The United States in the World Economy

C. Fred Bergsten (PIIE)
Speech delivered at the Chautauqua Lecture Series, "The US Economy: Beyond a Quick Fix"
 
August 12, 2011

THE GLOBALIZATION OF THE UNITED STATES

The United States has integrated dramatically into the world economy over the past half
century. The share of international transactions in our national economy has more than tripled. It
now exceeds 30 percent of total output. We are more dependent on external economic
developments than the European Union as a group or Japan, the other large high-income
parts of the world, which have traditionally been regarded as much more engaged in global
competition than the United States.

Over half of our oil, the world’s most important single product, is imported. Almost half the
revenues of the top 500 companies based in the United States derive from their international
operations. About half of publicly held US government debt is owned by foreign investors. 
Foreign capital finances much of the domestic investment required to maintain decent economic
growth.

The United States has thus joined the world, in two critical senses. We are highly dependent on
global developments for our own prosperity and stability. And we are now much more like other
countries, for virtually all of whom such international engagement has been a given throughout
their histories.

The United States has gained enormously from this globalization. Our country is more than
$1 trillion per year richer as a result of its trade integration. This equates to over 10
percent of our entire national income and more than $10,000 per household. Additional benefits
accrue from the financial globalization that has accompanied increased trade flows. 

The trade gains occur through three distinct channels. Increased imports hold down prices and
thus help limit inflation and provide a greater variety of attractive products to consumers and
industrial users. Increased exports enable us to do more of what we do best and enhance wages
by 15 to 20 percent for workers in those industries. Increased international competition
stimulates productivity improvement in our own economy and thus helps provide the foundation
for higher incomes.

Like any dynamic economic change, globalization generates costs as well as benefits.  About
half a million workers (of a total labor force of 150 million) lose jobs annually, most for
temporary periods, as a result of increased imports. Some have to accept lower paying jobs for
the longer run, suffering lifetime earnings losses. These effects total about $50 billion per
year, a substantial amount in absolute terms but only one-twentieth of the annual payoff from
globalization.
Hence the United States has on balance gained enormously from our integration with the world
economy. Substantial additional benefits, perhaps expanding the present totals by another 50
percent (half a trillion dollars annually), are available from further opening of global markets.

As already noted, however, this means that we have become heavily dependent on external
developments for our own prosperity and stability. Unfortunately, we have failed to recognize
that dependence and have behaved in ways that exacerbate our vulnerability. We have run large
trade deficits for 30 years. As a result, we have become by far the world’s largest debtor
country. Our gross foreign debt totals about $23 trillion, and our net foreign debt, even after
taking account of our very large (mainly privately held) assets abroad, is about $2.5 trillion. The
ongoing debate about our national debt and deficits must therefore proceed with a wary eye on
the fact that much of it is owed to investors in other countries, some of the largest of which are
institutions owned by governments (e.g., China, Russia, and several Middle Eastern oil
exporters) that may not always be our best friends.

We have let down our guard in a number of ways. Our primary and secondary education system
is no longer qualifying our people to succeed in a highly competitive global economy.  We do
not save enough as a nation to finance adequate levels of investment, and we therefore borrow
about $500 billion annually from the rest of the world. Our infrastructure is falling behind world-
class standards and, in many cases, is literally crumbling. Our governmental support for
technological innovation, which has been critically important for some of the most important
advances of the past half century, is lagging. Our tax system encourages footloose multinational
firms, based both here and abroad, to invest in countries other than the United States and rewards
consumption (including of energy and pollutants) instead of saving. We have let the exchange
rate of the dollar, by far the single most important determinant of our international
competitiveness in the short run, remain substantially overvalued for prolonged periods. The
latest debt deal fails miserably to resolve our budget deficits and once again reveals our
proclivity, in the absence of a real crisis, to kick the can down the road; Standard & Poor’s was
correct to downgrade our long-term credit rating.

The problems created for the United States by our increasing external dependence and the
failures of our national policies to enable us to compete effectively are compounded by the sharp
decline in our ability to influence (let alone dictate) the outcomes of international economic
policy events and negotiations. Our share of global output has dropped from 50 percent at the
end of the Second World War to 20 percent today. Our share of world trade is even less; both
China and Germany export more than we, though their overall economies are much smaller.
China alone could become a dominant global economic player over the next decade or two. The
dollar remains the world’s key currency, but the euro provides its first real rival in almost a
century and the Chinese renminbi could represent another in the near future.

