After the horrors of World War II, most Americans just wanted to “go to the movies and drink Coke,” observed Averell Harriman, who later became secretary of commerce.
Instead, their government built a world order centered around the United States.
Its economic achievements were exemplified by the Marshall Plan to help rebuild war-ravaged Europe — “the most unsordid act in history,” according to Winston Churchill. It revived the world economy and made the U.S. richer, too. By 1950, Coca-Cola was selling 50 million bottles a day in Europe.
This was a golden era of American foreign-policymaking. What did it take to make the country act in such enlightened self-interest? According to “The Wise Men”, a history by Walter Isaacson and Evan Thomas published in 1986, the magic ingredients included a rarefied East Coast foreign-policy elite who could easily glide between Wall Street and high office; responsible media; a thoughtful Congress capable of bipartisanship; a public that could be united against a common ideological enemy with which America had few economic links; and a president, Harry Truman, who was a war hero.
None of those conditions applies today.
Viewed from outside, America’s economic diplomacy since the financial crisis of 2007-08 has become cranky. Earlier this year, the U.S. tried to discourage its allies from supporting China’s new development bank, the Asian Infrastructure Investment Bank, only to find that many of them joined the institution anyway. It was a diplomatic fiasco. Old-timers complain that links with Chinese policymakers, once carefully cultivated, have atrophied. A row with China over cybersecurity is brewing.
Domestic constraints on economic policymaking have got worse. Political confrontations over the budget have pushed the country close to default, irritating the foreigners who own 60 percent of the Treasury market. Since 2010, Congress has refused to recapitalize or pass reforms of the IMF, keeping the world waiting.
Foreign banks have been subjected to fines and litigation costs totaling about $100 billion, some richly deserved, some little more than shakedowns by local officials looking for headlines and cash. Some banks from the emerging world and a few countries have been all but excluded from the dollar payments system by money-laundering rules whose cost, imprecision and extraterritorial reach are pushing the global banking system away from the U.S.
The Federal Reserve’s extension of liquidity to foreign banks is under attack from the left and from the Tea Party, and at least a third of Congress wants to review or limit the Fed’s powers. In July, Congress stopped the Export-Import Bank, a government body that finances exports, from writing new loans.
The grandest foreign-policy initiative has been the Trans-Pacific Partnership (TPP), a trade deal formally reached Monday between Asia-Pacific and America. (Another deal with Europe is coming up behind.) In June, Congress agreed to hold a simple yes or no vote on any TPP deal that Obama strikes. But TPP is a far cry from the trade pacts of the past. It excludes China and India. The hope is that both countries will eventually ask to join, but they could equally go into a huff and push their own trade pacts.
TPP negotiations have dragged on and Congress may now be voting on it during next year, in the midst of a presidential election. Hillary Clinton, the Democratic front-runner, has declined to endorse the pact, even though she had supported it in broad outline in the past. Half the field of Republican candidates are hostile to TPP.
The campaign will also see tensions with China flare. Marco Rubio, a Republican contender, has called on America to stop appeasing China. Donald Trump, another Republican hopeful, said ahead of a visit to America by Xi Jinping, China’s leader, that instead of a state banquet he would offer him a Big Mac.
One view is that all this is just a temporary blip. The U.S. has always harbored a strain of populism that dislikes elites and foreign engagements, sometimes called the Jacksonian tradition after Andrew Jackson, who served as president from 1829 to 1837.
Optimists point out that the U.S. usually manages to overcome its Jacksonian impulses. At the Bretton Woods conference in 1944, it designed and pushed through the IMF and the World Bank, along with a system of fixed exchange rates that lasted until the 1970s. During the 2007-08 crisis, American politicians agreed to bail out global banks based in the U.S. They did not stop the Fed from extending up to $500 billion of loans to foreign financial firms and at least the same again in dollar swap lines to foreign central banks.
Congress has always been tricky to handle. It delegates the power to negotiate treaties to the president but can investigate decisions, try to block funding for foreign-policy initiatives and pass laws that influence foreign policy. It also holds authority over the Fed. Even the policymakers of the postwar golden era found it troublesome.
In the 1990s, the U.S. was again ascendant abroad. Its economic ideas became a global, free-market orthodoxy known as the Washington Consensus. The U.S. led the response to the emerging-markets crises of 1995-99, prompting Time magazine to label a trio of officials, Alan Greenspan, Robert Rubin and Larry Summers, as “the committee to save the world.” The U.S. passed the NAFTA trade deal, joined the WTO and shepherded China into it, too. But all this was bitterly contested at home.All this suggests that Congress and the American public have always been ambivalent about economic diplomacy, and that the current White House has not been good at managing that tension. But the pursuit of America’s enlightened self-interest is also genuinely getting harder, for three reasons.
First, partisan politics have intensified, a fact attributed variously to gerrymandering, to a natural self-induced “sorting” of like-minded people into the same areas, and to the decline of the moderate wings of both parties. Congress has become gridlocked, a problem exacerbated by the 24-hour news cycle, lobbying and the huge sums spent on campaigning.
There is hostility to economic diplomacy on both sides of the political divide. The left wing of the Democratic Party, symbolized by Sen. Elizabeth Warren, opposes free trade, perhaps more strongly than it did in the 1990s. The right wing of the Republican Party, the Tea Party, has an expeditionary wing that is willing to use force abroad and an isolationist one that wants to keep the world away from America. Both dislike anything that smacks of world government.
Second, popular discontent with globalization and worries about stagnant middle-class incomes and shrinking blue-collar jobs have become more prominent. In the abstract, a majority of Americans still support free trade and globalization. But there are plenty of warning signs. Less than a fifth of them believe that trade creates jobs, and the poorer they are, the less they think it is a good thing. Americans are also suspicious of China, their most important economic partner. In polls, a majority of them agree that their country should “mind its own business internationally and let other countries get along the best they can on their own,” and that U.S. influence is declining.
The third problem is the fallout from the financial crisis, which has exacerbated mistrust of globalization. It has also made it harder for Wall Street types to work for the government, a staple of American economic diplomacy, thus reducing the quality of manpower available for such jobs. Of the 24 Treasury secretaries since 1945, 14 have worked on Wall Street at some point. America’s economic relations with China after it opened up in the early 1990s were built up by an elite that moved just as seamlessly between the government, Goldman Sachs and Citigroup as their Chinese counterparts did between state-owned enterprises, party appointments and government posts.
The consequence of American ambivalence is that the three pillars of the world’s economic architecture, the IMF, the World Bank and the WTO, are all in bad repair, though for different reasons.
Should anyone care if the IMF, the World Bank and the WTO do not work well? There is no magic about these particular institutions, but a widely agreed international economic framework is worth having. The postwar system hinged on the U.S. looking beyond its narrow self-interest to support a global set of rules. It is now less willing to do that.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.