Seminar 7

The US Economy and Foreign Policy

 Top 10 largest economies in terms of GDP
• USA - $19,39 trillion (24.4%)
• China - $12,24 trillion (15.4%)
• Japan - $4,87 trillion (6.13%)
• Germany - $3,67 trillion (4.53%)
• United Kingdom - $2,62 trillion (3.3%)
• India - $2,60 trillion (3.27%)
• France - $2,58 trillion (3.25%)
• Brazil - $2.05 trillion (2.59 %)
• Italy - $1,93 trillion (2.44%)
• Canada - $1,65 trillion (2.08%)
The figures for 2017; published by World Bank on September 21, 2018.
The UK was the only country where GDP declined (compared to 2016)
from $ 2.86 trillion to $ 2.62 trillion (due to Brexit).
Favorable geography for economic growth
• The first ingredient of a nation’s economic system is its natural
resources. The United States is rich in mineral resources and
fertile farm soil, and is blessed with a moderate climate. It
also has extensive coastline on both the Atlantic and Pacific
oceans, as well as on the Gulf of Mexico. Rivers flow from far
within the continent, and the Great Lakes – five large lakes
along the U.S. border with Canada - provide additional
shipping access. These extensive waterways have helped
shape the country’s economic growth over the years and
helped bind America’s 50 individual states together in a single
economic unit.
 America’s GNP and leadership positions
• By 1900, the U.S. had become the greatest industrial nation, and its citizens
enjoyed the highest standard of living in the world. In 1913, the United
States accounted for more than a third of the world’s industrial production.
By the post-World War II era, the United States was producing 50% of the
gross world product. Today, the American economy no longer dominates
the world as it clearly did then. But with only 5% of the world’s population
and 6% of its land area, the U.S. still produces around a quarter (24,4%) of
the world’s industrial products, agricultural goods, and services, a share
that has remained about the same for the last 35 years. America has not
dropped behind the nations: its gross national product (GNP) has more
than tripled since the end of WWII. Rather, the rest of the world has caught
up, or closed the distance. America remains the world leader in
biochemical and genetic engineering, aerospace research and
development, communications, computer and information services, and
similar high-technology fields. In fact, the US economy is still the engine of
the global economy. US global leadership depends on its economy.
 Agriculture
• Many people, including Americans, don’t know that the
United States is the world’s leading agricultural nation. That is
surprising, because America’s share of the world’s land that
can be used for farming is less than 8%, and because only a
tiny proportion of America’s total population (2%) is involved
in agriculture. America not only feeds her own people – one
of the few industrialized countries that does so – but a great
many of other people in the world as well. In 2010 China
emerged as the top market for U.S. agricultural products.
What is behind America’s economic success?
• What helped Americans to achieve such a great success in the economy? It is
America’s vitality, its so-called spirit of enterprise and initiative, the American
system of government.
• The progress of American industry and agriculture may also be explained by
characteristic which has often been called typically American. This is the constant
willingness to experiment, combined with the desire to find new solutions to old
problems. Social and geographical mobility have also played a part. Americans are
willing to move to areas where they could find better jobs. They are also willing to
be trained for new ones.
• American business and industry has also greatly benefited from the major
universities, their basic research, and their willingness to support talent. American
entrepreneurs today are likely to be young, adventurous, and well-educated.
Above all, they are willing to take risks to achieve success.
• Competitiveness is integral to American culture and the US economy.
 Willingness to taking risks and attitude to
failures
• American entrepreneurs remain eager to risk their own
savings to start small businesses, despite the potential for
failure. In 2008, 43 546 U.S. companies filed for bankruptcy.
One obvious reason why so many Americans choose this path
is the relative ease of starting a small business. The World
Bank ranks the U.S. as No.4 among 183 economies in ease of
starting a business.
• Business failure in the United States does not carry the social
stigma that it does in some other countries. In fact, failure is
often viewed as a valuable learning experience for the
entrepreneur, who may succeed the next time.
 Regulations
• Any American trying to start a business is faced with many regulations,
restrictions, and laws from all levels of government, federal, state, and
local. The federal government sets laws concerning working conditions,
transportation, minimum wages, and working hours. Environmental
protection and equal employment laws in the United States are among
the strictest in the world. Such laws and regulations, standards and
requirements represent the greatest contrast of the present business
climate with that of the past. The American blue-collar worker is among
the highest paid in the world, and his benefits and pensions also makes
him one of the most expensive. These regulations stimulate some
businesses to move to other countries with cheaper workforce and lower
environmental and other standards. As a result, American industrial (blue-
collar) workers are losing jobs year after year. Trump promised to stop this
tendency. It should be noted, however, that in many European countries
there are even more regulations than in the USA.