Hence the United States is caught in a classic scissors dilemma. On the one hand, our
dependence on the world economy has risen enormously and will continue to do so. On the other
hand, our ability to determine global economic conditions has declined sharply. The dilemma is
sharply exacerbated by the inadequacies of our own policies in response to these
profound historical trends.
THE GLOBAL ECONOMIC SETTING IN THE 21ST
CENTURY
How do these new structural considerations affect the prospects for today’s troubled US
economy? What do they mean for our efforts to restore decent growth and create enough jobs to
cut unemployment to acceptable levels? What are their implications for our strategies to rein in
our national debt and deficits?

To answer these questions, we must first recognize that the world economy of the 21st century is
very different than the world economy of the 20th century. The locus of globalized economic
power and vitality has shifted drastically. Virtually all of the rich industrialized
countries that have been the past drivers of the world economy—the United States itself,
Western Europe, and Japan—are struggling.  Virtually all of the emerging market
economies—especially China but also India, the rest of Asia, Latin America, and even Africa
and the Middle East prior to its recent disruptions—are booming.  We live in a bifurcated
rather than synchronized world economy. (China and India regard themselves as re-emerging
economies since they dominated world output for a long while until at least some time into the
18th century.)

Our chief traditional foreign partners, which are still the largest parts of the global economy
outside the United States, are doing worse than we are. The European Union is now the
world’s largest economic entity, about 20 percent bigger than the United States, but it is mired
in slow growth and, of course, contemporary crisis.

Europe succeeded brilliantly in creating the euro, the first currency to rival the dollar in almost a
century, over a decade ago. But its Economic and Monetary Union, as the project was formally
called, was an unstable halfway house from its inception. The monetary side was complete with
a common currency and area-wide European Central Bank. But there was no economic union:
no central fiscal policy or authority, no coordination (let alone fusion) of structural policies with
respect to key issues like labor markets and financial regulation, and limited economic
governance institutions.

The euro area was able to finesse this glaring discrepancy for a decade, abetted by the global
boom of 2003-07. But the financial crisis and succeeding Great Recession of 2008-09 laid bare
its problems and, as a result, posed both an existential threat to European integration itself and
major risks to the entire world economy.  

The crisis, of course, hit the weakest components of the euro area hardest: initially Greece,
Ireland, and Portugal—and now also Spain and Italy. The rich and successful European
economies, most notably by far, Germany, had to bail them out on an ad hoc basis because of the
lack of fiscal transfer mechanisms (and, for the medium to longer run, high labor mobility) like
we have in the United States. The lenders, of course, seek to extract commitments from the
borrowers that they will get their houses in order, mainly by trimming huge budget deficits and
reforming unstable banking systems, which inevitably leads to sharp tensions both between the
countries and within them (as German taxpayers are "asked to pay Greek pensioners" and poor
Greek workers are "asked to accept 20 percent pay cuts to satisfy rich Germans").

Europe has taken a number of far-reaching steps to remedy its structural shortcomings and
resolve its problems. It is moving toward an inevitable fiscal union and creating a de facto
European Monetary Fund to rescue and discipline the weak performers of the day, which will
increasingly replicate the characteristics of the true economic union of the United States. I
believe that a much stronger Europe and euro will emerge from the crisis. Getting there,
however, will almost certainly require more debt restructuring (which the media and the ratings
agencies will call "defaults") and condemn Europe to very modest growth for a while as even its
stronger economies tighten their belts to restore stability. The United States, and the world
economy as a whole, will not get much help from Europe for at least a few more years.

Japan, which remains the second largest national economy (with exchange rates calculated at
market levels), is even worse. The country inspired both worldwide admiration and fear as a
result of its unprecedented economic growth and surge in international competitiveness through
the 1980s, which brought it to per capita income levels above the United States. Japan became
the world’s largest creditor country.

But Japan imploded in the early 1990s. Its financial bubble burst and, exacerbated by several
huge policy mistakes, ushered in two lost decades of stagnation and indeed deflation—the only
example of such performance since the Great Depression of the 1930s—from which it has not
yet recovered. It faces the worst demographic profile of any country in the world, aging so
rapidly that it will have barely one worker per retiree by the middle of this century. So the United
States and world economies will not get much help from Japan either, and we indeed now fear its
weakness much more than we ever feared its strength. 

