Domestic Issues Greatest Global Threat

As President Obama and G20 leaders convene in Pittsburgh, their toughest challenge will not come from the threat of financial collapse or climate change, but from the most resilient and challenging threat of all—domestic politics that could neuter critical international efforts.

As the political urgency of the economic crisis fades amid seemingly endless summits and apparent “green shoots” of a stabilizing economy, G20 pledges of bold action on the international financial crisis risk being run over by domestic political priorities ranging from joblessness to punishing bankers.  Ironically, while health care may dominate U.S. news, the failure to revive meaningful economic growth or prevent a financial crisis 2.0 would have far more impact on G20 leaders’ political futures and judgment by history (as President Hoover learned following the Great Depression).  G20 leaders’ most urgent mission is to explain to struggling workers from Pittsburgh to St. Petersburg why global efforts from reviving trade to securing Afghanistan should matter to them.  Yet leaders are falling perilously short, and as seen by the two defining events of our century so far— 9/11 and the global financial crisis— the consequences can be vast in today’s interconnected world.

Protectionism, which festered in the Great Depression, has been a focus of G20 leaders’ statements.  The results so far, while not yet devastating, have often demonstrated the weaknesses of these pledges rather than the strength.  Despite the first G20 summit’s pledge to halt protectionism, 17 of the G20 enacted new protections by their second meeting.  Former U.S. Trade Representative Carla Hills has pointed out that new trade barriers have been erected at a pace of one every third day.  America, traditionally the free trade leader, has now followed its “Buy America” stimulus protections with a market-rattling decision to slap tariffs on Chinese tires.  Domestic protectionism pressures are only likely to ratchet up as the United States and other developed nations continue to face high unemployment and some emerging economies look to exports to revive growth.  Some correctly note that the World Trade Organization (WTO) might help slow a blatant return to 1920s-style protectionism.  Yet the irony of many U.S. and foreign measures is that they may be fully consistent with the letter, if not the spirit, of current WTO rules and—even if they aren’t—it could take two years or more for the WTO to rule on them—more than enough time for trade conflicts to spiral downward.

The most serious economic risks fall even further outside traditional trade protectionism where rules are even more lacking.  The lack of standards on currency looms throughout tense exchanges between China and the United States, the 21st century’s leading powers.  These heated exchanges have shifted from U.S. demands that China stop devaluing its currency and flooding America with imports, to Chinese warnings that America—faced with unprecedented peace-time debt and no clear path for fiscal responsibility while debating trillion-dollar health care reforms—must not devalue its currency and stick China with a loss so Americans can continue its free-spending ways.  Without any effective WTO-style rules to mediate, a currency-driven conflict could have even more consequences than 1920s-style tariff-based protectionism and shake global markets that depend on the dollar for exchanges.  Financial experts also warn that the derivatives that helped spark a crisis which nearly brought down the global economy were just a small part of a sea of risk that might crash through existing levees.  Yet while efforts to limit bankers’ pay may score political points for European or U.S. politicians, other more vital efforts to contain the risk of unregulated or poorly-understood markets appear to be moving slowly as the momentum for change in these technical areas subsides.

However, as in the Great Depression, the greatest consequences of nations turning inward could be felt far beyond the current economic debates.  Depression historians note that the biggest message from the Great Depression’s failed 1933 London Conference was that German and Japanese aggression would go unchecked—with tragic consequences that wiped even that era’s dire economic circumstances off the front pages.  Today politicians, publics from Germany to Japan, and even conservative pundits such as George Will are increasingly rethinking efforts to secure Afghan safe havens which spawned 9/11.  Few appear to have the backbone for tough sanctions or actions to stop Iran, the leading state sponsor of terror, from acquiring nuclear weapons capabilities that many estimate it could obtain in months.  One major poll found that 56% of Americans list the economy or jobs as our top priority, versus 1% or less for issues like our current wars, terrorism, or climate change.   It is not surprising that U.S. defense spending is targeted for spending cuts, despite the fact that no nation—Russia?, China?—is prepared to responsibly step into America’s role in providing global stability.

President Obama and G20 leaders can rightly say that this year they confronted some of the toughest economic problems in decades and avoided an economic catastrophe.  Yet they are likely to face even tougher problems in the years ahead if they cannot convince people in Pittsburgh and elsewhere why major global efforts matter.

Steven Schrage is the Scholl Chair in International Business at CSIS. He previously chaired the G8’s Anti-Crime and Terrorism Group and formerly served as Senior Adviser in the White House’s Office of the U.S. Trade Representative and as Deputy Assistant Secretary of State.