 Features of the US economy
• comprehensive promotion of entrepreneurial activity by society and the
state; a favorable entrepreneurial climate; social setting for success,
regardless of the person’s origin and social status
• a relatively small public sector in the economy – only 12%
• more limited government intervention in the economy than in other
countries
• high labor consciousness, based primarily on Protestant ethics: hard work
and the faith of most citizens in their own abilities to achieve success
• absence of numerous bureaucratic and status barriers typical of many
other countries
• Large service sector: services account for 84% of US GDP
Attempts to unite interests of employers and
employees
• A new trend has becoming more and more
popular among American companies which
want to unite the interests of employees and
employers. In some firms all employees own a
part of the company, but all share in the
profits or losses as well. This arrangement is
designed to give great incentive to employees.
 Self-reliance in getting a job
• Many European experts are surprised by the degree to which
Americans believe that they themselves, rather than their
government, are responsible for providing and getting jobs. In
a 1988 survey, Americans and Europeans were asked if it
“should be government’s responsibility to provide a job for
everyone who wants it.” Eighty-eight percent of Italians, 80%
percent of Germans, and 69% of the British agreed. Only 33%
of the Americans held the same view.
 Small firms, manufacturing and the service
sector
• About half of the people in the workforce have jobs in small businesses,
companies employing fewer than 500 people. In fact, of the nearly 26
million business firms in America, 97.5% employ fewer than 20
employees.
• Now little more than 10% of US employees work in manufacturing. Many
American companies focus now more in design, marketing and
management than on assembly of product.
• Over the last several decades, the United States has become a service
economy; more than 80% of all economic activity is in the service sector.
Manufacturing jobs (excluding high tech industry) are moving to other
countries with low-paid working force.
 High Tech Industry
• The United States developed the most high-technology-intensive
manufacturing sector among the major nations, growing from 12% to 30%
of total domestic manufacturing since 1990, according to a 2006
evaluation. In Western Europe, the high-tech sector accounts for 12% of
manufacturing, and for 15% in Japan. This sector contributes enormously
to technological innovation and economic growth, research, and increased
knowledge. Upwards of 20% of the people in this high-tech sector in
America are foreign born, encouraged by high salaries and opportunities
for self-realization.
• America is the world leader in new technologies. U.S. research and
development spending accounts for more than 40% of the global total,
and in the area of medical and biotechnology research, the United States
spends more than the rest of the world combined.
 The profits of US movie industry

• American films account for about 85% of box

office revenue in Europe and more than 80%
in the entire global market. American movie
industry spreads American cultural values
throughout the world and brings a lot of
money to the USA.
 Different views on the economy in the Trump
administration
• Bob Woodward in his book “Fear: Trump in the White House” wrote about the
debates in the White House concerning the main directions of US economy. Anti-
globalist economists, supported by Trump, argued that the main reason for the
huge trade deficit was the high tariffs imposed on American goods by China and
some other countries. They claim that the North American Free Trade Agreement
(NAFTA) sucked all the juices from the United States, turned Mexico into an
industrial power, and made Americans unemployed. Their opponents tried to show
the benefits of transferring U.S. industry to the third world. They explained that
goods from Mexico and China flooded the country because they were cheaper. The
Americans, who were now spending less on imported goods, had more funds left
for other goods, services, and savings. That, in their opinion, was the effectiveness
of global markets. Trump believes that classic protectionist policies will do America
more good than harm. He accused Clinton of opening borders and losing jobs to
China and Mexico. Trump implemented trade protectionism via tariffs, primarily on
imports from China, as part of his "America First" strategy. In response, the
Chinese government reduced import of agricultural products from the United
States.
“Head hunters” and corporate attempts to keep
skilled employees
• There is a problem of loosing good employees to their
competitors in many high-technology industries and
businesses. Many of these firms, therefore, try to keep highly
skilled employees by offering them benefits and good working
conditions. In addition to various profit-sharing and pension
plans, many large corporations offer their employees the use
of swimming pools and golf courses, or art classes, and free
day-care centers for their children. Today, the word “head
hunters” refer to those independent agents who lure away a
company’s best employees with offers of better working
conditions and benefits.
 Trade deficit and debt
• Trade deficit has become a permanent problem of the U.S.
economy. The United States had a horrible trade deficit in
1987 of some $146 billion. By 1990, this had been halved to
about 70 billion. In 1991, the total trade deficit was only $7
billion – in a $6 trillion economy. Now it is huge again, but
there is hope that it will decrease again in the future.