Fortunately, as already noted, most of the emerging market economies are booming. 
These developing countries now account for half the world economy (using purchasing
power parity exchange rates). They have provided three quarters of all global growth over the
past decade. They are growing three times as fast as the traditional leaders: about 6
percent versus 2 percent. Hence their global share is rising substantially every year and will
reach at least two- thirds over the next decade. They, especially China, will play increasingly
decisive world economic roles.

Moreover, their superior performance is likely to accelerate in the period ahead. They

experienced some declines in growth during the recent Great Recession but their lead over the
rich countries actually grew, indicating their ability to decouple from the West to a substantial
extent. Their fiscal positions are much stronger than ours: Projections to 2035 show their debt-to-
GDP ratios will rise to only 50 percent, well within the danger thresholds of 60 to 100 percent,
while the rich countries as a group are currently on (totally unsustainable) trajectories toward 200
percent. Having suffered their own debt crises in previous decades, the emerging markets
thoroughly reformed their banking systems and totally avoided the financial meltdown
experienced by almost all rich countries over the past few years. South-South trade and
investment among these countries is exploding, further enabling them to avoid negative
spillovers from the lagging rich nations.
Eight of these countries have now joined the "trillion dollar club" with national economic output
exceeding that level: China, India, Russia, Brazil, Korea, Mexico, and shortly Turkey and
Indonesia. China alone accounts for 10 percent of all global output and is growing by 10 percent,
providing one quarter of the world’s overall economic growth of 4 percent.

Perhaps most dramatic of all, the still poor South is largely financing the rich North. China
has become the world’s second largest creditor country, as the United States has become its
largest debtor. But numerous other emerging markets have also piled up massive levels of
foreign currency, much of which they then lend back to us: Russia, Saudi Arabia, Brazil, Korea,
India, Hong Kong, Singapore, Thailand, Algeria, Mexico, and Malaysia all fall solidly into this
category with reserves exceeding $100 billion. The world of finance has turned topsy-turvy on
the back of the role reversal in global growth.

These emerging and developing countries are in fact now growing so rapidly, despite
the continuing sluggishness of the three rich economic zones, that their immediate policy
priorities are virtually opposite to ours. We desperately seek ways to accelerate growth and
create employment while our excessive deficits and debt force us to pursue restrictive policies
instead.  By sharp contrast, they increasingly need to restrain their expansions to prevent
excessive inflation and the risk of new financial bubbles—but enjoy strong fiscal and monetary
positions that will enable them to again step on the accelerators if need be.

In fact, a third risk to the current global economic outlook—in addition to the debt and deficit
overhangs in the United States and Europe—is that these emerging markets will step on the
brakes too hard to remain drivers of world growth. China, by far the most important of the group,
has been tightening its monetary policy for over a year and is sharply curtailing credit to its
soaring property sector. India is unusual among developing countries in that it faces large budget
deficits, and its efforts to trim them could pare its rapid growth. I believe that most of these
countries will be able to dial back their expansions without throwing themselves into recession,
or even moderating their booms very sharply, but their newly dominant positions require us to
watch them as closely as we have traditionally watched our allies and main partners across the
North Atlantic and North Pacific. This is particularly true because, as we will shortly see, some
of their growth derives from policies that adversely affect our own interests and dampen our
growth prospects.

The institutional implications of these fundamental changes in international economic power

positions have already been recognized to an important extent. The steering committee of the
World Trade Organization (WTO), and thus the multilateral trading system, has been expanded
to include Brazil, China, and India, as well as traditional leaders: America, Europe, Japan, and
Australia (with Canada pushed aside). The International Monetary Fund (IMF) has twice (though
still inadequately) raised the quotas and thus voting power of the emerging countries. Most
importantly, the traditional G-7—comprised solely of high-income industrialized countries—has
been supplanted by the G-20, half of which are developing countries, as the chief global steering
committee. Within that broader construct, the United States and China are evolving into an
informal and de facto G-2, modestly institutionalized in their bilateral Strategic and Economic
Dialogue, because very little global economic progress can now be made unless these two
superpowers can at least agree to disagree.
THE IMPLICATIONS FOR THE US ECONOMY
What does all this mean for the United States? The United States faces a genuine dilemma
fashioning an effective response to its current economic woes. On the one hand, growth is
sluggish and unemployment is unacceptably high. This would traditionally call for larger doses
of expansionary fiscal and monetary policy.

