Fran O'Sullivan: Osama's side-effect on NZ

COMMENT

Osama bin Laden's chilling interjection into the final days of the American presidential election will backfire, ensuring that whoever wins will intensify the hunt for the Islamic terrorist.

The upshot is that the next US president - Republican George W. Bush or Democrat John Kerry - will step up American anti-terrorist efforts.

This means greater uncertainty in the world economy, and in New Zealand.

Before this, international economists believed the next president would have to tighten America's belt several notches to reverse snowballing fiscal and trade deficits.

The alternative was to hope foreign governments, savers and investors would keep bankrolling the US by buying more of its bonds, equity and assets.

Neither is a palatable option. The International Monetary Fund says the US budget deficit alone absorbs 6 per cent of world savings.

The US needs US$2 billion a day of foreign money just to break even.

But the renewed bin Laden threat undermines international confidence that the next president will get a quick focus on economic issues.

The terrorist's video sets out his mad rationale for the September 11, 2001 attacks and urges US citizens to take their nation's security into their hands.

His exhortation that if Americans "want to avoid another Manhattan" they must turn away from policies hostile to Muslims is nothing short of blackmail.

Neither Bush nor Kerry will bow to bin Laden's threats and withdraw US troops from Iraq or Afghanistan.

If anything the case for taking action outside America's borders is increased, and this will help cement Bush's wavering support.

Commentators have demonised Bush over the US economic problems.

Bush inherited a strong economy from his Democratic predecessor Bill Clinton four years ago.

Clinton introduced welfare reforms and spending cuts, paving the way for a return to strong fiscal surpluses.

The US Government is now back in the days of roaring budget deficits, and critics say Bush has wasted the Clinton margin.

But the roots of the Administration's deficit blowouts are the tax cuts, spending increases and interest rate cuts used to insulate American households from economic and political shocks since 2000.

These included the tech boom bust, the September 11, 2001 attacks, the Iraq invasion and a doubling of oil prices.

That Bush Administration blowout also gave a cushion to the rest of the world.

As American households kept spending, the rest of the world kept exporting and the US Government kept borrowing.

Polls show New Zealanders do not like Bush, but the outcome for countries such as ours could have been quite nasty if he had not moved to stop the American economy going into deep depression.

Any move by the incoming Administration to restore the fiscal balance will mean cuts in US demand, which will flow on to affect the global economy.

China, which exports much of its wares to the US, will have less ability to lead regional growth if this happens.

In this environment, the opportunity for wild policy swings in Washington is reduced.

There will no doubt be differences at the margins on policies such as education, energy and welfare, depending on which candidate wins.

But much of this is stylistic.

For instance, Kerry makes much of his ability to forge stronger relationships with countries opposed to the US invasion of Iraq, and modify American foreign policy accordingly.

But that does not extend to pushing for the US to join the Kyoto Protocol or the International Criminal Court.

Some believe Kerry will be more protectionist than Bush and less inclined to get a resolution to the present world trade talks.

In Bush's case, concerns at his inability to rein in a profligate Congress continue.

Despite the 1.9 million new jobs created in the past year, Democrats accuse him of being the first President since Herbert Hoover to preside over a net loss of jobs.

In New Zealand there is speculation that if Kerry is elected president, the push for a free-trade deal will get a more favourable hearing in Washington.

Again, that is a naive view. The United States is a much more protectionist country than New Zealand.

Look at the recent Australian free-trade deal, which was approved - narrowly - by the US Congress and Senate.

What got the Australian deal over the line was Bush's importunings to senior House leaders that he could not afford to let his Australian ally Prime Minister John Howard down.

It is also true that the 12 free-trade deals the US has signed in the past four years under Bush have primarily been with strategically useful partners.

New Zealand's strategic usefulness comes from the demonstration effect that a deal could show the US was not afraid to forge agreements with one of the world's most open economies.

It is this factor, rather than our role in global security, which will ultimately have the biggest pulling power with the new Administration.