• In mid-2000, the U.S. debt totaled $1 trillion. Eight years later,
the total was $ 2.7 trillion. It has been increasing under Trump.
The major holders of U.S. treasury securities (debt) are China
(20.8% - 2010) and Japan (20.2% - 2010). These countries are
heavily dependent on the US economy and do not plan to
harm it.
 Trump’s taxation policy
• Prior to Trump, the United States had one of the highest
corporate tax rates (corporate profit tax) - 38.92%. The
average rate of this tax in the world is 22.5%. Europe has a
low corporate tax rate of 18.88%. High corporate taxes are not
conducive to attracting business from other countries.
According to the Wall Street Journal, American corporations
held more than $ 2 and a half trillion abroad because it was
not profitable for them to pay corporate tax at a high rate of
35%. Trump managed to lower the rate to 21% (he wanted
15%). In fact, the tax policy of Trump is in many ways similar
to the tax policy of Reagan.
• Trump wants to lower export taxes and increase import taxes.
The American tax system is designed in such a way that it is
more profitable for enterprises to produce products in other
countries where the tax rate is lower and there are fewer
regulatory rules, which means that it is possible to pay
workers less. Then they deliver these products to the huge US
market without import tax.
• Trump criticizes Democrats for their intentions to get the rich
to pay more taxes. He believes that this will lead to the
withdrawal of businesses and investments from the country.
 Democrats and the Economy
• Before the great depression of the 1930s Democrats advocated
unrestricted free-market economy. Their doctrine stated that the state
should not interfere into business. The Great Depression in the 1930s
forced them to reconsider this doctrine and to allow state interference
into the economy to ease social tensions. Democrats revised the role of
the state in the economy. They believe that unrestricted free market
without government intervention will give upper classes extremely large
economic and political powers and, consequently, will lead to social
tensions and political instability. Democrats support aggressive
government intervention to provide disadvantaged individuals a way out
of bad economic and social conditions. They claim that bad economic and
social conditions deny the poor real opportunities to improve their lives.
• Poor people tend to crime, teenagers become pregnant and drop out of
school, and rates of drug addiction reach epidemic proportions, say
Democrats, because social conditions deny these people real
opportunities. Thus, a typical trait of Democratic programs is extensive
social programs. Poor people cannot develop their talents to the fullest
extent if they are not provided with opportunities and financial support. In
a good society, Democrats believe, all individuals should be able to
develop their minds, musical talents, athletic abilities, or any other gift as
much as possible. Critics of extensive social program policy say that it
often stimulates the poor to live idle lives at the expense of the people
who work.
• Extensive social programs require a lot of money. Hence, one of the
distinctive signs of the Democratic party’s socio-economic policy is high
taxes, imposed mostly on businessmen. That is why many business people
prefer to vote against Democrats. The poor, who are the chief
beneficiaries of social programs, support Democrats more strongly than
do those whose taxes are paid for the programs. One of the distinctive
features of the Democratic government is a large bureaucratic apparatus
since extensive social programs require a lot of officials.
• Some analysts express doubts that Democrats help the poor and
minorities because they feel sorry for them. Democrats just need their
support during elections, these analysts say.
 Republicans and the Economy
• In their economic policy Republicans usually support the idea of only
slightly restricted free market. Republicans (conservatives) regard the idea
of social equality as an enemy of freedom. That partially explains their
negative attitude to extensive state interference into the economy. They
believe that economic system should reward initiative, talent, and hard
work. Republicans believe that social programs rob individuals of dignity
and self-respect which can be gained only when a person is responsible for
one’s own life and wellbeing. A famous Republican slogan says, “State-
help kills self-help.” Social programs must be reduced to a minimum not to
produce idleness, Republicans claim. Only those people should receive
governmental assistance who really cannot help themselves (the disabled,
the old, the ill, etc).
• In economic policy Republicans particularly oppose efforts to impose
government regulations on business, pointing out that such regulations
are inefficient and can ultimately lower the entire nation’s standard of
living. Republican governments often help the rich by reducing taxes on
their extra profit (progressive taxes). As a result, these businessmen invest
the saved money into perspective branches of the economy and thus
create new jobs. Low taxes on profit also attract foreign investments.
Republicans believe that government should help producers to produce,
rather than consumers to consume. Thus, typical traits of the Republican
policy are reduction of the number of state officials (bureaucrats), social
programs, and taxes on profit.
• Republicans successfully applied the old economic law which reads “In
order to lower taxes, the government must lower social expenses.” It
means reduction of subsidies for the poor.