On the other hand, US budget deficits and national debt have risen rapidly and are on clearly
unsustainable paths. Prior to the new debt deal just passed by Congress, which may or may not
change things very much, our annual deficits were on track to exceed $1 trillion annually for the
next decade. The debt of the federal government has doubled over the past four years and, at
about 80 percent of GDP, is fast approaching the danger threshold. The usual prescription is
fiscal tightening. 

It is not surprising that we face such an acute policy dilemma after experiencing the deepest
economic crisis since the Great Depression, especially one that was triggered by a profound
financial crisis. Careful studies of past financial crises show that the deleveraging required to
restore normalcy takes seven to ten years; that public debt-to-GDP ratios tend to double over
such a period, as revenues lag badly due to subdued growth (or worse), and additional spending
is required to escape the downturn; and that growth can be expected to slow by a percentage
point or more (i.e., one-third or more of a previous 2 to 3 percent norm) when debt ratios
approach 100 percent. Those typical patterns describe quite well what the United States is now
going through, but they do not of course obviate the need to make every possible effort to
improve the situation. 

There are two standard ways to resolve the dilemma. One relates to the policy mix: tighten the
budget to limit the debt buildup but maintain easy monetary policy to spur growth.  The other
addresses the timing of corrective actions: adopt corrective fiscal measures now to restore
market confidence, but implementthem over time to avoid weakening the economy even
further. (Some of the most promising budget measures, such as an energy or gasoline tax and
increasing the retirement age for Social Security and Medicare, should be phased in gradually in
any event to cushion their impact on those Americans most directly affected.) Both strategies
will be part of any definitive restoration of robust US growth.

But this macroeconomic dilemma facing the United States is compounded by a series of
structural problems that antedated the financial crisis, in some cases by a decade or more. 
Average wages have been stagnant for a generation. Income distribution has become highly
skewed with the lion’s share of our growth proceeds accruing to a very small share of the
population. Globalization is undoubtedly a factor in these developments, although most studies
conclude that it is only a minor cause thereof.

Whatever measures are adopted in the short run, a fundamental rebalancing of the composition
of the US economy will be required. We simply cannot expect to resume buoyant and job-
creating growth on the basis of the same four elements that drove the economy over the past
decade or so: debt-financed consumer demand and housing, government deficits, and easy
money. None of these, let alone the four in combination, offer a sustainable path forward. We
must rebalance the US economy to achieve such a path.

This brings us squarely back to the world economy and the opportunities that it offers for the
United States. A resumption of substantial US growth, even to the modest level of 3 percent or
so annually that is needed to restore and maintain full employment over several years, will
require a major expansion of US exports to the rest of the world and a sizable reduction of our
trade deficits. This in turn calls for substantial private investment in the United States, to
strengthen our competitive position and provide the capacity to service foreign markets (as a
second major component of the new US growth model.)  The United States must achieve
export-led growth for at least the next decade.

President Obama has announced a National Export Initiative to double US exports over the next
five years. However, his Administration has done very little to realize that goal.  Moreover, the
target is far too modest. By any reasonable metric, the United States trades far less than it
should. We need to aim to double the share of exports in our total economy from about
10 percent in 2010 to at least 20 percent in 2020: "from 10 in ’10 to 20 in ’20." We
should simultaneously aim to eliminate our trade and current account deficits over the
same period, which would boost our real growth by about half a percentage point per
year and create 3 million to 4 million good US jobs when fully achieved—half the total
needed to restore full employment (on the most widely used measure thereof).

My earlier description of the world economy of the  21st century clearly indicates where those
US trade efforts must focus. We of course cannot forget Japan and especially Europe, as well as
Canada, which is our largest export market and a partner (along with Mexico) in the North
American Free Trade Area. But our major target must be the half of the world that is growing
rapidly, is flush with cash, and is widely running large trade surpluses. This last point is
particularly important: Most countries, both high-income and emerging, want export-led growth,
but those that are already running huge surpluses must accept reductions in their imbalances to
permit countries with huge deficits (like the United States) to adjust and thus
permit global expansion to proceed.

There is another key reason to focus our efforts on the developing countries: Many of them make
it exceedingly difficult for us to penetrate their markets. China is by far the most egregious case.
It is not a closed economy in economic terms: The share of trade in its GDP is double ours and
triple Japan’s, and its tariffs and other traditional barriers to imports are very low compared with
other emerging markets. China in fact made a conscious decision to integrate deeply with the
world economy as a central part of its development strategy, liberalizing dramatically to enable it
to join the World Trade Organization and then using the rules of that organization to promote
more internal reforms. This was a brilliant choice that has paid huge dividends for China over the
past three decades. 

