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U.S. Foreign Policy and Domestic Realities

China Daily
November 8, 2012

US foreign policy and domestic realities
By Dan Steinbock*

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As the campaigns demonstrated, the two parties support the Obama administration’s strategic pivot toward the Asia-Pacific, which has already contributed to escalating rearmament in the region and includes efforts to promote the Trans-Pacific Partnership that excludes China.

In a disruptive scenario, US stagnation could turn recessionary, which would deepen and prolong the turmoil in the eurozone at the worst possible moment, while transmitting the contagion to Asia.

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US President Barack Obama’s first term began with an inspiring victory, and great hope. His second term starts with a weary victory and great uncertainty. For Sino-US relations, it means changes, as the administration’s foreign policy initiatives will be constrained by somber domestic realities in the coming months.

During the campaigns, neither candidate was eager to address the post-election economic challenges facing the United States. But according to polls, nine out of 10 Americans chose the new president on the basis of four priority issues: jobs, the budget deficit, healthcare and social security. China did not figure in this list directly, but indirectly it did, as it has been made the scapegoat for the US’ woes.

Today, the unemployment rate in the US is 7.9 percent, which translates to 12.3 million Americans. More than 40 percent of these are long-term unemployed. The problem is that the current emergency federal unemployment insurance is scheduled to expire on Dec 31.

In addition to unemployment, the US fiscal cliff also includes the issue of the Bush tax cuts, which will account for more than 40 percent of the $18 trillion debt that the US will owe under current policies in the course of the next decade.

It also involves making substantial cuts in defense and non-defense outlays, which neither the Democrats nor the Republicans want to see taking effect. Most importantly, the fiscal cliff includes the US debt burden, which has now soared to almost $16.2 trillion – $2 trillion more than in August 2011, when Washington lost its historical triple-A rating.

In the short term, Washington needs a new debt ceiling. But what it needs even more urgently is a credible, bipartisan and medium-term fiscal adjustment program.

In the absence of such a plan, new credit rating downgrades in the US would contribute to increasing volatility, which could spread to the eurozone and to Asia, which currently drives global growth.

As the campaigns demonstrated, the two parties support the Obama administration’s strategic pivot toward the Asia-Pacific, which has already contributed to escalating rearmament in the region and includes efforts to promote the Trans-Pacific Partnership that excludes China.

But if this approach represents the US’ “bad cop” stance toward China, the administration’s US-China Strategic and Economic Dialogue plays the role of “good cop”, focusing on a wide range of bilateral, economic, strategic and security issues between both countries.

In the past, the Obama administration has brought trade cases against Beijing at nearly twice the rate of the previous administration. In the future, trade friction is likely to increase and spill more into innovation policies, intellectual property rights, and security issues.

Some of this friction could be avoided by refocusing the Strategic and Economic Dialogue on the issue of foreign direct investment. The US has much to gain from greater Chinese FDI in the US, while China needs the US’ advanced technologies and know-how.

While the Obama administration has promoted the Trans-Pacific Partnership, China is getting ready to join talks to create the Regional Comprehensive Economic Partnership, which excludes the United States.

In the short term, these two huge trade blocs could prove exclusive. But in a positive scenario, with patience, the two could converge in the long-term.
Obama has a plan to address the fiscal cliff, but it will be constrained by Washington’s political gridlock, which is now worse than ever. In his second term, Obama will need to develop a bipartisan compromise. That is a hard balancing act.

How bad could the post-election aftermath get in the US? Theoretically, a potentially severe contraction in the fiscal deficit could shave more than 4 percent off the US’ gross domestic product in 2013. If reason prevails, that reduction could be limited to around 1 percent.

However, taking into consideration the fact that US growth is likely to remain around 1 to 2 percent in 2013, the impact could halt growth. That’s the benign scenario.

In a disruptive scenario, US stagnation could turn recessionary, which would deepen and prolong the turmoil in the eurozone at the worst possible moment, while transmitting the contagion to Asia.

The political struggle over US’ economic future has only just begun.

*The author is research director of international business at the India, China and America Institute.

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