Most of Asia seems happy with the US election result, signaling the end of the Rumsfeld “war of terror” and a return towards the sort of bipartisanship which has generally characterized US foreign policy. Allies will feel more allied and there is less danger of lurid axis-of-evil rhetoric translating into real war.
But with failure in Iraq, the impasse of Iran and North Korean nuclear issues was already pushing even a reluctant George W. Bush administration towards dealing with the real world rather than the one dreamed up by the neo-cons in Washington and the know-nothings of Texas. So should Asia pause before celebrating as hard as the US Democrats when they think of the other results of the polls?
Three issues will soon come to the top of US agenda and be heavily influenced by the election outcome and the Democrats control of both houses of Congress.
The most worrying for Asia is trade. Whoever won this election and whoever wins in 2008, the great global issue of the moment is not terrorism or even, quite yet, global warming. It is the un-sustainability of US trade and budget (especially trade) deficits. The US current account is now in deficit to the tune of over 6 percent of GDP or US$700 billion annually. It can only be brought down to a sustainable (2-3 percent) by one or more of the following: the dramatic decline of the dollar slashing US consumer importing power; a major US recession – not the mini-event of 2001; massive new trade restrictions, whether global or aimed specifically at China and perhaps other Asian countries.
Any of these will be painful for Asian exporters generally and especially for firms reliant on the US market. Given that US imports are almost double exports, and that it is moving into increasing deficit on other current payments, a cut of perhaps 20-25 percent in overall imports may be needed to fix he problem. An oil price fall would help but most of the burden will have to be borne by manufacturers.
The additional danger for Asia and China in particular is that the Democrat dominated Congress is likely to be much more protectionist in sentiment than its predecessor. Although traditionally Democrats have been generally as in favor of free trade as Republicans, there is currently a strong protectionist sentiment. Many identify the failure of low and middle income people to see their earnings keep up with prices as partly blamed on Bush’s tax cuts for the rich and professional class, who were doing well already, and the huge increase in corporate profits in recent years. However, much too is blamed on the impact of imports from Asia for the decline in manufacturing employment and of wages of unskilled and semi-skilled workers in particular.
This protectionist pressure will grow as the economy enters recession, which is likely within the next 18 months, at most, as consumers appear exhausted and the cash machine of ever rising house prices is no longer operating.
It went largely unnoticed overseas, where attention was focused on the Iraq war issue as decisive. But many Democrats also campaigned on blatantly protectionist platforms. It would be no surprise to see bills singling out China for new trade barriers when the new Congress starts to sit. – and that is while the economy is still growing, albeit modestly.
Meanwhile a weakened George W. Bush may feel reluctant to see the US make any further concessions which would enable the Doha Round to succeed. What is absolutely clear now is that there is no chance at all of Congress agreeing to renew “fast-track” negotiating authority when it expires in mid-2007. It is now or never for Doha and the WTO.
The Democrats do not take much of the blame for getting the US into its current debt and trade mess. That accolade belongs in the first place to Alan Greenspan and his years of cheap money and ever more dubious financial instruments, and secondly to the Bush mix of tax cuts for the rich and famous and the costly Iraq war. But a Democrat controlled Congress will now play a major role in determining the manner in which the fallout from the consumer and debt binge is treated.
Their influence may help address the budget deficit, reining in military spending and reversing Bush tax cuts. But these are just minor issues compared with the dangers posed by the external deficit itself, and any attempt to address it which results in a sharp slowing in the growth of global liquidity – the money which has pushed China’s reserves from US$300 billion to US$1 trillion in just three years and enriched large numbers of mangers of hedge funds, private equity funds and dealers in dodgy derivatives.
A less obvious negative for Asia is the impact of the Iraq – and wider Middle East – failure on the US outlook towards the wider world. It is not difficult to see that, as after the Vietnam debacle, US sentiment shifting from the “masters of the universe” unilateralist attitude of the Rumsfeld/Cheney era to a mild form of isolationism, of not wanting to deal with a world which is seen to have rejected the US politically and impoverished it through “unfair” trade.
Over-extension of the US in the Middle East may well lead to under-extension in East Asia where US bases and overwhelming military superiority is still a useful blanket which keeps China and Japan from allowing history to boil over into an arms race which could eventually lead to war. The US is already short of resources for its Pacific theater and its will to engage may now be further eroded. Can China and Japan rise to the challenge of keeping their own relationship in balance – and keeping the peace in Korea – as US hegemony erodes?
That is a long term question. A more encouraging medium term one is the issue of carbon emissions, energy supplies and global warming. The election has at least undermined the Texas oil lobby with its tentacles through the Middle East and brought closer to power people with an avowed interest in energy conservation and carbon issues. The trend is already there. Bush and his cronies may still be in denial, but the Republican governor in California Arnold Schwarzenegger was re-elected on a platform which included much tighter emission controls and Al Gore continues to stump the country and the world preaching the warming warning and promoting his movie, “An Inconvenient Truth.”
The election result will speed belated US conversion to the need to cut greenhouse gases. Happily that coincides with a growing recognition in China (and even India) that regardless of the global issue, pollution is killing vast numbers of their own people. US, China and India (plus most of the rest of East and Southeast Asia) share an interest in reducing imports of fossil fuels and thus also in reducing use of greenhouse emitters. The US meanwhile has the technological capacity to do something about it whether through energy saving devices, finding commercially viable alternative sources, ways of sequestrating carbon and provision of mechanisms for pricing and trading emissions.