• Critics of conservatism note that Republican economic policy with time
leads to the deepening of social differentiation, the growth of relative
poverty and social discontent. Republicans are more than Democrats
interested in creating a powerful middle class which is their major
electoral basis. Poor people are among the strongest supporters of
Democrats.
• Republican policy is usually not environmentally friendly. Business elites,
who usually support Republicans, try to avoid spending money on
adjustment of their factories to new environmental norms. That is why
many Republican leaders are against signing the Kyoto protocol.
 Gap
• The gap between rich and poor in the U.S. is
very large for such a wealthy country. The top
1% of American households have accumulated
more wealth than the entire bottom 95%.
 Who are the poor?
• Poverty in the USA is most common among families headed by women.
The incidence of poverty among these families is four times greater than
that for married couples. These women and their children constitute over
two-thirds of all the persons living in poverty. The disintegration of the
traditional husband-wife family is the single most influential factor
contributing to poverty today.
• Blacks also experience poverty in much greater proportions than whites.
Over the years, the poverty rate among blacks in the USA has been almost
three times higher than the poverty rate among the whites. Poverty
among Hispanics is also significantly greater than among whites.
• In contrast, elderly people in America experience less poverty than the
non-aged. Moreover, elderly people are much wealthier in terms of assets
and they are more likely than younger people to own homes with paid-up
mortgages. They also receive various welfare benefits. Parties compete for
their votes and pay much attention to the needs of the elderly.
 Persistent poverty
• About half of the Americans on welfare rolls are persistently
poor, i.e. likely to remain on welfare for five or more years. For
those people, welfare is a more permanent part of their lives.
Prolonged poverty and welfare dependency create an
underclass that suffers from many social ills – teen pregnancy,
family instability, drugs, crime, alienation, apathy, and
irresponsibility. Governmental educational, training, and jobs
programs, as well as many other social service efforts, fail to
benefit many of these people. It is sometime argued that
government welfare programs, however well meaning, ended
up perpetuating poverty and social dependency.
 Homelessness in America
• There are many homeless people in American big cities. About half of all
street people are chronic alcohol and drug abusers; an additional one-
fourth to one-third are mentally ill.
• The current plight of homeless people is primarily a result of various
“reforms” in public policy, notable “deinstitutionalization” of care for the
mentally ill and the newly recognized rights of individuals to refuse
treatment; the “decriminalization” of vagrancy and public intoxication;
and urban renewal, which has eliminated many low-rent apartments and
cheap hotels. Deinstitutionalization has resulted in the release of all but
the most dangerous mental patients from state-run mental hospitals.
Decriminalization of public intoxication has also added to the numbers of
street people.
 Foreign policy shapers
• Under the Constitution the President is primarily responsible for foreign
relations with other nations. The President appoints ambassadors and
other officials, subject to Senate approval, and with the Secretary of State,
the National Security Council formulates and manages the nation’s foreign
policy. The Secretary of State is the nation’s chief diplomat who oversees
the Department of State (the Foreign Service). She/he is the second in the
line of presidential succession after the vice president. Mike Pompeo is the
current Secretary of State (since April 2018).
• Congress is also a major foreign policy maker because most modern foreign
policies require financing. Both the House and the Senate have foreign
policy committees: the Senate Committee on Foreign Relations and the
House Foreign Affairs Committee. Usually, a few members of these
committees who have spent years in foreign affairs become trusted
members of the foreign policy establishment who play an important role in
shaping US foreign policy.
 Key foreign policy actors in Congress
• The Speaker of the House, the House minority leader, and the Senate
majority and minority leaders are usually given updates on foreign policy
matters by the president or the president’s staff. They are also consulted
when the president needs foreign policy support or funding. However, the
expert in Congress who are most often called on for their views are the
committee chairs and the highest-ranking minority members of the
relevant House and Senate committees . In the House, that means the
Foreign Affairs Committee and the Committee on Armed Services. In the
Senate, the relevant committees are the Committee on Foreign Relations
and the Armed Service Committee. These committees hold regular
hearings on key foreign policy topics, consider budget authorizations, and
debate the future of US foreign policy.
Mike Pompeo – Secretary of State
Mike Pompeo became the Secretary of State
In April 2018 after Trump fired Rex Tillerson.
The President chooses the person for this
position, but the Senate must give its
consent. Previously, Pompeo served as
Director of the Central Intelligence Agency.
He received his doctorate from Harvard University.
 The Pentagon
• Foreign policy and defense policy are closely linked.
