We’re all too familiar with the economic and social effects of the credit crunch – rising unemployment, house price collapses, bankers portrayed as devils incarnate, but in an interdependent world, how far is the credit crunch affecting our foreign policy?
The biggest concern is the spectre of protectionist-led trade wars. The omens of Barack Obama’s ‘Buy American’ refrain from the economic stimulus package are not good. On 17 June 1930 the US Congress passed the ‘Smoot-Hawley Tariff Act’ which raised tariffs on over 20,000 different imported goods. Despite opposition from over a thousand noted economists, the act was designed to help boost American farmers by reducing the supply of foreign agricultural products. The act directly led to retaliation from different governments in Europe, severely reducing transatlantic trade and creating a major catalyst for the Great Depression.
The creation of organisations like the World Trade Organisation (WTO), whatever their faults, was to ensure that such devastating trade wars never happened again.
Nearly 80 years on, we may be in danger of repeating some of those mistakes. Obama’s $819 bn legislation contains clauses that both the EU and Canada claim could violate world trade agreements. At a time when world steel prices are still falling, the act contains measures that require public works projects receiving money from the stimulus package to only use American-made iron, steel and manufactured goods.
The package led Richard Fisher – who is a former deputy US trade representative – to warn that “protectionism is the crack cocaine of economics. It provides an immediate high that leads to economic death.”
Although the costs of cheap imported goods or labour in a recession can lead to feelings of anger, concern and even xenophobia, we should always remember that free trade is in the best interests of all countries. The answer to the textile worker who has lost their job because of being undercut by India or China is not protectionist tariffs, but government backed retraining to provide new skills to find new employment. Thankfully, with organizations like the WTO it is now far harder to increase import taxes on a large number of goods in one go.
But there are subtler ways of bringing in protectionist policies. While Gordon Brown speaks passionately of protecting free trade, the government is instructing those banks that have received bail-outs to boost lending to British businesses and citizens first.
One of the difficulties with current WTO agreements (there are plenty of others) is that they are far stricter on developed countries. According to the Washington Post, “Indonesia last month raised new trade barriers on electronics, garments, toys, footwear and other imports. That is happening at a time when the IMF and World Bank say that global trade is set to shrink for the first time since 1982.”
Some claim that the current crisis is to the US model of economics as the Iraq war was to US foreign policy. It’s an interesting theory, and no doubt critics from all political views will use the current situation to question whether America is any longer the world’s economic powerhouse.
No doubt there has been a paradigm shift when the free-marketeers begin nationalising the banks, but what are the geo-strategic implications?
Niall Ferguson argues that “One possibility is that the ‘great reconvergence’ between East and West is speeding up. If you go back to the very first report that Goldman Sachs produced about the BRIC economies (Brazil, Russia, India and China), China was projected to overtake the United States in gross domestic product in 2040. But in more recent reports, that has been brought forward to 2027. Maybe it will be even sooner.”
The US will inevitably face slower growth over the next few years, but China is still predicted to rise by around eight per cent. The American sneeze may not necessarily cause an American cold.
Ferguson concludes that this could lead to a strategic shift in China’s focus, the end of ‘Chimerica’ – the term he coined for the special relationship between the consumer and producer economies. “With China decoupled from the United States — relying less on exports to America, caring less about the yuan’s peg to the dollar — the balance of global power is bound to shift, and China may feel less committed to the Sino-American friendship established back in 1972, China can explore other spheres of global influence, from the Shanghai Cooperation Organization that groups together China, Russia and four Central Asian nations to China’s own nascent empire in commodity-rich Africa.”
All this would seem to explain why Hillary Clinton decided to make her first overseas trip to Asia – signalling her vision of the importance of the ‘transpacific relationship’, as well as the transatlantic one.
At home, we may see other effects of the credit crunch. Financial problems for both individual and institutional philanthropists may reduce the amounts that charities receive – meaning it will be even more important that the UK, leading our G8 allies, increase our development spending to 0.7 per cent of GDP and beyond.
Unfortunate cutbacks to diplomatic staff in the FCO, a necessary result of both the increases in DFID’s budget and the overall savings that need to be made in Whitehall, may also lead to a leaner, more focussed British foreign policy, with better uses of our strategic allies.
The credit crunch has become a defining moment in recent history. It is increasingly clear that its effects are not just limited to economics.