Publisher Council on Foreign Relations Press
Release Date July 1998
Price $17.95 paper
The world is experiencing two broad and seemingly paradoxical trends. On the one hand, countries are becoming ever more integrated economically— and in some cases politically. On the other hand, power is devolving from national governments to regional and local governments. These trends are particularly evident in the United States: the effects of global economic and political events are increasingly felt in localities around the country, and those localities are playing a larger role on the world stage.
In this volume, Earl Fry explores the forces behind the rise of state and local influence in foreign affairs. As the lives of Americans become enmeshed with those of peoples outside U.S. borders— whether through trade, immigration, travel, or the Internet— the consequences reach deep into state and local government. With all this activity, the federal government is less able to regulate the multiple strands of U.S. involvement in the world. Thus, state and local governments increasingly shape the ways Americans cope with the outside world. Fry documents these various forces, and suggests how the different levels of U.S. government— federal, state, and local— can best share the conduct of international relations.
This book, and the study group that informed it, were made possible by a generous grant from the Ford Foundation.
Gary C. Hufbauer
Maurice R. Greenberg Chair
Director of Studies
Council on Foreign Relations
As we exit one century and enter the next, many Americans will carry with them two major misconceptions about the contemporary U.S. role in international affairs. The first is that with the collapse of the Soviet Union and the end of the Cold War, the United States is now, by default, the world's only superpower and thus relatively impervious to what transpires outside its own borders.1 Too many people forget that the year 2000 has little in common with 1945— when America emerged from World War II seemingly both triumphant and supreme. In the first place, the United States enters the 21st century with the world's largest national economy but now accounts for only approximately one-fifth of total global production, down from a staggering one-half in 1945. The European Union (EU) as a unit now produces more than the United States, and East Asia will soon pass both the EU and the United States as the largest producer of goods and services. China alone is expected to attain the same level of gross domestic product (GDP) as the United States by the year 2015, when measured in terms of purchasing power parity.2
Moreover, the United States faces other huge economic hurdles both at home and abroad. Even though President Bill Clinton has pledged to balance the national government's budget by no later than 1999, Washington's cumulative debt remains the highest in the world, having increased sixfold from $900 billion in 1980 to $5.4 trillion in 1998. Even a "balanced" budget will require massive borrowing from Social Security and other trust funds, leaving little in the coffers when the 76 million baby boomers, born between 1946 and 1964, begin to retire around 2012.3 In addition, the national government's mandatory spending linked predominantly to entitlement programs has increased from 31.7 percent of the total budget in 1965 to 52.7 percent in 1998 and should reach 60 percent by 2005. Interest payments on the national debt also have increased from 6.8 percent of the budget in 1965 to almost 15 percent in 1998. In fiscal year 1997, $1 trillion of the $1.6 trillion federal budget flowed to individuals, and $250 billion was earmarked for debt servicing, leaving a very small allocation for discretionary programs.4 Early in the next century, an even larger portion of federal funding will be funneled into entitlements and debt servicing, leaving little for defense, foreign aid, education, infrastructure modernization, and other programs that are critical to U.S. political and economic security.5
In absolute dollar terms, the United States also ranks as the world's largest debtor country, with an external debt burden of about $1 trillion in 1998. This debt is more than the combined external obligations of Argentina, Brazil, Mexico, Nigeria, Poland, and Russia. In 1997 America's merchandise trade deficit approached a record $200 billion, and its current account deficit surpassed $160 billion, with both deficits expected to grow during the remainder of the decade.6
In addition, much of Europe, the Soviet Union, and parts of Asia were devastated in 1945, whereas the United States emerged from the war with its territory intact and at full industrial capacity. Today many countries around the globe are moving forward economically at a brisk pace, with some of the major advances occurring in the once-moribund nations of the developing world.
