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 Date:4/21/2009

 

Wake Up Call
A Changing World Order
If G20 turns out to be a ‘central institution of global governance,’ Obama will need to offer more than an olive branch, Reginald Dale says.

When candidate Barack Obama embraced “change” as the centerpiece of his presidential campaign, most Americans could be forgiven for assuming he was talking about how he would run their own country. Fate decreed, however, that on entering the Oval Office Obama found himself at the center of a gigantic wave of global change, in a world struggling to find a new international economic and financial order in the midst of crisis.

That search began in earnest at the G20 summit of leading economies in London in early April. And the role Obama plays – or fails to play – in the effort will not only help define the nature of the new order, and how friendly it is to America, but also the future capacity of the United States to exercise global leadership.

The G20 summits, attended by all the top developed and emerging economies, now seem likely to become the main vehicle for managing the international economy, superseding the rich-country club of the G8, which failed to avert or even predict the crisis. So, a vitally important question is whether Obama’s easy-going “let’s all be friends” approach to international relations will be adequate to advance America’s interests in dealing with hardball-playing emerging nations like China, Russia and, to a lesser degree, India – countries that do not share America’s fundamental commitment to the rules-based liberal market economy, although they are fully prepared to enrich themselves from it.

Obama inherits a weaker hand than any of his predecessors since World War II. Even the biggest fans of George W. Bush can hardly deny that respect for America declined sharply in much of the world during his presidency. And Obama has arrived at a moment when American influence is in any case on the wane, as a result of the shift of global economic power to Asia and the American origin of the current crisis – a disaster that can easily be portrayed as discrediting Anglo-Saxon capitalism and undermining America’s authority to defend its open-market, free-enterprise philosophy.

The task facing the United States is huge: to maintain the fundamental Western-inspired principles of the open world economy, while managing the rise of Asia and integrating China smoothly into the global system. Washington must ensure that the crisis is not treated as a reason to dismantle the free-market structures that have brought America and the world a surge in prosperity unparalleled in human history during the last 60 years.

The challenge is amplified not just by China’s growing weight in the international economy but by the leverage it has acquired over U.S. decision-making through the acquisition of vast dollar reserves. As a recent study puts it, “financially closed China, with its $2 trillion in foreign exchange reserves, rivals a financially open America rapidly acquiring $2 trillion in additional government debt.”

China’s economic weight is often exaggerated, just as that of Europe is often overlooked. The world’s largest economy is the European Union, followed by the United States, and the closely interwoven transatlantic economy “remains the foundation of the global economy,” according to a new report by the Center for Transatlantic Relations at Johns Hopkins University. From 2000 to mid-2008, U.S. companies invested more than twice as much in Ireland as they did in China, and sales by U.S. foreign affiliates in China in 2006 matched those in Belgium.

But while U.S. economic relations with Europe are vital to American prosperity, Europe does not have the potentially coercive influence over Washington enjoyed by China with its vast store of dollars. In a sense, Europe doesn’t need it. Obama’s economic philosophy of greater government intervention, tighter regulation and more multilateralism is pretty close to that of most continental Europeans. Although France and Germany brushed aside Obama’s demands for a coordinated global fiscal stimulus in London, and established their own priorities for new global financial regulations, the European Union generally shares Obama’s predilection for running the world through “soft power.”

China presents a much tougher challenge. But Obama’s dealings with Beijing have so far fit cosily into his overall approach to virtually every other country, which is to offer friendship and respect, punctuated with apologies for previous American behavior. He seems to have embraced the narcissistic delusion, common to political leaders, that intractable problems have suddenly become easier to resolve with his appearance on the scene. He makes unreciprocated concessions, avoids unpleasant topics, and frequently allows his interlocutors to set the agenda – a strategy that risks being interpreted by others as betraying exploitable weaknesses, if not abdicating American leadership.

More specifically, in Beijing in February, his Secretary of State, Hillary Clinton, explicitly offered Beijing joint leadership in “a coordinated global response to stabilize the world’s economy.” And Obama has bestowed on Moscow an enormous though as yet unrequited gift by appearing to accept Russia’s return to the kind of parity status it enjoyed with Washington during the Cold War. Russia may not approach China as an economic heavyweight, but it is a world-class energy power, with a stranglehold hold over Europe’s fuel supplies, a delicate subject Obama does not yet appear to have broached with Moscow.

China, however, emerged the main winner from the London summit. Shortly before the meeting, Beijing adroitly switched the focus of debate from its own currency manipulation to the future of the dollar. China knows its proposal for a new world reserve currency to replace the dollar will not be enacted overnight. It is prepared to wait – but it is ostentatiously flexing its muscles. By its very presence at the G20 top table, China has enhanced its global influence. In London it also won promises of a greater say in the international financial institutions and commitments by the countries that provide its main markets to eschew protectionism. It is hard to identify comparable gains by the United States.

China’s successes will be even more significant if the G20 fulfills its stated aim of expanding into areas “such as climate change, food security, the rule of law, and the fight against terrorism, poverty and disease.” Washington is at odds with Beijing over many of China’s policies, including disregard for human rights, neo-colonialism in Africa, reluctance to curb greenhouse gases, an artificially low exchange rate and a selective approach to the rule of law. Even more fundamentally, as part of any resolution of the economic imbalances that helped cause the crisis, the United States must sharply reduce its trade deficit with China, altering the very basis of China’s economic growth. For now, however, China appears much readier to exploit its financial advantage than America is to wield its consumer leverage.

Of course the G20 may turn out to be an unwieldy and ineffective decision-making forum. But Washington must prepare for the possibility that it will emerge as a central institution of global governance. That means a much more robust approach to U.S. leadership. With the future of the international order and America’s role in it at stake, just offering friendship to hard-bitten rivals will not be nearly enough.

Reginald Dale is Director of the Transatlantic Media Network at the Center for Strategic and International Studies in Washington, DC, and a former columnist and senior editor fort the International Herald Tribune and the Financial Times.