America the Absent
Why is the U.S. afraid to lead the global economic recovery?
The release of another weak U.S. jobs report this Friday, July 6 — which showed the economy adding only 80,000 jobs in June and the unemployment rate holding steady at 8.2 percent — raises some serious red flags. It’s just one of many signs these days that the world economy is once again on the brink of an abyss. Nearly four years after the collapse of Lehman Brothers, U.S. growth is flailing, central banks are racing to cut interest rates, and several European nations have plunged back into recession. Instead of powering the 21st-century world economy, export-dependent emerging markets remain hostage to the transatlantic economic morass. We should be out of this by now. The missing ingredient? U.S. leadership.
In the 20th century, beginning with the creation of the Bretton Woods system in 1944, America’s great contribution was to champion an economic paradigm and set of institutions that promoted open markets and economic stability around the world. The successive Groups of Five, Seven, and Eight, first formed in the early 1970s, helped coordinate macroeconomic policies among the world’s leading economies and combat global financial imbalances that burdened U.S. trade politics. The International Monetary Fund (IMF) spread the Washington Consensus across Asia and Latin America, and shepherded economies in transition toward capitalism. Eight multilateral trade rounds brought down barriers to global commerce, culminating in the establishment of the World Trade Organization (WTO) in 1995.
Meanwhile, a wave of bank deregulation and financial liberalization began in the United States and proliferated around the world, making credit more available and affordable while propelling consumption and entrepreneurship the world over. The U.S. dollar, the world’s venerable reserve currency, economized global transactions and fueled international trade. Central bank independence spread from Washington to the world and helped usher in the Great Moderation, which has produced a quarter-century of low and steady inflation around the world.
Globalization was not wished into being: It was the U.S.-led order that generated prosperity unimaginable only a few decades ago. Since 1980, global GDP has quadrupled, world trade has grown more than sixfold, the stock of foreign direct investment has shot up by 20 times, and portfolio capital flows have surged to almost $200 trillion annually, roughly four times the size of the global economy. Economic reforms and global economic integration helped vibrant emerging markets emerge: The "Asian Tigers" (Hong Kong, Singapore, South Korea, and Taiwan) that boomed in the 1980s were joined in the 1990s by the awakening giants of Brazil, China, and India.
It was the United States that quarterbacked the play, brokering differences among nations and providing the right mix of global public goods: a universal reserve currency, an open-trade regime, deep financial markets, and vigorous economic growth. Trade liberalization alone paid off handsomely, adding $1 trillion annually to the postwar U.S. economy.
Talk about American decline notwithstanding, the economic order created by the United States persists. In fact, at first blush, it appears to have only been reinforced in the past few years. New institutions such as the G-20, a forum for the world’s leading economies, and the Financial Stability Board, a watchdog for the international financial system, are but sequels to U.S.-created entities: the Group of Five and the Financial Stability Forum. Investors still view America as a financial safe haven, and the dollar remains the world’s lead currency. Open markets have survived, and 1930s-style protectionism has not materialized. The WTO continues to resolve trade disputes and recently welcomed Russia as its 154th member, while the mission and resources of the Bretton Woods twins — the World Bank and IMF — have only expanded. No country has pulled out of these institutions; instead, emerging nations such as China and India are demanding greater power at the table. Countries have opted in, not out, of the American-led order, reflecting a reality of global governance: There are no rival orders that can yet match this one’s promise of mutual economic gains.
Still, while the American order is peerless, it is also imperiled. The deepening European debt crisis, discord over national policies to restore growth, and the all-but-dead Doha Development Round of WTO negotiations speak to the failures of the global economy’s existing instruments to manage 21st-century challenges. Instead of coordinating policies, leading countries are trapped in a prisoner’s dilemma, elbowing for an edge in world trade and jockeying for power on the world stage. Tensions simmer over issues such as exchange-rate manipulation, capital controls, creeping protectionism, and financial nationalism.
Right at the moment when we most need to shore up the troubled global economic order, America — the architect of this very order — is failing to lead. Even as the United States remains pivotal to global growth, U.S. corporations — the engines of the American economy — are stifled by taxes, regulations, and policy uncertainty. Gaping fiscal deficits in the United States are undermining the dollar, exacerbating trade deficits, and undercutting U.S. economic dynamism and credibility in world affairs, but political posturing has obstructed the country’s path to solvency. Earlier this week, the IMF warned that if political deadlock takes America to the so-called fiscal cliff of automatic tax hikes and spending cuts in January 2013, it could have a devastating impact on the U.S. and world economies. No wonder America’s image as the global economic superpower is receding around the world.
Europe’s travails, meanwhile, are reducing U.S. companies’ exports and overseas profits, threatening America’s recovery. And yet Congress has balked at boosting the IMF’s resources to fight the eurozone crisis while the Obama administration has deflected responsibility, framing the crisis as Europe’s to manage. It has fallen to countries such as Brazil, China, India, Mexico, and Russia to instead build the firewall that will shield the rest of the world from Europe.
The welcome momentum in negotiations between the United States and Pacific Rim countries on the Trans-Pacific Partnership free trade agreement does not undo over three years of drift in U.S. trade policy that has jeopardized the very global trading system that the United States built and powered in the postwar era. The only trade deals that the Obama administration has passed — with Colombia, Panama, and South Korea — were launched and negotiated by the Bush administration.
The world is now facing a triple threat of global economic instability, divisions among top powers, and a global leadership vacuum. This perfect storm could produce a world disorder of mercurial financial markets, widening global imbalances, spreading state capitalism, and beggar-thy-neighbor protectionism — a scenario with a sorry past and few safe exits.
In the late 1940s, a new world order arose because of American strength, vision, and leadership, not because global governance was in vogue. Leadership was never easy: Resistance from allies, protectionist pressures at home, and resource-draining wars all stood in the way. But capitalism spread, trade and financial markets were liberalized, and emerging-market crises were defeated. Global economic integration forged ahead.
Today, American leadership is again essential. China prioritizes mercantilism over multilateralism, and emerging nations have yet to fully step up to the plate when it comes to global governance, while Europe and Japan are neither able nor willing to lead. In placing their faith in multilateralism, liberal institutionalists often fail to realize that the world economic order is built on American primacy and power, and Washington’s willingness to project it.
To lead abroad, the United States must reform at home by imposing ironclad fiscal discipline, cutting taxes and red tape for businesses, and locking in long-term policies — summoning the private sector to reform schools and rebuild infrastructure, for instance — that harness the productivity of America’s future generations.
Abroad, the United States needs to focus on pre-empting instability and integrating the global economy. It should push the IMF to address financial risks before they mushroom into catastrophes, revise the multilateral trade regime to allow for fast deals among a critical mass of members rather than agonizing, decade-long talks requiring the consent of the full membership, and work toward unfettered global financial markets — all the while deepening access to U.S. goods, services, and investment around the world. A Trans-Pacific Partnership agreement and a transatlantic free trade pact are low-hanging fruits that can jump-start global growth without any new stimulus dollars.
The quintessential challenge facing U.S. policymakers is to convince other nations to buy into a rules-based order rather than respond to the siren calls of currency wars and capital controls. For example, with most emerging economies uneasy about Beijing’s trade and foreign policies, Washington must incentivize others to take the high ground and strengthen investor protections, enforce intellectual property rights, and adhere to trade rules. With others playing by the rules of the game, a misbehaving China would be turned into a pariah.
A stable, integrated, and growing world economy serves our national interests. But such a world is America’s to make.