But China and some other emerging markets, especially in its immediate neighborhood, are also
violating some of the most fundamental rules of the international economic system, to the great
detriment of the United States and many other countries. A cardinal goal of the International
Monetary Fund, which was created to avoid replication of the beggar-thy-neighbor policies that
deepened the Great Depression, is to prevent competitive currency devaluations through which
countries keep their currencies cheap to provide large price advantages for their exporters and
their firms that compete with imports. Yet China has intervened massively in the foreign
exchange markets for at least five years, buying at least $1 billion every day to keep the
dollar strong and its own renminbi weak. The result is an undervaluation of the renminbi of
at least 20 percent, which is the equivalent of a subsidy of 20 percent on all China’s exports and
an additional tariff of 20 percent on all China’s imports. This is by far the largest
protectionist measure adopted by any country since the Second World War—and
probably in all of history.

China has thus run huge trade and current account surpluses, which reached an unprecedented
10 percent of GDP at their peak. It has piled up a hoard of foreign exchange reserves that now
exceeds $3 trillion, three times as much as runner-up Japan and six times greater than anybody
else. It is clearly exporting its own unemployment problem to the rest of the world.

The current overvaluation of the dollar, of 10 to 20 percent, is primarily due to this

undervaluation of the Chinese renminbi and several other Asian currencies closely aligned to
it.  Elimination of this misalignment would improve the US international economic
position by $200 billion to $250 billion annually and produce at least a million good
jobs, mainly in manufacturing but also in some price-sensitive services sectors such as tourism.
This would represent a major step toward the needed rebalancing of our economy. China and
other huge surplus countries indeed must reduce their own imbalances if the United States is to
cut its deficits substantially. They simply must stop manipulating their currencies to perpetuate
their huge surpluses. And it is doubly egregious for them to fight inflation by restraining the
growth of domestic demand, which adds to global as well as national growth, while maintaining
large trade surpluses that instead redistribute global growth away from deficit countries like the
United States. Yet China’s growing international clout has been sufficient to prevent the United
States, the IMF, or even the growing coalition of countries that opposes its practices to deter
continuation of these policies.

A second area of international commercial conflict is protection of intellectual property rights

(IPR). The United States and some other high-income countries compete primarily at the high-
tech end of the product spectrum and rely on being paid for the innovations (like Microsoft
Windows, iPads, wonder drugs, and Oscar-winning movies) that are the results of their corporate
investments and employees’ unique skills. But many developing countries steal these secrets and
thus deny their producers much of the fruits of their work. China is again by far the largest
though by no means the only culprit; the US government has estimated that it robs US firms of
$50 billion to $100 billion annually through this route. The global loss to the US economy is
probably at least twice as large.

There are many other areas as well where other countries, largely emerging markets that are
doing so well, violate the international rules of the game that the United States has labored so
hard to erect since the Second World War. We take a tiny fraction of those cases to the World
Trade Organization, whose efficient dispute settlement mechanism frequently renders judgments
in our favor. (We are also occasionally on the losing end of such cases because we do not always
play fully by the rules either.) But achievement of truly free global trade would generate very
sizable additional benefits for the US economy. This is especially true with respect to
international trade in services. The United States is highly competitive in a wide array of
services, especially business services ranging from engineering and architecture to lawyers and
accountants. We run a very large (about $150 billion) and growing surplus in this sector, and it
can contribute substantially to the required rebalancing.

Many people express surprise at this view. Some believe that a revival of manufacturing must be
key to any lasting US recovery. Thinking of haircuts and home nursing, others accept the
traditional view that most services cannot be traded across borders. Many think that the services
sector generates only low-paying, dead-end jobs ("hamburger flippers"). 

All these views, common as they are, are incorrect. Manufacturing accounts for only 10 percent
of US employment and has been declining for 50 years, due mainly to rapid productivity growth,
just as agriculture declined from 50 percent of our economy a century ago to 1 percent today.  By
contrast, business services alone provide 25 percent of US jobs and have grown by 30 percent
over the past three decades, while manufacturing has fallen by another 20 percent. More than
half these business services are widely traded within the United States and thus are quite tradable
internationally, in amounts considerably larger than the entire manufacturing sector. Average
wages are at least 10 percent higher in services than in manufacturing. Manufacturing remains
important to the United States, and the required rebalancing toward global markets will help
stabilize it, but services already dominate our own economy (and those of all other high-income,
high-wage countries) and must therefore become a focus of our international efforts as well.

