American Foreign Policy Evolution – The New World Order [Part I] by Bill O’Grady of Confluence Investment Management

As our regular readers know, we have been focusing for several years on the issue of the uncertainty surrounding America’s superpower role. It has been our position that the U.S. has lacked a coherent foreign policy since the Cold War ended in the early 1990s. Although we cannot definitely say that a new policy is in place, the trappings of one does appear to be emerging.

Historians tend to adopt one of two methods to analyze history. One method is the “Great Man” theory, which looks at history as a progression of key personalities that change and shape the world. The other is the “Great Wave” theory, which suggests that social, economic and political factors work their way through history and individuals simply play their role by supporting or opposing the wave.1 I lean toward the latter. Although exceptional people matter, history is littered with great people trying to make changes at the wrong time and failing miserably. Changes that the “failure” had attempted may eventually get made because the timing was right. Given this position on how history unfolds, the personalities matter less and thus, this is why I don’t focus on people as much as trends.

The focus of this paper is how policy seems to be evolving and why; if this assessment is correct, who wins the next election has only a marginal impact. Instead, it makes more sense to concentrate on the trends that are emerging and project how they are likely to evolve.

Although this report details my own analysis of emerging trends, it is greatly supported by the research of others. I want to especially mention George Friedman of Stratfor. His book on the next decade2 and his firm’s recent decade update3 were instrumental in this analysis.

This will be a four-part report. Part I will begin with the evolution of U.S. foreign policy, focusing on the 25-year cycle pattern that has exhibited itself between the adaptations to new circumstances. Part II will recap the superpower role and the American adaptation of that role. Part III will examine why the current policy configuration is no longer adequate for the task. It will analyze the economic and military costs of the current policy and argue that the costs have become too high to maintain the current role. At the same time, it will conclude that no other nation can replace the U.S. in the hegemon role. Part IV will discuss the emerging policy configuration, including its key features that will allow the U.S. to maintain some degree of global influence and yet also make the costs more manageable. This analysis will include the winners and losers in this new order. And finally, as always, we will conclude Part IV with market ramifications, which are many and significant if our view
is correct.

The Evolution of American Foreign Policy

It should be noted that American foreign policy evolves and, in the face of major events, it often takes time for policymakers to develop a workable foreign policy stance. The U.S. was a rapidly rising power from the mid-1850s but really didn’t begin to exercise power on a global stage until the late 1890s, despite becoming the world’s largest economy in terms of GDP in 1870.

American Foreign Policy

This chart shows the shares of global GDP from 1820 to 2013. By 1870, U.S. GDP had exceeded that of Britain; however, the latter remained the global hegemon.

Theodore Roosevelt was critical in shaping the new foreign policy that was more outward-focused than the previous policy. It should be noted that he could not have accomplished this change had the U.S. not experienced significant economic growth that established the country as a major power. In a sense, the expanding U.S. economy was the “wave” that supported the change in foreign policy.

Roosevelt’s strategy was to secure the Port of New Orleans by ousting Spain from Cuba,4 acquire colonies in the Far East and greatly expand the Navy. Until this policy change, U.S. foreign policy was mostly about the Western Hemisphere and North America. Matters of Europe were generally ignored. In effect, the U.S. was “punching below its weight” in terms of its economic power until Roosevelt changed policy. In a nutshell, the new policy stance was outward-looking but unwilling to shoulder major international burdens.

American colonization was limited and the U.S. was more than willing to allow the European powers, especially Britain, to carry the burdens of global hegemony.

The U.S. reluctantly intervened in WWI, but waited until the conflict had reached a stalemate. Germany’s unrestricted submarine warfare against American civilian shipping led the American public to support entering the war.5 President Wilson was reluctant to enter the conflict, seeing it as a European matter that was best solved by those powers. However, the attacks on shipping became a casus belli and led to America’s entry into the war. In addition, the collapse of Russia and the Bolshevik revolution meant Germany was fighting a single front war. The fear was that by shifting troops from the eastern front, Germany might win the war. Instead, U.S. intervention ended the stalemate and led to the Allies winning the war in 1918.

However, U.S. policymakers decided to retreat from the world after the war. Congress refused to support Wilson’s League of Nations and his successor, Warren Harding, won on a platform of a “return to normalcy.” The U.S. became isolationist and left Britain to return to its superpower role.

Unfortunately, Britain was struggling to maintain this role. Its economy was severely hurt by the war and it was finding it difficult to maintain its colonies and provide the global reserve currency. The inability of Britain to provide the global public goods usually supplied by the hegemon and the U.S. refusal to accept that role was one reason for the onset of the Great Depression.6

After WWII, U.S. policymakers, for the most part, accepted the role of global hegemon. However, there were important dissenters. Senator Robert Taft, the eldest son of President William Howard Taft, feared that the deep involvement in world affairs would forever change America, forcing it to engage in policies that were diametrically opposed to democracy and small government. In general, as we will discuss next week, he was right. However, the alternative, which was probably forfeiting the world to communism or fighting WWIII, led the majority of policymakers to accept the burden of hegemony.

The U.S. held this role and shared in a global superpower duopoly with the Soviet Union from 1945 to 1990. In 1990, communism collapsed and the Cold War ended. Since then, four administrations have struggled to create a new foreign policy model. For the most part, all four have been wooed by the “siren song” of Wilsonian7 foreign policy solutions which has led to “humanitarian” military operations in Somalia, Kosovo and Libya,8 and wars of occupation in Afghanistan and Iraq. These conflicts were, at best, modestly successful and, at worst, debacles. It is arguable that all four presidents struggled to prioritize policy aims. President G.H.W. Bush was masterful in his execution of the First Gulf War but was consistently behind the curve on

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