Furthermore, the United States was the sole holder of atomic weapons in 1945, in sharp contrast to the present day, where any number of nations have access to nuclear weapons and delivery systems infinitely more powerful and accurate than the crude but deadly atomic devices dropped on Hiroshima and Nagasaki. Although there should certainly be a "peace dividend" in the defense and international relations sectors as a result of the end of the Cold War, the U.S. Congress, in its efforts to preserve entitlements and still balance the budget, now has cut foreign affairsrelated spending by more than one-half— in real terms— since 1984.7 Congressional shortsightedness has been compounded further by earmarking almost 50 percent of foreign aid for just two countries, Israel and Egypt. In many respects, the national government seems intent on having the United States venture forth into a much more complex, competitive, and dangerous global arena with a bare minimum of resources at its disposal.
Perhaps most important, so many issues that today affect the American people on Main Street or in the suburbs are simply beyond the capacity of Washington to solve single-handedly. Most environmental issues, for example, including global warming and the deterioration of the ozone layer, cannot be solved unilaterally within the borders of the United States, but each has the potential of having a devastating impact on the quality of life of the average American citizen. The same vincibility exists in terms of resource and energy depletion, including fossil fuels and the world's fisheries; the spread of contagious diseases; the proliferation of nuclear, biological, and chemical weapons; organized crime, including international drug trafficking; the spillover effects of ethnic and religious conflicts, including terrorism; economic turmoil related to currency exchange volatility; and illegal immigration movements and refugee flows.
Quite simply put, in the year 2000, the United States will not be a superpower capable of riding roughshod over the rest of the world, nor will it be powerful enough to isolate itself from what is transpiring elsewhere on the planet. In effect, America has become a vulnerable nation that must cooperate openly with other countries in an effort to find workable solutions to problems threatening the well-being of its citizens.8
GLOBALIZATION, PLURALISM, CREATIVE DESTRUCTION, AND FOREIGN AFFAIRS
The second major misperception of many Americans is that the White House and Congress enjoy a virtual monopoly in dictating every important detail related to U.S. foreign affairs and that this pattern will continue indefinitely into the 21st century. It is of course true that the U.S. Constitution grants the national government the authority to declare war, make treaties, and regulate international commerce. However, much latitude is provided to corporations, individuals, and state and local governments to be very much involved internationally, and their combined influence over the conduct of U.S. foreign affairs is likely to grow in the decades ahead, especially if Washington continues to slash foreign affairsrelated budgets and increasingly shies away from foreign aid, U.N. dues, or more free trade agreements.
By the year 2000, 20 million American jobs will be linked to international trade, investment, and tourism. Approximately 7,000 multinational corporations (MNCs) existed a quarter of a century ago, compared with 40,000 today. The value of goods and services produced annually by the foreign affiliates of MNCs now exceeds the total value of cross-border trade in goods and services around the world.9 Moreover, in the global trading arena itself, intrafirm transactions among MNCs are responsible for one-third of total merchandise trade and MNC exports to nonaffiliates for perhaps an additional one-third.10 In the United States, intrafirm trade by U.S. and foreign-based MNCs accounts for almost 50 percent of total U.S. merchandise exports and over 50 percent of imports.11 The capability of the White House or Capitol Hill to control the international activities of these MNCs is becoming increasingly limited.
