America Cannot Resolve Global Imbalances on Its Own
Op-ed in the Financial Times
© Financial Times
The Obama administration is increasingly signaling that the United States will not continue to be the world's consumer and importer of last resort. The clearest statements came last month from Larry Summers, White House economics director, in a speech at the Peterson Institute for International Economics and in an interview with the Financial Times. The United States, he said, must become an export-oriented rather than a consumption-based economy and must rely on real engineering rather than financial wizardry. Tim Geithner, the US Treasury secretary, and other top officials have spoken similarly of rebalancing US growth.
The logic of this new US position is not just economic. It is also strategic. Mr. Summers has previously remarked on the tension between superpower status and net foreign indebtedness. US influence can be compromised if it is dependent on foreign investors to bail out its financial sector (as in the early part of this crisis) or to finance its fiscal profligacy (as China and other surplus countries have been doing for a long time). The United States undoubtedly also recognizes that it might not be able to finance large external deficits in the future at an acceptable price so to some extent it is making a virtue of necessity.
This long-run vision for US growth entails greater exports and probably a smaller current account deficit than where it is now (about 3 percent of gross domestic product). Although Mr. Summers did not and could not say so, the vision will require an end to the remaining overvaluation of the dollar. Studies by William Cline and John Williamson at the Peterson Institute suggest that holding the US current account deficit to something close to these objectives will probably entail a further real depreciation of the dollar, mainly against the Chinese renminbi and other Asian currencies.
In the short run, US recovery from the recession requires that the fiscal and monetary stimulus programs be effective. In turn, that calls for domestic and foreign investors to absorb smoothly and trustingly the voluminous amounts of IOUs being offered by the US government. Hence it is essential to avoid perceptions that the dollar is about to fall, at least by very much, and that the US authorities are pushing it down.
But Mr. Summers' long-run structural targets will come into play once the economy is out of the woods. Redirecting resources away from finance and consumption towards exports and investment will require relative price shifts, for which the dollar has to move down. So a stronger rate for the dollar now and a more sustainable rate once the recovery has taken hold can reconcile the short-run imperative and the medium-term goal.
What are the implications of this vision for America's trading partners? To the extent it is credible, it is a warning shot to the rest of the world. If the United States will not run large and persistent current account deficits, countries such as China, and probably Germany and Japan, will not be able to run large and persistent current account surpluses. They will not be able to rely on export-led growth. They will have to find ways to expand domestic demand on a lasting and substantial basis.
Progress is already being made in reducing global imbalances. The US current account deficit has come down from a peak of more than 6 percent of GDP to about 3 percent. China's current account surplus has declined from 11 percent of GDP to about 9.8 percent and is expected to decline much further this year.
But there is no guarantee that this process will continue. Mr. Cline predicts that the US current account deficit will rise back above 5 percent by 2012 and soar into unprecedented terrain thereafter unless the budget deficit is cut sharply and the dollar depreciates substantially. China has again been preventing the renminbi from strengthening and the jury is still out on whether the country intends to depart from its mercantilist growth strategy.
When the Group of 20 leaders meet in Pittsburgh in September, the question of how to achieve balanced as well as higher world growth must be at the top of the agenda. The US strategy on this issue is not, at least for the moment, consistent with strategies elsewhere. Put starkly, Mr. Summers has stated that China can no longer behave like China because the United States intends to behave much more like China. The world economy cannot have two, or even one-and-a-half, Chinese growth strategies from its two most important economies. Which will prevail?