Latvia, Estonia, Poland or any other NATO member nation. Though Russia will remain a concern for Europe and a flashpoint in US-European relations as stronger differences of opinion emerge over the wisdom of Ukraine-related sanctions, trade will likely be the focal point in the transatlantic relationship. TTIP, the Transatlantic Trade and Investment Partnership, remains a long-term project, and efforts on both sides to hedge bets on China’s continued rise will influence negotiations.

The next president will probably try to limit US involvement in the Middle East, the region where risks most obviously outweigh opportunities. The nuclear deal with Iran will allow the Islamic Republic to export an additional one million barrels of oil per day by the end of 2016, earning its government a revenue windfall that bankrolls an even more active role in the region’s politics. US relations with Iran will remain strained, but the White House will probably try to better balance its relations with resurgent Iran and traditional ally Saudi Arabia. Combined with increased Iraqi oil production that ISIS cannot reach, the likeliest result of the region’s reorientation is another surge in turmoil that exerts little pressure on oil prices.

In Latin America, Washington is likely to direct more spending towards fighting organised crime and the drug trade in Mexico and Central America in order to relieve pressure on the southern US border. In Africa, funds are more likely to go towards quiet efforts to combat active terrorist groups in West, North and East Africa. Given the unwillingness to commit to military action in either region, success will be sharply limited and instability will continue in both.

Trade and Investment

The next president will have ‘trade promotion authority’, the power to present Congress with negotiated trade deals for a simple up-or-down vote without amendment, for at least four years. Add a reluctance to accept the political and other risks that come with the use of military force, and the promotion of trade and investment ties will likely be a crucial component of foreign policy in all these regions.

Expansion of TPP to new members is a likely priority. TTIP will advance slowly. We are likely to see a similar approach to new commercial agreements elsewhere as Europe works to diversify its partnerships, China expands its economic influence, Russia tries to make its Eurasian Economic Union internationally relevant, and other emerging markets look for new opportunities. A more fragmented global order will put greater emphasis on regional and bilateral deals, leaving little interest in the continued slow progress of the Doha Round.

Barriers

For cross-border investment, a more active US role in global trade will increase the risk aversion of many other governments. In recent years, heightened geopolitical competition and advances in communications technology that undermine state control of information have led many governments to more broadly define ‘national security’ and ‘strategic sectors’ of their economies. Beyond the defence, energy, and communications and information technology sectors, both developed and developing states will apply greater scrutiny in coming years towards foreign investment in sectors like pharmaceuticals, food products and other commodities. In this environment, the relations that companies and investors build with individual governments will be more important than ever.

Finance

We should also expect an accelerated divergence in capital market flows and likely asset price performance across emerging and frontier markets. The countries where the US is most likely to invest, especially in emerging Asia, will benefit from stronger ties to developed markets and greater competition for capital flows and market access between China, Japan, the US and Europe. An emerging Asia will almost certainly see a surge in portfolio flows and other capital markets financing. This will boost near-term economic performance, but also create a higher likelihood of imbalances and asset price bubbles.

Emerging regions more peripheral to US interests, like Latin America and Africa, will likely have to turn more often towards alternative investment and trade blocs, including those led by the BRICS countries in general and China in particular. ‘South-South’ capital flows will probably accelerate. As a result, emerging market currency and financial volatility is likely to rise, suggesting more frequent crises. Given more limited US means, Washingtonled responses to financial crises will probably become more selective in coming years and more narrowly designed to limit risks of contagion.

Competition Among Institutions

The rise of China and the more selective use of US power will intensify competition between Westerndominated multilateral lenders like the International Monetary Fund and World Bank, and Chinese-led projects like the BRICS Bank and the Asia Infrastructure Investment Bank, which boost China’s ability to set new rules and standards as an internationally recognised lender of first resort.

For this reason, we can also expect fragmentation of the global regulatory environment, as Washington tries to protect its economic interests by working to bolster uniform global standards. In Latin America, Africa, and those developing countries in Asia that are most quickly deepening trade and investment ties with China, the US will have diminishing influence in this area. More broadly, regional, not global, standards are likely to determine the future of regulation. As with cross-border investment, this could force complex adjustments for global businesses, raising the cost of regulatory compliance for multinational companies.

The best laid plans of world leaders will always remain subject to events beyond their control. Crises define foreign policies, as the September 11 attacks and the financial crisis set President George W Bush and President Barack Obama on paths that Washington continues to follow. But the evolution of events inside the US and around the world limit the range of options available to America’s next president, making it easier to predict what actions he or she will take and what impact they are likely to have on the rest of us.

Ian Bremmer is president of Eurasia Group, the world’s largest political risk consultancy. He is also a columnist for Slate, a contributing editor at The National Interest, and a political commentator on CNN, Fox News and CNBC TERRA

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