Market Turmoil and U.S. Foreign Policy
from Renewing America, U.S. Foreign Policy Program, Renewing America: Debt and Deficits, and Renewing America: International Trade and Investment

Market Turmoil and U.S. Foreign Policy

Global markets’ reaction to eurozone turbulence and S&P’s downgrade of U.S. debt add uncertainty to U.S. foreign policy, raising questions about which goals the country has the means to pursue, says CFR’s James M. Lindsay.

August 9, 2011 9:10 am (EST)

To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

Standard & Poor’s downgrade of U.S. debt, along with the political battle over the debt ceiling and a faltering U.S. economy, will siphon away the time President Barack Obama has to deal with foreign policy issues, says CFR’s James M. Lindsay, an expert on U.S. politics and foreign policy. The president will be "spending an awful lot of his time with these economic issues" to try to build political clout to address them effectively, says Lindsay. He notes that even independent of the economy, the United States is limited in how much it can steer events in place like the Middle East. Lindsay says that while the United States remains the world’s dominant power, the S&P downgrade strengthens the hand of those who argue that the United States is "in terminal decline."

Looking at the Standard & Poor’s downgrade, how bad is the situation in the United States?

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The Standard & Poor’s downgrade came at a time of great uncertainty and weakness in the global economy. So it’s not surprising that we’re seeing strong ripple effects, because we’re facing not just the problems in the United States but concerns in the European Union, particularly the debt problems of Italy, Spain, and Greece. The odds are the market will eventually even itself out. But given how interconnected many of these markets are, we could be in for a wilder ride than we would like.

The emphasis on economic crises seems to have shut out discussion about foreign policy these days.

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In many ways, the turmoil in the financial markets affects foreign policy as well because it involves a number of key issues, ranging from the budgetary decisions we make here in the United States to the kind of foreign activities we’re going to be able to pursue. Everything in this globalizing world has become much more interrelated and interconnected. A second side effect is that while President Obama has many issues on his foreign policy agenda, he’s going to be spending an awful lot of his time with these economic issues--as he did on Monday when he addressed them at the White House--and trying to rally his troops domestically so that he gains the political clout to deal with all these issues.

How will the S&P’s decision affect U.S. standing in the world?

The S&P decision to downgrade U.S. treasuries doesn’t tell anyone what they don’t already know. Clearly it has triggered strong ripple effects in the global financial markets, and we’re still not sure how these effects will end up. It has also strengthened the hand of those who have argued that the United States is in terminal decline. One of the more interesting reactions to the downgrade came from Beijing, where Chinese news services, reflecting the government’s attitude, are extraordinarily critical of America’s debt addiction, and are calling on the United States to revamp its spending patterns and put its fiscal house into firmer order. The officials do this in part to justify themselves domestically on why they have invested so heavily in U.S. treasuries, but it’s also part of a broader Chinese effort to undermine American soft power and to make the argument to others in the international community that the United States is a declining hegemon.

The turmoil in the financial markets affects foreign policy as well because it involves a number of key issues, ranging from the budgetary decisions we make here in the United States to the kind of foreign activities we’re going to be able to pursue.

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A major foreign policy concern is the Middle East, where Syria is brutally cracking down on protesters despite international anger, and Palestinians are due at the UN this fall to seek a resolution calling them a state. Can the United States move effectively in the foreign policy sphere, or are its actions constrained by economic problems?

Economic problems don’t help the administration. In part this is because it drains away the administration’s time, attention, and energies, as well as diverts the attention of other countries that could be U.S. partners. The big issue that is not getting enough attention is the direction that Egypt is evolving. The United States clearly has a strong interest in the choices that Egypt makes, but the ability of the Obama administration to influence how events unfold in Egypt is quite limited. Likewise, if you look at Syria, where the United States has been working to increase pressure on the Assad government, the ability of the administration to go much further than jawboning is limited. Over the weekend, we saw increasing pressure on Damascus from Turkey and Saudi Arabia, but it’s quite clear that the minority ruling government in Syria sees itself facing an existential threat and is willing to ignore or endure criticism from foreign capitals because they are trying to preserve their hold on power.

Does this reinforce the view that the United States is no longer the dominant global power?

The United States remains the single most influential country, whether measured economically, politically, diplomatically, or militarily. But the Arab Spring highlights that the ability of the United States to influence events is greatly constrained, particularly when we are talking about events that are driven by the internal politics of countries. Certainly Washington would love to be able to steer what we are seeing in the Middle East in a positive direction, but the ability to do so is actually quite limited because, ultimately, the future course of Egypt is going to be chosen by the Egyptians, and likewise in Syria, Tunisia, and elsewhere.

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President Obama is being criticized by many of his supporters for not taking more of a leadership role. Do you share that criticism?

Your question touches on the big debate in American domestic politics. And that is, whether what we’ve seen unfold over the last several months indicates that the president is a card player who does not know how to play the game very well or whether the president is someone who was dealt a very bad hand and has made the best of it. Obviously the president’s defenders adhere to the latter view and the president’s critics to the former view.

In the president’s defense, two things can be offered up. One is that he inherited a large number of problems domestically and internationally that did not lend themselves to easy solutions, particularly when you look at the so-called "great recession," which was triggered in 2008-2009 and which the Harvard economist Kenneth Rogoff calls "the great contraction." The problem was really triggered by a credit crisis; it was not the usual market downturn or business cycle downturn. And because it was a credit crisis, it has created a whole different series of problems that can take a long time to work out. That’s very difficult to do.

The Arab Spring highlights that the ability of the United States to influence events is greatly constrained, particularly when we are talking about events that are driven by the internal politics of countries.

The second problem the president faces is that on many of the things that he wants to do domestically, he needs Congress to go along. When you’re in that situation where Congress’ assent is essential, those members willing to say "no" have immense power and leverage. What we discovered over the last six to eight weeks is that the Republican Party in the House was willing to say "no" even if it risked default--or probably more correctly the perception of default--and in that situation it would have been very difficult for any president to be able to get his way. At the end of that day, the framers of the Constitution created a government that is based on the separation of powers and checks and balances. And what we saw over the past month is the president being checked by Congress. The system, in that sense, worked.

The deal that was struck calls for a bilateral commission to come up with recommendations by the end of November. How is this going to work out?

The creation of the supercommittee in Congress presumes that given a bit more time, Republicans and Democrats on Capitol Hill will be able to come to an agreement. It’s not obvious why that would be the case. The argument for the supercommittee doing what they weren’t able to do this summer is that the legislation creates a so-called trigger: that is, if the committee does not propose $1.5 trillion in cuts over the next ten years by Thanksgiving and if Congress does not enact the recommendations into law by essentially Christmas Eve, across-the-board spending cuts totaling $1.2 trillion over ten years will go into effect. The presumption is that Republicans, who were unwilling to bargain before, will be willing to bargain when there’s a risk that defense spending will be cut by this automatic trigger. The problem with that analysis is that while the trigger will be touched off this holiday season, the actual budget cuts will not go into effect until a year from then, which gives politicians all of 2012, an election year, to argue about the impending cuts.

The wild card in all this is will be the S&P downgrade. A number of people have argued that whatever the mistakes in the analysis that the S&P made in issuing its downgrade, the effect will be to put more pressure on the two parties to reach an agreement. You can also argue that the net result of the downgrade is to push both parties to dig their heels in even deeper because they want to take the case to the public next year. We see this in the competing analyses of the S&P decision. If you are a fan of the White House, it is a Tea Party downgrade, and if you are a booster of the Republican congress, then it is the Obama downgrade.


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