The Global Financial Crisis: Foreign and Trade Policy Effects

The global financial and economic crisis affects all three of the essential national interests of the United States: national security, economic well being, and value projection. Only occasionally does an event of this magnitude occur that generates such daunting challenges yet also opportunities for U.S. policy. The effects of the crisis on foreign policy, trade, and security are so diverse and widespread that, out of necessity, policy responses must range from the highly specific to the broad and ethereal. This report provides an overview of the major non-financial effects of the global crisis. In some countries, incumbent governments have lost support or authoritarian governments are consolidating power. In certain countries, conditions for citizen discontent or even radicalism are being augmented and market capitalism is being questioned. On the world stage, U.S. leadership is being challenged; money to lend is becoming a critical component of soft power; budgets are tightening and threatening funds for economic assistance and national security; international financial institutions are assuming a higher profile relative to national governments; and shifts in trade flows are raising forces for protectionism. As seen in the G-20 London Summit, the financial crisis also has become a rallying point for anti-globalization groups and anti-government activists. The U.S. Director of National Intelligence, Dennis Blair, has told Congress that instability in countries around the world caused by the global economic crisis and its geopolitical implications, rather than terrorism, is the primary near-term security threat to the United States. The political and foreign policy effects of the global financial crisis can be divided roughly into the following categories: effects on political leadership, regimes, stability, and spheres of influence; effects on economic philosophies, state capitalism, and trade protectionism; effects on U.S. international leadership and attitudes toward the United States; effects on supranational financial and economic organizations; effects on poverty; and budgetary effects on resources for aid, diplomacy, and defense. Congress has been active in recognizing and moving toward dealing with the longer-term effects of the crisis, but most of the long-term effects are just developing, and it is yet not clear whether they are temporary jogs in a path or a permanent deviation from post-World War II trends. The response to the effects depends both on "more of the same" (working through existing institutions for diplomacy, aid, trade policy, and security) with incremental changes and at a higher level of intensity, and on new and innovative approaches to cope with problems laid bare by the crisis. As the dust from the onset of the crisis has begun to clear, it is apparent that the world has become more unstable, that much of the blame for the turmoil is being aimed at the United States, that attempted solutions are taking enormous amounts of budgetary resources, and that, if the crisis worsens, it may cause wrenching changes both within the countries most vulnerable and among the big power nations of the world.download