State governments now operate almost as many permanent offices overseas as the U.S. government operates embassies. Governors lead far more international trade and investment missions on an annual basis than the president of the United States and the members of his cabinet. State governments also issue more export grants and loan guarantees than agencies of the U.S. government.12The federal government does not facilitate efforts by foreign firms to make direct investments in the United States, and provisions in the Exon-Florio amendment actually permit the president of the United States to block foreign investments when he considers them detrimental to U.S. national security. In contrast to Washington's overall neutrality or even periodic antipathy toward inward direct investment, state and local governments are spending millions of dollars tracking down potential overseas investors and then have been willing to ante up billions of dollars in incentives to attract foreign-based companies to their areas of jurisdiction. In addition, over the past quarter of a century, state and local governments have entered into thousands of accords, compacts, and agreements (but not "treaties") with national and subnational governments around the world. With the approval of Washington, state governments even have begun to dispatch their National Guard units abroad to train military and civilian leaders in a number of former Warsaw Pact nations.13
In most cases, the international activities of American state and local governments coincide with the interests of the nation as a whole. However, at times some of these subnational governments have decided to take matters into their own hands and have attempted to punish foreign governments for what they consider to be offensive acts. Over 150 states, counties, and municipalities placed sanctions on U.S. and foreign businesses operating in pre-Mandela South Africa, long before Congress passed a national set of restrictions directed at the pro-apartheid government in Pretoria.14 The State of Massachusetts and the city of San Francisco imposed similar sanctions on Myanmar (Burma), even before President Clinton placed a ban on new U.S. business investment there.15 More recently, both New York City's comptroller and California's treasurer banned certain Swiss banks from bidding on billions of dollars in bond offerings and other contracts sponsored by their respective agencies, explaining that they were personally unhappy with explanations given by these banks concerning the disposition of gold and other assets taken from Holocaust victims prior to and during World War II. These bans have been severely criticized by the U.S. Department of State.16
To the consternation of officials in Washington, a few states also have sent their own observers to meetings of the Organization of Petroleum Exporting Countries (OPEC), have exchanged trade missions with Libya, and have ordered their law enforcement officers not to cooperate with U.S. Immigration and Naturalization Service (INS) agents seeking to track down undocumented immigrants from Central America. Such episodes, even though infrequent, make it difficult for the U.S. government to speak with one voice in the foreign affairs arena.
Many people also continue to assume that the federal government is the only important public-sector actor in the United States and that the 22,300 state, county, and municipal governments are little more than branches or subsidiaries of Washington, D.C.17 In actuality, the American federal system divides sovereignty among the national and state governments and has provided noncentral or subnational governments a great deal of latitude in tackling many of the major challenges currently facing the nation. Moreover, in an era of growing economic globalization and interdependence, it is often difficult to differentiate between foreign policy and domestic policy issues. This means that, over the next few decades, subnational governments will be more actively involved in overlapping issue areas. The transportation and communications revolutions also have made it easier than ever before for representatives of subnational governments to keep abreast of what is occurring nationally and internationally as well as to be actively engaged both domestically and globally.
Indeed, many of these state and local governments are already very powerful public-sector actors. It is worth noting that among the 197 nation-states and territories represented at the 1996 Olympic Summer Games in Atlanta, over 40 had population bases below 1 million and another 12 between 1 and 2 million.18 In the United States, 42 states have populations exceeding 1 million and 34 surpassing 2 million. In terms of the annual production of goods and services, 2 U.S. states would rank among the top 10 national economies in the world, 10 among the top 25, 33 among the top 50, and all 50 states among the top 70 nation-states globally.19 State and local governments also collectively spend about $1 trillion per year, a sum far larger than the expenditures of all but a handful of worldwide national governments. Unlike Washington, most state governments enjoy balanced budgets, and state and local governments actually recorded a $93 billion surplus in 1996— money that can be set aside for special programs, "rainy day" conditions, or tax cuts.20 California's annual budget is much larger than Mexico's, a nation with 95 million people, and only slightly smaller than Russia's, a country with 150 million people. Even New York City's budget is far larger than the budget of the Philippines, which services 70 million inhabitants.
Subnational governments are better prepared than ever before to be actively engaged both at home and beyond the borders of their own nation-state. In addition, in an era of unprecedented economic and technological change, citizens are demanding that their state and local governments do more to protect and enhance their interests. More than 70 million new jobs have been created in the United States since 1979, but over 45 million have been eliminated.21 On an annual basis, roughly one out of every four jobs is created, lost, or altered substantially, clear evidence of Joseph Shumpeter's notion of capitalism as "creative destruction," a process that recently has been accelerated by intense global competition and rapid technological change. Who bears the responsibility for helping those who lose jobs but are unable to secure new employment or who find jobs at much lower wages? Many Americans, especially males with a high school education, also have found their inflation-adjusted wages stagnating since the early 1970s. Which level of government is supposed to assist both men and women to receive a better education and training and to secure employment opportunities that will permit them to take care of themselves and their families?