Thus, a key foreign policy actor is the Department of
Defense, often called “the Pentagon” after the five-
sided building in which it is located. Created by
Congress after World War II, the department
collected together the US Army, Navy, and Air Force.
The secretary of defense manages a budget larger
than the entire budget of most nations and the
president’s main civilian adviser on national defense
matters.
Pentagon
 Civilians in the Pentagon
• Foreign and military decision-making is organized to give
civilians control. The president is assisted chiefly by the
National Security Council and the secretaries of state and
defense. Civilian control of the military is vested in the
president, who issues orders not through military officers but
through the secretary of defense (a civilian).
• The Department of Defense is headed by the secretary of
defense, under whom serve the secretaries of the army, the
air force, and the navy (all of them are civilians). This practice
symbolizes civilian control over the military.
 The National Security Council
• High-ranking officials are supposed to
coordinate American foreign and defense
policies. Congress formed the National
Security Council (NSC) in 1947 for this
purpose. The key figures of the NSC are the
president, the vice president, the secretary of
defense, the secretary of state, and the
national security adviser, who leads the
council meetings.
The time factor in foreign policy decision-making

• When an important foreign policy decision has to be made under

conditions of crisis, where “time is of the essence”, the influence of the
presidency is at its strongest. Under those time constraints, access to the
decision is limited almost exclusively to the narrowest definition of the
“foreign policy establishment”. The arena of participation is tiny; any
discussion is limited to the several officially designated players.
• As time become less restricted, even when the decision to be made is of
great importance, the arena of participation expands to include more
government players and more nonofficial, informal players including
interest groups and influential journalists, especially from such journals as
“Foreign Affairs” and “Foreign Policy.”
 Public opinion and foreign policy
• American foreign policy and public opinion are closely related.
That is why the president tries to win public opinion,
especially before starting some radical action in foreign policy
(See, for example, Naira’s testimony in Topic/Seminar 5)
• America is a democratic country and a change in public
opinion can bring changes to its foreign policy. For example,
the president had to stop the Vietnam war when it became
unpopular. Otherwise, he would not be reelected. In contrast,
the USSR continued the widely unpopular war in Afghanistan
for 10 years.
 Foreign policy and interest groups
• Interest groups have a significant impact on US foreign policy. The interest
group with the reputation for greatest influence is Jewish Americans,
whose family and emotional ties to Israel make them one the most active
interest groups in the whole field of foreign policy. Similarly, Americans of
Irish heritage still maintain a vigilance about American policy toward
Ireland and Northern Ireland. Many other ethnic and national interest
groups wield similar influence over American foreign policy.
• In recent years, the Christian Right has been a vocal advocate for the
human rights of Christians who are persecuted in other parts of the world
for their religious beliefs. It lobbied Congress to cut trade with countries
that permit attacks against religious believers.
• Various business groups lobby their interests in Congress, primarily in tariff
policies.
 US military supremacy
• By the end of the 20th century, US military supremacy seemed complete,
with hundreds of bases around the globe, many of them secret, and
military personnel stationed in about 150 countries. By 2001, the USA
accounted for 37% of the world’s military expenditures, by 2013 it
accounted for almost 50%. Defense spending is now about $700 billion a
year. The USA spends on defense more than the next 15 biggest spenders
combined. Washington is investing more in military research than the
other countries combined. NATO's capabilities are also added to US power,
where the United States plays a decisive role. It is the Armed Forces that is
the main instrument of US international policy.
• To at least some extent, such huge spending on the military reflect
domestic and economic imperatives. Weapon systems create jobs, profit
for arms merchants who sell them to the government and a market for
foreign governments.
 Richard Haass on Trump’s foreign policy
• A prominent US foreign policy expert Richard Haass in his recent book “A
World in Disarray: American Foreign Policy and the Crisis of the Old Order”
argues that American foreign policy is rejecting its historical legacy; Trump
is the first American president since World War II to believe that the
burden of leadership outweighs its benefits. It seems that the United
States is voluntarily renouncing its power and responsibility. America no
longer wants to bear the burden of leadership, allied commitments,
building regional and global institutions. Soon after assuming office,
Trump pulled out the USA from the Trans-Pacific Partnership (TTP), a trade
agreement of 12 countries that generate 40% of global GDP. The previous
president Barack Obama made a lot of efforts to conclude this agreement.
Now there is no agreement among American politicians on how the
United States should act in the international arena. In addition, current
international alliances are looser than before.
Richard Haass

Richard Haass is an American diplomat.

He has been president of the Council of
Foreign Relations since July 2003, prior
to which he was Director of Policy Planning
for the US Department of State and a
close advisor to Secretary of State Collin
Powell.