America's Biggest Foreign-Policy Challenge: Warfare in Washington

Flexing muscle abroad depends on having a strong economy--and capable politicians--at home.

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Republican presidential nominee Mitt Romney has been bashing President Obama for fumbles in Libya, softness on China and indifference regarding the Middle East. Obama, in return, has characterized Romney as a ham-handed amateur who lacks the delicate touch needed to manage complex global issues.

[GALLERY: The 2012 Presidential Campaign Trail]

But the key to effective foreign policy over the next four years lies not in Tehran or Beijing or Kabul, but in Washington, where politicians of both parties have been frittering away American wealth, prestige and power.

America's national debt, at $16 trillion, is the largest in the world, by far, and it may soon cripple the nation's ability to spend on defense, foreign aid and many other things. The fast-approaching "fiscal cliff" could promptly plunge America into an easily avoidable recession, further undermining U.S. economic power. Many Wall Street analysts, meanwhile, expect further downgrades of the U.S. credit rating no matter what happens, since there may be no way to address the debt without harming the economy.

That has made the federal budget, typically a domestic issue, one of the top concerns of foreign-policy wonks. "There is great uncertainty as to whether America will resolve its domestic political dysfunction and bounce back as a vibrant and strong engine of global growth," analysts from the Brookings Institution wrote in a recent analysis of U.S. relations with China. "The president in 2013 should focus his attention on setting the United States on a fiscally sound path."

[See why Romney and Obama both have Chinese investments.]

China may pose the biggest foreign-policy challenge over the next decade—and that is directly linked to how Washington handles economic issues. China's economy is growing much faster than America's and will become the world's largest within a few years. China is also pursuing a deliberate strategy of harnessing economic power to advance national interests, whereas Washington, awash in bickering over the appropriate level of regulation, tends to avoid any kind of national economic policy. As its economic power grows, China—which already possesses nuclear weapons—is building military power to match. Meanwhile, China has become American's biggest foreign creditor, raising worries that it could wage economic warfare against the United States if it chose to.

Romney has made China a focal point of his campaign, saying he'll "crack down" on China by toughening trade policies, officially labeling China a currency manipulator, and expanding U.S. naval presence in the Pacific. He has also promised to axe government programs financed by foreign creditors. "Is the program so critical it's worth borrowing money from China to pay for it?" he said in the first presidential debate, in Denver. "If not, I'll get rid of it."

That might sound decisive and simple, but Romney's proposals are predicated on Washington developing a coherent set of tax and spending policies—which is turning out to be the biggest political problem in decades. China holds about $1.2 trillion in U.S. government securities. That's only about seven percent of the $16.2 trillion national debt. (Foreigners in total hold about one-third of the national debt, with the rest held by U.S. investors, the Federal Reserve and government entities such as the Social Security Trust Fund.)

[See the case for getting much tougher on China.]

Yet cutting seven percent from the federal budget is remarkably difficult. One element of the fiscal cliff is a set of spending cuts set to go into effect on January 1 that would save about $110 billion per year—which is less than three percent of the total budget. The White House has described those cuts as "destructive," and even Romney has decried the risk to the defense budget, which would absorb half the cuts. Congress is expected to battle over the issue right up till the January 1 deadline, and possibly beyond.

Raising taxes would reduce the need to cut spending (or borrow from China), yet there's profound disagreement over that, too. "Temporary" tax cuts due to expire at the end of the year add up to another $375 billion in federal revenue per year (roughly 10 percent of the total budget), which may or may not materialize depending on what Congress decides to do. Taxes, of course, are one of the biggest issues in the presidential campaign, with Romney proposing across-the-board tax cuts and Obama wanting to raise taxes on the wealthy.

The huge mismatch between spending and revenue has alarmed military leaders. Retired Adm. Mike Mullen, former chairman of the joint chiefs, has been arguing for several years that the national debt is America's biggest security threat. Former Defense Secretary Robert Gates has joined Mullen in a kind of mini-tour to promote the urgent need for a resolution of the fiscal cliff. Some critics argue that Mullen and Gates are shilling for a bloated defense industry that needs to shrink. Yet regardless of the defense budget, it's self-evident that the United States will be able to practice a more muscular foreign policy with a healthy economy and manageable amount of debt than with a self-induced recession that makes the debt problem even worse.

Romney and Obama are sure to keep arguing until the last vote is cast about allies, enemies and global hotspots. Yet strength abroad starts with strength at home, which means that the candidate who can tame Congress and work out the tedious details on taxes and spending will be the one with the best foreign-policy credentials.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.