Top Political Risks for 2008

US a major risk factor in coming year

IAN BREMMER, PRESIDENT, EURASIA GROUP

The biggest story in this entire forecast is that the United States is a serious (indeed, the serious) macro risk factor. The American electorate is increasingly troubled by a laundry list of signs that the nation’s influence is on the wane—the war in Iraq, the rise of China, Washington’s inability to denuclearise Iran and North Korea, the global move away from the dollar, energy insecurity/high oil prices, resurgent sovereign wealth funds shoring up wobbly blue-chip US financial (and other) institutions.

All of these factors, amplified by homeland security worries create a significant risk that America will scale back its engagement with the world, strengthen barriers to trade and immigration, and renounce its global leadership on a range of international challenges from trade liberalisation to international security. International efforts for which US leadership is necessary, like climate change, will remain underdeveloped and leaderless. In short, in 2008 the United States will lack the necessary political will and political capital to provide the public goods that form the foundation of long-term growth in the global economy.

This is a shift of profound importance. The last several years have seen a spike in negative international sentiment toward the United States. Couple that with American surprise that efforts at exporting democracy haven’t always gone over well—or proven successful. The main geopolitical risk in 2008 comes more from a change in domestic US politics that will create greater policy uncertainty, scepticism over the United States’ role as the world’s policeman and, more troubling for world markets, doubts over the benefits from present trends in the global system.

Some of that change is an election-year phenomenon, including constituency-serving statements from moderate republicans and democrats on the stump and, more significantly, the sudden emergence of previously fringe ‘America first’ Republican candidates like Mike Huckabee (R-AR) and libertarian Ron Paul (R-TX). Deterioration in consumer confidence in coming months will benefit their campaigns most, pulling the rest of the field in their direction politically. As that occurs, we’ll also see protectionist pressures intensify.

We can expect an expansion in the mandate of the Committee on Foreign Investment in the United States (CFIUS) that will dissuade a number of would-be foreign investors; increased scrutiny and potential regulation of sovereign wealth funds in US markets; greater scrutiny of free trade pacts (existing and proposed); tougher trade relations with China (as congress takes the lead on that relationship away from Treasury Secretary Hank Paulson); and intensified debates over homeland security and immigration. All of this will create more inefficiencies in the global marketplace in conducting business with the United States.

But the more important shift in the United States is structural. One national poll (from the Pew Research Centre) is particularly instructive. In 2007, 59% of Americans considered international trade good for the United States…compared to 82% five years ago (and 82% in Russia and 91% in China today). Relatedly, fewer than half of Americans had a positive view of “large companies from other countries” compared with 64% of Chinese, also with a comparable swing from previous years. In what has to be the single most troubling development for the global economy in the past twenty years, domestic insecurities are quickly moving the American electorate away from support for the international status quo.

The real question here is not this tendency, which is indisputable, but whether 2008 proves the straw that breaks the camel’s back. This coming year is going to be one in which the United States is increasingly inwardly focused. This trend creates political risks that give rise to meaningful market inefficiencies globally. But to what extent will 2008 prove a blip, stimulated by the election year, with the United States returning to business more or less as usual—muddling through with increased multilateralism, but still taking a leadership role on proliferation issues, free trade, the US-China strategic economic dialogue, etc? That depends more on the state of the nation than on who wins the November presidential election. But if the current credit/liquidity crisis rocks the real economy; if there’s a recession for any other reason; if there’s a terrorist attack of any scale pre-elections; if events in Iraq deteriorate, creating demand for imminent US withdrawal (from the sudden collapse of the Iraqi government, a successful large-scale attack inside the green zone or against a visiting high-level US delegation; etc)…all of those things would call a halt to election-year agenda-setting on economic reform issues (health care, climate change, tax reform). This would instead lead America toward neo-isolationism, with a prioritised focus on immigration, homeland security, and protectionism. That’s something I would expect whether there’s a Republican or Democratic president.

Right now I’m still an optimist—I’m 70-30 in favour of the more favourable outcome. In other words, the United States proves dicey as an international actor and force for global economic growth in 2008. But after the election of a new president, the US gets back to normal. There’s then a longer-term shift toward multilateralism—with a growing number of diverse global players demanding a say in the agendas and nature of international initiatives and institutions.

This increasingly assertive international behaviour from the likes of China, India and the EU—to say nothing of adversaries like Iran and Venezuela—in turn creates additional risk of US backlash, but that’s a more gradual process at least for the next administration. I would have been 90-10 on the optimistic side six months ago but in my view, the overall trajectory in my outlook is negative.

For the full report of Eurasia Group’s top political risks for 2008 go to www.eurasiagroup.net