Barring the collapse of what are at present relatively cordial relations with Russia and China, one can anticipate that U.S. foreign policy will continue to shift away from the traditional strategic-military issues that dominated the Cold War period and go back to strategic-commercial issues that figured prominently from the end of the Civil War up to World War II. As economist Jeffrey Garten points out, commercial relationships "have become the sine qua non of links with Russia, China, Japan, Southeast Asia, the European Union, and the nations of the western hemisphere"22; he adds that the "spread of business across borders may be the most powerful force operating in the world today."23
Whether recognized or not, international economic and commercial linkages are of growing importance for the average American. Over the past half-dozen years, fully 70 percent of America's economic growth is attributable to export activity.24 Almost one-third of new job creation in the United States also has been linked to the international economy. Most U.S.-produced goods and services face stiff competition from foreign-made goods and services in the nation's own domestic marketplace, and the trend toward the globalization of production even prompted the Federal Trade Commission (FTC) to consider briefly lowering the standard for carrying the "Made in the USA" label to 75 percent domestic content.25
At the corporate level, export activity continues to be dominated by the large MNCs, but smaller firms may account for a larger share in the years ahead. Rapid changes in technology, consumer demand, and product innovation can place even the largest corporations at risk and provide small companies with the opportunity to expand rapidly and to evolve into MNCs. Of the dozen largest U.S. industrial companies in 1900, only General Electric will survive to see the year 2000.26 Many corporations have downsized, merged, or simply been eliminated because of stiff competition from domestic or foreign firms or because new innovations and discoveries have rendered their products obsolete.27 Roughly 22 million businesses currently exist in the United States, with only 14,000 employing more than 500 workers.28 Between 1990 and 1994 these large enterprises employing over 500 workers eliminated 3.8 million positions, whereas smaller companies with fewer than 100 employees added 8 million new workers, with three-quarters of these positions added by firms with fewer than 20 workers.29 Many of these smaller businesses are part of the U.S. service sector, which accounts for 79 percent of overall private-sector output and more than 80 million jobs.30 This sector also presents the best opportunity for the United States to remain globally competitive, because in contrast to the huge deficits in merchandise trade, the service sector has been producing impressive surpluses surpassing $80 billion annually.31 The interaction of small, service-oriented businesses with their state and local governments will most likely play a major role in determining America's future global economic standing.32
"Creative destruction" also may affect the various regions in the United States in different ways. For example, New York City was once the headquarters for one-third of the largest 500 corporations in the United States; today it is home to less than one-eighth. The most rapid rate of job creation during the 1990s occurred in the Southeast and the Mountain West, two regions that had lagged behind much of the rest of the nation during the first few decades of the Cold War. Which level of government is responsible for helping New York to remain competitive both nationally and globally, and which level already has helped states and municipalities in the Southeast and Mountain West to move forward so rapidly?
Furthermore, are Ross Perot, Pat Buchanan, Richard Gephardt, Ralph Nader, and Jesse Jackson, politicians who cover almost the entire political spectrum, correct when they contend that freer trade has been injurious to the American workforce, especially to those living in major cities, because of massive merchandise trade deficits and the alleged transfer of millions of jobs to low-wage countries such as Mexico or China? Is only the national government responsible for shielding American urban workers from globalization, and— if so— at what potential cost in terms of protectionist wars? What future role should state and municipal governments assume in mitigating the downside effects of globalization on urban workers while at the same time helping them to take advantage of the opening of new markets around the world?
