Guest Column by C. Fred Bergsten
The United States can only restore its national economic vitality by sharply improving its global competitiveness. We no longer can rely on debt-financed consumption, government spending and abnormally loose monetary policy to fuel our growth and create jobs. We must recognize that 95 percent of the world’s population and 80 percent of global commerce are outside our borders. The United States must become an export powerhouse if it is to prosper and avoid renewed crises.
President Barack Obama has set a goal of doubling U.S. exports in five years. This is not nearly enough. We need to double the share of exports in our total economy, from about 10 percent in 2010 to 20 percent in 2020: “from 10 in ’10 to 20 in ’20.” Moreover, we need to eliminate or at least sharply reduce the deficit in our trade balance from its current and rising level of $600 billion.
Achieving this transformation requires us to understand that the global economy is proceeding at two very different speeds. Virtually all of the traditionally rich industrialized countries, in Western Europe and Japan as well as the United States, are struggling to grow at even 2 percent per year and suffering from high unemployment. They have experienced severe financial crises from which the essential deleveraging and thus recovery are painfully slow.
By contrast, virtually all of the emerging markets and developing countries are booming. China alone accounts for one quarter of global growth. The rest of Asia, Latin America and much of Africa are expanding by more than 6 percent annually. Their main economic problem is in fact inflation and renewed risk of financial bubbles, so they are adopting restrictive policies while we desperately seek ways to boost growth.
These emerging markets now fortunately make up half the world economy and have become its chief drivers. They are growing three times as fast as the high-income group, so their share continues to rise rapidly. They expanded their lead during the recent worldwide recession, underlining their ability to largely decouple from the traditional leaders. Projections of fiscal positions over the next 25 years reveal that their budget policies are far sounder than ours and will reinforce their superior performance. So will the relative stability of their financial systems, which avoided the debt implosions of the United States, Europe and Japan.
This topsy-turvy global economy exhibits another historically unprecedented dimension: that the booming poor countries are financing the struggling rich countries, especially the United States. We have become by far the world’s largest debtor country, with gross external debt of more than $20 trillion and even net foreign debt (after taking account of our own assets abroad) at about $2.5 trillion. We must borrow at least $500 billion annually to pay for our trade deficits. China is by far our largest creditor, at well over $1 trillion, but we are deeply in debt to another dozen emerging markets as well (and to Japan). Our financial vulnerability ranges well beyond our budget deficit to encompass these external imbalances, which could at any moment threaten the value of the dollar and indeed its role as the world’s premier currency.
A dollar crash would drive up U.S. inflation and interest rates. It may in fact be the most likely crisis scenario that would finally force our politicians to seriously address the budget problem. This linkage occurs because our fiscal and trade positions are intimately related: large budget deficits force our government to continue borrowing heavily from foreigners, since Americans save so little, which drives up the exchange rate of the dollar and prices U.S. products out of world markets.
Hence the United States is increasingly dependent on the world economy but decreasingly able to dictate the course of global commercial events. The only stable solution to our dilemma is a dramatic expansion of US exports to the large and rapidly growing emerging markets. The list includes at least Brazil, Hong Kong, India, Indonesia, Korea, Malaysia, Mexico, Russia, Singapore, Taiwan and Thailand as well as bellwether China. The problem is seriously complicated by the fact that China and several of its Asian neighbors blatantly violate some of the most important international rules of the game, by inflating their competitiveness and trade surplus by intervening massively in the foreign exchange markets to keep their currencies artificially cheap and by severely impeding our access to their markets, especially in the services sector, where U.S. firms and workers are highly competitive.
Thus the United States must adopt a five-part strategy to revive our economy and place it on a sustainable path for the coming decades. We must adopt much more ambitious trade goals. We must put our budget house in order to enable correction of our huge trade deficit. We must effectively address the roots of our national competitive position, especially strengthening our education system to produce the needed human capital and promoting innovation to exploit our physical capital. We must achieve and maintain a competitive exchange rate for our currency. We must negotiate trade agreements to open foreign markets to U.S. products.
The United States has gained enormously from globalization. Our economy is more than $1 trillion per year richer as a result of our integration with the world economy over the past half century. Increased imports bring us cheaper and better products. Expanded exports enable us to do more of what we do best, creating millions of jobs and generating substantially higher wages. Competitive pressure from foreign counterparts has prompted sharp increases in U.S. productivity and thus national living standards. The average American household is at least $10,000 better off. We can increase these gains by another 50 percent if we can complete the process of globalization.
But international trade, like any dynamic economic change, creates losers as well as winners. We suffer adjustment costs of perhaps $50 billion annually that trigger significant backlash against our international economic involvement. The benefits exceed the costs by a ratio of 20:1, but we risk losing these huge gains, and the U.S. global leadership position that goes with them, if we fail to embrace the new realities and respond effectively to them. This will be a cardinal challenge to the United States over the years and decades ahead.