Another major thrust of US economic strategy must therefore be to open foreign markets to our
services exports (notably including intellectual property as already discussed). This strategy must
focus on the rapidly growing emerging markets, who are still in fairly early stages of the
development cycle and have still to experience the burgeoning of the services sector that
accompanies the normal evolution to high-income or even middle-income status. The extreme
outlier is again China, where services represent only about 40 percent of the entire economy
(compared with 80 percent in the United States). Moreover, most of these economies maintain
very high impediments to imports of services from the United States and other foreign suppliers. 

The emerging markets thus offer a triple opportunity for a US initiative on services.
They are growing very rapidly. Their own economies are rebalancing sharply in the direction of
services.  They retain substantial barriers to foreign penetration of their services sector.

To carry forward its own rebalancing strategy, the United States should thus mount a major
campaign to negotiate new trade agreements that will open emerging markets to US
services exports (and investments, which are often essential to facilitate these exports).  It can
do so through bilateral arrangements, such as the Korea–United States Free Trade Agreement
that will shortly be sent to Congress and breaks new ground in several services sectors such as
insurance and pharmaceuticals. It can do so through plurilateral agreements, such as the Trans-
Pacific Partnership that aims to create "a 21st century trade agreement" with eight Pacific Rim
countries and eventually expand into a Free Trade Area of the Asia Pacific. It could do so most
effectively through a global agreement in the World Trade Organization, as a successor to (or
revival of) the Doha Round that has fallen into repose after a decade of negotiating effort.
Inexplicably, the United States has not yet adopted such an approach. Its failure to boost services
into a prominent role in the Doha talks in fact explains much of their inability to attract political
support within this country and hence their demise in Geneva.

Part of the reason is the innate difficulty of liberalizing foreign access to services markets in
other countries. Unlike manufacturing industries, which have been protected largely by tariffs
and import quotas and other border barriers, the myriad of services industries are mainly shielded
by a complex array of behind-the-border measures: industrial and technology standards,
preferential patent and trademark regimes, lax competition (antitrust) policies, discriminatory
government procurement practices, and the like. It will take a substantial intellectual effort to
identify these impediments and devise strategies to address them, and then a major political
effort to persuade other countries to begin liberalizing (and, hopefully, eventually abandon)
them. But a number of modern trade agreements are beginning to encompass these dimensions,
and a successful future for the US economy demands no less.

It is thus clear that the United States, in order to resuscitate its economy on a successful and
sustainable basis, must reorient toward the global economy within which it operates and on
which it has become so dependent. It is equally clear that there is a feasible strategy for doing
so.  Such a strategy begins with, and rests primarily upon, our getting our own house in order and
substantially beefing up our international competitiveness. But it also encompasses a trio of
directly international policy approaches: restoring and maintaining a competitive exchange rate
for the dollar, demanding and achieving full protection for the intellectual property rights of
American firms and workers, and opening (especially emerging) markets abroad to the wide
array of services sectors in which the United States is highly competitive. 

HOW TO DO IT?
Implementing such a strategy in a world of almost 200 sovereign nations, at least two dozen of
which (even counting the European Union as one) are important for the world economy, would
never be easy. It is especially difficult as we enter the 21st century, however, because as noted
above the United States has become both more dependent on external events and less able to
influence (let alone steer) them. Hence we will need to be exceedingly clever in fashioning an
effective game plan.

As noted, we will first have to put our own house in order. We must place our budget deficits on
a credible path to substantial correction. We must get serious about our international competitive
position. We must implement trade agreements negotiated years ago rather than letting them
languish in yet another battle between the Administration and Congress.  

On the budget, the legislation recently passed by Congress includes no explicit spending cuts but
relies wholly on procedures and tangible decisions in the future. We need instead a program that
trims at least $4 trillion to $6 trillion off the prospective deficits over the next decade and meets
three basic criteria. It must include specific, tangible measures (rather than deferred processes) to
be credible to the markets. These measures must be phased in over time to avoid further
weakening of today’s very fragile economy. They must address long-term structural needs that
will have to be addressed at some point anyway. Examples are increases in the retirement age for
Social Security and/or Medicare and, on the revenue side, phasing in a $1 per gallon gasoline tax
over ten years or a 5 percent value-added tax (or national retail sales tax) at the rate of 1 percent
per year. For all the polarization in Washington, the ability of the Bowles-Simpson Commission
and "Gang of Six" in the Senate to fashion sizable and balanced budget packages shows that
bipartisan political agreement is possible.