Arguably, the future competitiveness of the nation as a whole is rooted in local politics and economics. Without any doubt, the nation will require a well-educated workforce to remain competitive in the decades ahead, and education is largely the responsibility of state and local governments. States are also the ongoing laboratories for democracy and capitalism, providing the impetus for programs as diverse as voter referenda, welfare reform, research centers, and enterprise zones.33 They also are spending most of the money earmarked for the construction of a modern infrastructure and have assumed the key role in the development of human capital.34 Increasingly, state and local governments are involving themselves in foreign commercial activity and selected foreign affairs issues, with this urge to be engaged beyond the "water's edge" expected to intensify in the new millennium.
1. In a survey of 2,000 American adults administered in September 1997, a majority of respondents perceived that events in Europe and Asia, or even elsewhere in North America, have little or no impact on their lives. This survey was sponsored by the Pew Research Center for the People and the Press. See the New York Times, October 10, 1997, p. A7.
3. The so-called surplus from the Social Security Trust Fund has been expended on a regular basis. For example, the official government deficit for fiscal year 1996 was $107 billion, but $65 billion had been taken from the trust fund, meaning that the true deficit was in the range of $172 billion. By 2011 the trust fund surplus should be approximately $140 billion, but likely all or much of it will be used up to narrow the government's annual deficit for that year. See Charles Krauthammer, "Call Their Bluff on Social Security," Washington Post, January 31, 1997, p. A21.
8. This thesis is explored in much greater detail in Earl H. Fry, Stan A. Taylor, and Robert S. Wood, America the Vincible: U.S. Foreign Policy for the Twenty-First Century (Englewood Cliffs, NJ: Prentice-Hall, 1993).
13. U.S. Department of Defense, 1996 Annual Defense Review, Chapter 26, "National Guard and Reserve," found at Internet web site http://www.dtic.mil/execsec/adr96/chapt_26.html. In 1996 National Guard units from 16 U.S. states had formed partnerships with the national governments in 14 countries located in eastern and central Europe.
15. Other cites with selective purchasing laws punishing companies that do business with Myanmar (Burma) include Berkeley and Santa Monica in California; Madison, Wisconsin; Ann Arbor, Michigan; and Takoma Park, Maryland. See ibid.
17. Including townships, special districts, and other entities, there are more than 85,000 distinct government units in the United States. See the Statistical Abstract of the United States, 1996 (Washington, DC: U.S. Government Printing Office, 1996), p. 295.
25. New York Times, May 18, 1997, IV, p. 7. The new standard was to stipulate that 75 percent of the overall cost of making a product must occur within the United States, but fierce opposition from certain business and labor groups prompted the FTC to withdraw its proposal.
27. The late Carl Sagan illustrated very well the monumental changes occurring in the high-tech sector. Marconi's first radio broadcast across the Atlantic took place in 1901. Before the end of the twentieth century, radio had been used to communicate with four spacecraft beyond the outermost known planet of our solar system, and sophisticated radio equipment also had picked up natural emissions from quasars located 8 to 10 billion light-years away from Earth. See Sagan, "A Challenge of Twenty-First Century Will Be Dealing with the Innovations of the Twentieth," Deseret News (Salt Lake City), January 12, 1997, p. AA6.
31. Christopher L. Bach, "U.S. International Transactions, Fourth Quarter and Year 1996," Survey of Current Business (April 1997): 32; and Office of Trade and Economic Analysis, International Trade Administration, U.S. Department of Commerce, "United States Foreign Trade Highlights," at http://www.ita.doc.gov/industry/otea/usfth/t01.prn.
32. As Joseph S. Nye, Jr., and William A. Owens stress, "knowledge, more than ever before, is power," and the United States has a clear lead in knowledge-based industries. See their article, "America's Information Edge," Foreign Affairs 75 (March/April 1996):20.
34. Gary S. Becker points out that "wealth in the form of human capital consists of present and future earnings because of education, training, knowledge, skills, and health." He adds that because "wages and salaries account for over 75 percent of the national incomes of developed countries, it should be no surprise that human capital is estimated to be three to four times the value of stocks, bonds, housing, and other assets." See Becker, "Why a Crash Wouldn't Cripple the Economy," Business Week, April 14, 1997, p. 26.