Bruised both at home and abroad

Business Times - 18 Nov 2010

Bruised both at home and abroad

President Barack Obama has his work cut out to devise a strategy that would deal with global economic challenges


US PRESIDENT Barack Obama returned this week to Washington from a 10-day trip to Asia, an excursion that involved several geo-strategic and geo-economic juggling acts. He set out to strengthen relations with India; hoped to conclude a free trade agreement with South Korea; stabilise the Sino-American balance of power by expanding security ties with allies; improve America's standing with Muslims during the visit in Indonesia; win support of other economic powers for the rebalancing of the global financial system.

And framing the Asia tour - including participation in the G-20 meeting in Seoul and the Asia-Pacific Economic Cooperation (Apec) summit in Yokohama - has been an effort to win the support of an economically distressed and wary, if not hostile, American public.

At the same time, the White House is looking for ways to manage the relationship with the newly empowered Republicans on Capitol Hill in the aftermath of electoral blows inflicted on Mr Obama and the Democrats in the mid-terms. As well, Mr Obama is also starting to prepare for the 2012 presidential election.

Against this backdrop, Mr Obama and his aides wanted to ensure that the trip to Asia would highlight the president's global economic leadership goals and his role as the protector of US economic interests. His efforts were to establish the foundations of a new global financial and trading system in which the American economy will prosper, many new well-paying jobs will be created, and US deficits will start contracting.

In Washington, the general consensus among officials, lawmakers, and the media is that stops at Delhi, Seoul, Jakarta, and Yokohama have produced much less than what the White House had expected - or hoped for. Mr Obama failed to complete the trade accord with South Korea which he had pledged to do before arriving in Seoul.

And more ominous from the perspective of Washington was his inability to persuade the G-20 leaders to agree on a clear timeline and numerical goals for fixing global financial imbalances between surplus-large economies such as China and Germany, and deficit-large economies such as the US.

Moreover, the Americans who were urging the other G-20 participants to focus their attention on the 'undervalued' Chinese currency, found themselves, in the aftermath of the Federal Reserve's decision to launch a new round of quantitative easing, under a lot of criticism for what was seen as an American effort to put downward pressure on the US currency.

Most stinging were the attacks on American fiscal and monetary irresponsibility by officials from Germany, a long-time security ally and economic partner of the US.

Mr Obama did announce a few important economic deals with India in Delhi, and his support for India getting a permanent membership in the United Nations Security Council was a clear sign that the momentum driving the diplomatic and strategic partnership between the world's two largest democracies was accelerating.

The US president who had lived and studied in Indonesia from the age of six to 10 seemed to succeed in winning the hearts and minds of the leaders and people of Indonesia, the world's most populous Muslim country.

Indeed, at a time when more assertive moves involving territorial disputes by a rising China have been creating unease among Asean members, Mr Obama's attempt to re-energise US economic and military ties with the members of the Asean grouping, as well as with Japan and India, helped send a clear signal to US allies that Washington is going to remain engaged in Asia.

Coupled with the more activist approach being pursued by Secretary of State Hillary Clinton in the region, the Obama administration was hoping to display a more Asia-centric strategy after the administration of George W Bush seemed to be investing much of American diplomatic energies in fighting two major wars in the broader Middle East while placing the Pacific Rim on the policy backburner.

That the biracial Mr Obama who was born in Hawaii has described himself as the first 'Pacific President' should certainly help the administration to strengthen American 'soft power' in the region where Mr Obama may be more popular than back at home.

But there is no doubt that the failure to conclude the trade deal with South Korea, after coming under pressure from the US car industry - some parts of which are owned by the federal government - and trade unions which insist on gaining more access to the Korean market, could raise some doubts among trade partners about the White House's commitment to promoting global trade.

Mr Obama has framed his support for opening new global markets for US trade and investment in terms of advancing US economic security and prosperity. But he has refrained from trying to mobilise support for the principles of free trade at a time when, according to the opinion polls as well as many Democratic political figures and activists, Americans perceive global trade competition, especially from China and other emerging economies, as a threat to a struggling manufacturing sector, and by extension to American jobs.

American business executives and free traders in Washington are hoping that the increase in the number of Republicans in the new Congress could provide Mr Obama with the votes that he needs in order to get the proposed trade deal with South Korea as well as with Columbia, Panama, and other economies approved.

While the pro-business Republicans have traditionally been supportive of free-trade policies, many of the Tea Party members elected to the new Congress regard trade agreements as a threat to US sovereignty and will probably be less inclined to approve them.

In fact, some pro-free trade Republicans may want to deprive Mr Obama of any major legislative success even if that means denying him the fast-track authority to negotiate new trade deals and a stalled global trade agenda.

But a stalled trade agenda would make it very difficult for Washington to promote US interests in Asia. In fact, one of the centrepieces of US trade goals in the region is the Trans- Pacific Partnership (TPP) initiative, involving at least nine economies, and to be concluded by November 2012.

The TPP originated in a regional free trade agreement among Brunei, Chile, New Zealand, and Singapore, but negotiations have now expanded to involve the United States, Australia, Peru, Malaysia, Vietnam, and perhaps Japan.

The Americans want to ensure that the US assumes a leading position in this new Asian free trade arrangement that will be committed to high-standard rules on trade liberalisation and intellectual property rights for the region. The Chinese, on the other hand, prefer a looser trade arrangement that included China, Japan, South Korea, and Asean, but excludes the US, Australia, and New Zealand.

Mr Obama may have an opportunity now to market his free trade agenda, including the TPP as part of a broader strategic effort to assert a US position in Asia, and to argue that those in Congress who are refusing to provide him with 'fast-authority' and are opposed to his trade initiatives are playing directly into the hands of China while weakening US power.

In any case, America's relationship with China will probably be central to the legislative debate in the new Congress - perhaps even in the lame-duck session of the outgoing Congress this month - as lawmakers from both parties are expected to demand that Washington retaliate against the Chinese for allegedly maintaining an undervalued currency as part of their mercantilist strategy.

But it's going to be difficult to 'decouple' this issue from the broader debate about dealing with American economic woes, including the ballooning trade deficit, with the two major political parties split over the ways to increase economic growth and cut the federal deficits.

And what happened in Seoul suggests that these problems will not be resolved through multilateral arrangements a la G-20 and that US lawmakers and policymakers - and the American public - will have to agree, sooner rather than later, on a set of strategies to put the US fiscal house in order.

And that would have to include major cuts in the US defence budget, which in turn will require a major reassessment of US policies in the Middle East.

Indeed, it will be a Mission: Impossible for Washington to continue maintaining the current US diplomatic and military intervention in the region - in Iraq (where political instability and violence could force US presence for many more years) and Afghanistan (where US troops could remain until 2014 and beyond), with Iran emerging as another potential trouble spot (especially if Israel decides that it needs to attack that country's nuclear facilities) - while trying to advance a more activist diplomatic and economic strategy in Asia.

The huge financial costs of US intervention in the Middle East are one of the two major reasons (the other are the financial costs of the national insurance and government-backed health programmes) for the ballooning federal deficits that are endangering long-term US economic security.

China spends less on defence and can devote its resources to improving its roads and rail networks and other infrastructure while the Americans are being pulled into military quagmires, where they seem to be making Afghanistan safer for, well, Chinese investment.

It's not that America should take steps to retard the rise of China as an economic power. But America should ensure that its military policies don't drive it into economic bankruptcy.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


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