On the international front, we will want to create alliances to the maximum extent possible.
China has become more responsive to external pressure to let its exchange rate strengthen as
Europeans, and especially a number of its fellow emerging market and Asian economies, have
joined the chorus of criticism. We will want to use the international economic institutions,
especially the WTO and the IMF, whenever possible to mobilize such "coalitions of the willing"
to effectively implement the current international rules and to write new rules where none now
exist.  

We will also have to offer concessions of our own. We can only induce other countries to
enhance our access to their services markets if we relax our own remaining impediments, such as
agricultural subsidies (which should be dismantled for budget reasons anyway), high tariffs on
some textile products, and tight visa policies that limit entry to the United States for many
foreign nationals (even when they would strengthen our own economy).

We will also have to get much tougher with some of our foreign partners. The Treasury
Department, for example, has never been willing to label China a "currency manipulator" despite
its blatant manipulation and the law of the land that directs Treasury to do so and then launch
negotiations to remedy the situation. We could take China to the WTO for violating that
organization’s proscription (like that of the IMF) of competitive undervaluation and sharply limit
its access to our market if the case prevailed. We could initiate "countervailing currency
intervention," buying Chinese renminbi to offset the effect on our exchange rate of their massive
purchases of dollars. 

The combination of carrots and sticks will be particularly important with respect to China. On
the one side, China wants the United States to recognize it as a "market economy" (rather than a
centrally planned economy), to protect it from some of our trade safeguard measures, and
assurances that the United States will permit its companies to invest here without running afoul
of national security blockages. On the other side, we will have to place higher priority on our
economic interests with China than on seeking its cooperation vis-à-vis North Korea, Iran, or
other security issues (where it has not been very helpful anyway). In any event, we will almost
certainly have to strengthen the informal de facto "G-2" between our countries because very few
international issues can be resolved successfully in the 21st century without extensive
understanding—even when that amounts simply to agreeing to disagree—between China and the
United States.

We may also want to review some long-standing US international economic policies.  Virtually
all Americans, and foreigners even more so, believe that the international role of the dollar is
good for the United States because it helps us finance our large external (and thus internal)
deficits. But is it really desirable that China and other mercantilist countries can perpetuate their
surpluses by piling up dollar balances, thus lending to us rather than reducing their imbalances,
that they enable these huge inflows of foreign capital that enable us to put off the inevitable
restoration of fiscal discipline when the pain will be much greater the longer we delay—
especially when we have already seen that those inflows helped create the loose monetary
conditions, and consequent over-borrowing and over-lending, that brought on the recent financial
crisis and Great Recession? Is it really desirable to let other countries set the exchange rate of our
currency, as the Chinese and others do by intervening in the dollar market while we sit by
passively?

However one answers these questions, it is clear that international economic issues will have to
play a much larger role in both the economic policy and overall foreign policy of the United
States. The current Administration recognizes both realities. In a series of summits of the G-20,
the new steering committee for the world economy, half of whose membership is emerging
markets, President Obama has stressed the imperative of a rebalancing of the world economy
including a rebalancing of the United States but emphasizing correctly that others—notably the
huge surplus countries of China, Germany, and Japan—must rebalance in the opposite directions
if the process is to succeed. Secretary of State Hillary Clinton has begun a series of speeches
stressing the growing centrality of economic issues in US foreign policy and calling on other
countries to cooperate much more fully in that context.  

One of the enduring legacies of the second half of the 20th century was the onset of the second
wave of globalization. The first wave of globalization, in the 19th century, ended disastrously
with world wars and global depression. The rising powers of the day, Germany and Japan, were
not assimilated into the international power structure and the results were cataclysmic. Today the
world must adjust a new set of rising powers, most importantly China, but with India and several
others not far behind. This poses particularly acute challenges for the United States, the
traditional leader of the global economic system, as it struggles to restore its own economic
vitality and thus its global role. As the title of this lecture series suggests, there is no "quick fix"
and these issues will be at the forefront of our concerns for many years, and probably decades, to
come.

OPEN TO GO TO "MORE FROM AUTHOR"More from C. Fred Bergsten

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