The Bush Administration enters its final two years of office facing a number of difficult and pressing challenges around the world, including, but in no way limited to, Iraq, Iran and North Korea. This is taking place at a time when the country is bogged down militarily, divided politically, stretched economically and dependent on huge amounts of imported energy. Together, it makes for the most demanding strategic situation faced by the United States since the Berlin Wall came down-and arguably since the end of the Second World War.

To be sure, it is not all gloom and doom. The likelihood of major power conflict, the defining characteristic of much of contemporary history, is negligible, a reality that frees a still-powerful United States to focus on the global and regional challenges of the day, on occasion with China, India, Russia, Japan and Europe as partners. Europe, the principal theater of twentieth-century conflict, is today a region of unprecedented stability, democracy and prosperity. World economic performance is robust.

Alas, these positives do not offset the negatives. The United States is paying and will continue to pay an enormous price for the ill-conceived and even more poorly implemented policy of transformation in Iraq. Hopes that regime change in Iraq would lead to a broader political transformation of the Middle East were unfounded. Events in Iraq have disillusioned many in the Arab world given the violence and the loss of Sunni political primacy. Iraq is likely to be a messy and somewhat dysfunctional country for years or even decades to come; at worst, it could become a failed state characterized by civil conflict that invariably draws in several of its neighbors. It is increasingly clear that Iraq, a classic war of choice, was a bad choice.

There is then the threat posed by North Korea's nuclear weapons capability, dramatically demonstrated by its October 2006 nuclear test, and by Iran's apparent determination to proceed with plans to develop an indigenous capacity to enrich uranium, thereby giving it the potential to develop nuclear weapons of its own. Iran-backed Hizballah is more of a power in Lebanon; Iran-backed Hamas is more powerful in the Palestinian territories. The Middle East peace process is moribund. Afghanistan is beginning to show some of the same strategic deterioration seen in Iraq. Genocide continues in Western Sudan; unrest is growing in Nigeria; anti-American populists, fueled by revenues from oil and gas exports, are gaining ground in several Latin American countries.

Global challenges are similarly numerous and difficult to contend with. Efforts to stem the spread of nuclear materials and weapons could be dealt a decisive setback if nothing is done to reverse the North Korean program and halt Iran's. It is more a question of "when" and not "if" there is another significant terrorist attack. Global climate change continues to occur as the world is no closer to a consensus on what is to be done to stop it. Preparations for a predicted outbreak of avian flu are inadequate in most American cities.

Is there anything to be done? The short answer is "yes." Those who suggest otherwise, claiming that a lame-duck president in the last two years of his presidency and facing a Congress controlled by the opposition cannot act effectively, are wrong. Any president enjoys great latitude under the Constitution when it comes to foreign affairs. Democratic control of Congress will not change this fundamental reality except in areas such as trade, where the Constitution does give Congress a central role and where a majority in the Congress is increasingly protectionist. A bigger constraint might be the reality that the U.S. Army is tied down in Iraq and Afghanistan, and the U.S. budget is seriously in the red. This argues for choosing initiatives that emphasize diplomacy and avoid major new commitments of ground forces or dollars.

The good news for the president is that the opportunity to pursue such initiatives exists. In the cases of Iran and North Korea, there is, of course, no guarantee that diplomacy will succeed. But none of the alternatives to diplomacy are promising. Regime change appears futile, launching preventive military strikes would result in costly retaliation, and living with nuclear weapons raises the prospect that these weapons could end up in the hands of terrorists or prompt Iran to act with even greater assertiveness than already is the case.

