Finance and Foreign Policy

Robert McMahon
Council on Foreign Relations
Wednesday, October 15, 2008; 11:52 AM

With many economists now pointing to a looming recession, spending constraints are likely to further complicate the foreign policy options of the next U.S. president. So far, Sen. Barack Obama (D-IL) and Sen. John McCain (R-AZ) are giving few signs as to how they would alter their priorities. McCain, in the first presidential debate, suggested a spending freeze on all but defense and entitlement programs. Obama said in an interview he might have to delay plans to double foreign assistance. Yet a number of sectors involving national security and foreign appropriations may face a tighter funding environment.

The most budgetary scrutiny could center on defense, where spending (McClatchy) in the most recent fiscal year came close to the $700 billion pricetag of the government's bailout plan for the finance sector. Even before the financial crisis, experts acknowledged that recent growth in defense spending would need to be curtailed. Defense Secretary Robert M. Gates said in a speech last month at the National Defense University that the Pentagon must be prepared for "inescapable tradeoffs and opportunity costs."

Both Obama and McCain have spoken of the need to reform the Pentagon's procurement system to control costs. In addition, the controversial practice of budgetary supplementals (CQPolitics), which since 2001 have funded the Iraq and Afghanistan wars and global counterterrorism operations separate from the normal budgeting process (at a cost of more than $800 billion), is expected to end no matter which candidate is elected. Meanwhile, military contractors are anticipating a move away from some expensive defense systems (WashPost).

Outside of defense, the biggest expectations for change are in U.S. foreign aid. Such aid has doubled under President Bush to more than $20 billion, with the administration identifying "transformational" foreign aid for weak societies as a national security imperative in the post-9/11 world. Speaking at the Clinton Global Initiative on September 26, both McCain and Obama indicated support for foreign aid programs to fight disease and poverty. Obama pledged to raise foreign aid spending to reduce extreme poverty in the world by half by 2015.

Notwithstanding these pledges, some major nongovernmental humanitarian organizations and officials with several chief UN programs for the poor have expressed concern that the cost paid by developed nations to rescue their battered financial sectors is likely to sharply cut back everything from food aid to disease mitigation. Steven Radelet of the Center for Global Development told Reuters: "Foreign assistance is not going to have the preeminent role that it has had in past years" in Washington. There are also concerns about the appetite developed nations will have for shouldering costs to implement new emissions controls to limit greenhouse gases. Some experts in the field, like UN Special Envoy Kevin M. Conrad, worry the financial crisis will lead to excuses for delaying action. However, Conrad also sees an opportunity for making progress sooner in the new economic climate.

In the area of trade policy, debate is forming over whether a more vigorous trade agenda is better to boost the U.S. economy. Paul Blustein writes in a new paper for the Brookings Institution of the need to turn away from options (PDF) like revising the NAFTA deal, which has been proposed by Obama, and "toward enhancing the system that has underpinned the expansion of global trade for the past 60 years." But Will Straw of the Center for American Progress says this is an appropriate time for the three nations in NAFTA to review their deal. "These talks could be framed as a strategy to strengthen the competitiveness of North America as a whole and to ensure gains in living standards for all Americans, Canadians, and Mexicans," he writes.

© 2008