Brand boycotts, brain drains, big debts and low savings: the US has a fight on its hands

As the Bush administration muses on whether its blueprint for democratisation has been so successful in Iraq that it should now be applied to Iran, it might be worth considering how much this might cost the US in the long term. War is extremely expensive in itself: the US racked up huge budget deficits in the 1960s because of prolonged campaigns in Korea and Vietnam which left it highly vulnerable. America's fiscal health is also suffering now, and in spades.

But there are other, perhaps less obvious but potentially even more far- reaching, costs to America's pre-emptive doctrine of foreign intervention. Last week, an online survey by Brandchannel asked nearly 2,000 brand and advertising executives to name their top global names. America dominated: Apple, courtesy of the spectacular success of its iPod, was in first place, Google in second and Starbucks in fourth. But there was also Ikea in third and, the surprise of all surprises, a new entrant - Al-Jazeera.

It is no wonder the executives pounced on the Middle East station that has become a byword for fear, because it is the station of choice for Osama bin Laden's broadcasts to the world as well as for the transmission of footage of the gruesome deaths of kidnapped Westerners. But Al-Jazeera's presence also points to more deep-seated and alarming consequences for America stemming from its "war on terror".

Its foreign policy not only involves expenses that have contributed mightily to a federal deficit heading for 5 per cent of US GDP; it also makes America unpopular, and that costs, too. During 2003, the US Pew Global Attitudes Project found an intensifying "fear and loathing of the US" due to the war in Iraq. Meanwhile, a Eurobarometer survey of EU countries found that as many people rated the US as significant a threat to world peace as Iran. In four countries, it was viewed as more menacing than Iraq or North Korea.

It is not surprising that poll after poll has shown consumers turning their backs on US brands as a protest against the administration's policies. So great is the concern over this that an organisation called Business for Diplomatic Action has set out to counter the damage being done to US multinationals. Keith Reinhard, President of BDA, says: "If we were looking at the US as a brand, we'd say it is time to relaunch."

Consumer boycotting is just one problem; another was highlighted by Microsoft's Bill Gates at the recent World Economic Forum in Davos. He noted that the tough new US visa regime introduced in response to 9/11 has caused a fall in the number of foreign computer science students coming to America. This decline is so severe that it threatens to undermine America's pre- eminence in the global software business.

The US is highly dependent on foreign talent. Between 1985 and 2000, more than half of US PhDs in science and engineering were awarded to overseas students from China, India, South Korea and Taiwan. But now, as a result not only of visa bureaucracy but the rapidly improving universities and business schools outside America, the US is failing to attract its usual quota of talent. In 2004, American universities suffered their first decline in international student enrolment since the early 1970s (as the Vietnam War reached its unhappy denouement). A survey in November 2004 by the Association of American Universities reported declines in international enrolment in advanced engineering programmes, and nearly 50 per cent said enrolment in business schools had fallen.

Late last year, Adam Segal, a senior fellow in Chinese studies at the Council on Foreign Relations, bemoaned the fact that American research is increasingly concentrated on the fields of defence and homeland security and the space (weapons) programme.

Writing in Foreign Affairs magazine, he said; "Research driven by scientific curiosity rather than specific commercial applications is under-funded, depriving the economy of the building blocks of future innovation."

It may appear a rather old-fashioned view, but it does seem intuitively to be the case that countries which do not make things the rest of the world wants to buy - whether it is widgets or stunning haute couture - don't, in the end, thrive economically. The US has a record trade deficit partly because Americans buy so much and buy so much from abroad. They have not saved so little since the Great Depression of the 1930s.

In 2003, household debt increased four times faster than the US economy as a whole. The average student credit card debt, it has been reported, rose by 46 per cent between 1998 and 2000. Meanwhile, personal debt is now an extraordinary 130 per cent of disposable income, up by nearly one third since the mid 1990s. In other words, people owe more than they earn. So imports are booming.

Exports are not. For one thing, America has been running down its manufacturing capacity steadily for several years. Employment in manufacturing has been dropping, too.

Instead of responding to its ballooning trade deficit by making more, innovating and reining back consumption, the US generally tends to blame others: China's exchange rate is too low, its tariff barriers too high, its workers badly paid and so there is "unfair competition".

Or the US boosts the bottom line through creative accounting, not creativity, as in the case of Enron. Or it uses marginally legal wheeling and dealing, as Citigroup appears to have tried to do in the eurozone government bond market to steal competitive advantage.

America has been at the top of the global economic tree for so long that it has become mightily complacent. It is not only getting the fundamentals of a successful economy wrong; it doesn't appear to realise it and is actively exacerbating its vulnerabilities.

While the mighty American Eagle turns his beady gaze on Tehran, the chickens are thundering in to roost at home.