The dilemmas of foreign policy

First, and foremost, the fact is that our domestic policies affect other nations.  For example, the American-led “War On Drugs” is responsible for the creation of criminal organizations and the funding of terrorists throughout the world.  Without the high price they can charge for dealing in substances that the US deems illegal, but still demands in massive quantities, these organizations wouldn’t be nearly as profitable, or be able to use violence so readily to maintain their profits.

Second, there’s the fact that we are the world’s policeman – there is an expectation that we will use our diplomatic, economic, and military power to keep the peace in the world.  We maintain the most capable military in the world, with the largest navy, in order to fulfill this expectation, and this is expensive.  That said, the benefits of having such a large role in the world (not to mention the peace and continued growth of trade) are considerable.  The question is, how much American blood and treasure is necessary to maintain those benefits, and how much is too much?

Third, there’s the dilemma of how to maintain the flow of goods that we must have, even though many nations would like to use their control of supplies or trade routes as leverage against us.  Oil is the most obvious example, but there are a number of other critical materials needed by our economy.

The American obsession with the Middle East is a result of this dilemma – we and our allies need the oil from the Middle East to continue to flow, without significant obstruction, and so we’ve continued to intervene in the area in order to maintain that flow.  Similarly, the international economy (and the US, as part of that economy) desperately needs a supply of Rare Earth Elements (REEs) to build a lot of the high-tech equipment that our modern world depends on – which makes the fact that China supplies over 95% of the world’s demand for these substances a definite concern, especially since the Chinese have already demonstrated their willingness to punish other countries in a political dispute by completely cutting off their exports of REEs to the target country.

Fourth, we control the dollar, which functions as the world’s reserve currency.  This gives Americans, American companies, and US governments at all levels some extra fiscal flexibility, without the constant currency risks and transaction costs experienced by people and organizations in other currency zones.  It also increases the Federal government’s profits from seigniorage, both actual and virtual, and allows the US to borrow money internationally at bargain basement rates.

This hidden subsidy is, incidentally, one of the ways we are able to afford our large military.  In effect, we extract a tiny tax, via the dollar’s role, on the entire world economy in return for keeping the sea lanes open, acting as a guarantor against hostile invasions, and supplying everyone else with the dollars they use for trade and investments.  However, history warns us that a reserve currency can be replaced swiftly with a different currency when the country providing the current reserve mismanages its economy or is placed in a precarious financial situation, just as the dollar replaced the pound sterling almost overnight in 1944.

Finally, and most frustratingly, is the fact that we are no longer the sole economic superpower – we are still in the lead, but our role as the sole global superpower (which we reveled in for much of the 1990s and early 2000s) is over.  Other nations (China in particular) have risen to a level of importance on the world stage that rivals our own, and we need to figure out a way to deal with that that doesn’t harm our own self-interest.  Since our self-interest depends on being at the top in a growing world economy, we cannot significantly hinder other nations without harming our own interests… but we nonetheless would hate to lose our place at the top of the pack.

This is the real crux of America’s foreign policy challenge – figuring out how to remain dominant without depleting our own resources or destroying the international system that is responsible for so much of our prosperity.  We’re still on top, for now, but that dominance is dependent on many things, like increasing our economic growth rate, maintaining the international peace, and maintaining the dollar as the world’s reserve currency.  The Interlock impacts all of these things, in some way or another, and we are perilously close to allowing our domestic mistakes to radically shift the world order.


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