A diplomatic approach would offer each country a generous package of economic, energy, diplomatic and security-related incentives in exchange for its accepting strict limits on its nuclear programs and highly intrusive inspections designed to build confidence that these limits are being respected. Ideally, such an offer would be accepted; if not, it should be seen as sufficiently fair by others that it would pave the way for sanctions or, in extremis, support for the use of military force. Winning over China, through whose territory most of North Korea's trade transits, is essential if diplomacy will have the desired effect on Pyongyang. When it comes to Iran, there is no "China" in the sense that there is no third country with potentially critical influence. Here the goal must be to present a package that appeals to the Iranian people so that the regime feels pressure from below to abandon elements of its radical foreign policy to receive economic benefits sought by the population.

In Iraq, a policy of more of the same promises far more in the way of costs than results. Terrorists, Sunni insurgents and Shi‘a militias are targeting and killing one another, government forces, and officials and civilians. Iraqi government forces, despite being trained, equipped, advised and supplemented by American troops, show few signs of being able to maintain order in the country's center, home to Baghdad and most of Iraq's Sunnis. Increases in the level of American troops cannot be sustained for long; more important, there is little evidence to suggest that more troops will be able to turn around the security situation on the ground in Iraq and slow or end the sectarian conflict.

That said, the United States should also eschew a classic exit strategy in which U.S. policy is determined by the calendar rather than by conditions on the ground. Although withdrawal would cut the immediate costs (human, military and financial) of maintaining a presence, conditions in Iraq would almost certainly deteriorate further, producing a full-scale civil war that would kill and displace tens or even hundreds of thousands. Such a war could draw in one or more of Iraq's neighbors and spread to other parts of the Middle East. The U.S. reputation for dependability and steadfastness would suffer. This could only encourage terrorists and radical forces and states in the region and beyond-and discourage America's friends and allies in the region and beyond.

Instead, and over time, the U.S. military effort should be reduced, reoriented (toward advising and training and away from fighting) and redeployed (away from the civil war and towards the borders with Turkey and Syria). The rate and degree of these changes would be linked to judgments made by the president and his senior national security team as to the intensity of civil conflict and the effectiveness of the U.S. military presence, the brokering of internal arrangements that provide for considerable regional autonomy, and the sharing of revenues derived from oil sales, minority rights and the standing down of militias. Additional economic aid could be tied to such agreements as a way of increasing the incentive of Iraqis to show more flexibility and moderation.

The United States should also move to convene a standing forum involving governments with a major stake in Iraq's future. The model here would be the so-called "6 plus 2" forum that was used to ease Afghanistan's transition from Taliban misrule to democracy. The goal would be to limit some forms of external interference-and to encourage those forms of involvement that could help put Iraq back on its feet. This would require the participation of both Iran and Syria, two states that have contributed to Iraq's internal problems but also have a stake in its territorial integrity and viability.

It is quite possible, of course, that no new policy will yield fruit. This must be recognized by the administration as well as the public at large. Iraq could well descend into all-out civil war. The United States would have to look for ways to offset this foreign policy setback by demonstrating that it could still be an effective and reliable actor-something that could involve reinvigorating diplomacy between Israel and Syria-and outlining U.S. thinking about the terms of a final peace agreement between Israel and the Palestinians. Washington could also do more to halt the unraveling of Afghanistan and the genocide in Darfur. Failing in Iraq does not preclude succeeding elsewhere-and should not be used as the sole yardstick for measuring U.S. foreign policy.

Recent experience also argues strongly for doing something more about American energy dependence. The president's statement in his 2006 State of the Union that "America is addicted to oil, which is often imported from unstable parts of the world" is true. Unfortunately, the policies put forward by the administration do not match the scale of the problem. The current state of affairs is extremely costly in terms of dollar flows (many of which go to leaders and countries pursuing aims inimical to the United States), in terms of increasing the burdens of the world's poor and in terms of exacerbating factors bringing about climate change. The solution lies not in pursuing the chimera of energy independence, but rather in some mixture of near- and mid-term policies designed to hasten the emergence of alternatives to oil and gas and to reduce the amount of oil and gas consumed. This translates into higher gasoline taxes (offset by reductions in income or payroll taxes) and higher fuel economy requirements for cars and light trucks.