An Economics Agenda for Neorealists

Correspondence I 211 To the editors: Economists, argues Samuel Huntington in the debate with Christopher Layne and Robert Jervis about primacy for the United States, “are blind to the fact that economic activity is a source of power as well as well-being. It is, indeed, probably the most important source of power, and in a world in which military conflict between major states is unlikely, economic power will be increasingly important in determining the primacy or subordination of states.”’ What economic policies will in fact foster the pursuit of “American primacy” that Samuel Huntington seeks? What economic policies would, in contrast, lead to the redistribution of power in favor of America’s rivals, complete with the hostility and antagonism of earlier big power struggles, that Christopher Layne fears? What, in short, is the economics agenda best suited for neorealists? Is there a special policy path, perhaps built around strategic trade theory, for those who wish to pursue relative gains at the expense of mutual gains, or political power at the expense of economic welfare? An economics agenda for neorealists should address three principal dangers to America’s position in the international political system that emerge directly from U.S. economic policy: a persistent imbalance in trade and capital accounts, which mortgages the assets of future generations or turns over the assets of the current generation to foreigners; a lagging competitiveness of firms and workers, which undermines the growth rate and skill level of the nation’s industrial base (and other sectors) in comparison to rival states; and a growing dependence on outsiders for critical products or technologies, which leaves the nation vulnerable to denial or manipulation by external suppliers. RESTORING EQUILIBRIUM IN TRADE AND CAPITAL ACCOUNTS At first glance it might seem that preventing cumulative imbalances in trade and capital accounts would be the central arena for neorealists to distinguish themselves, Theodore H. Moran is Landegger Professor at the School of Foreign Service, Georgetown University. He is currently on leave as Senior Adviser, Policy Planning Staff, U.S. Department of State. 1. See Christopher Layne, “The Unipolar Illusion: Why New Great Powers Will Rise,” Robert Jervis, ”International Primacy: Is the Game Worth the Candle?” and Samuel P. Huntington, “Why International Primacy Matters,” all in International Security, Vol. 17, No. 4 (Spring 1993). International Security 18:2 I 212 insisting especially forcefully for other nations to open their markets, or pushing especially forcefully for domestic controls on investment inflows. But the method to stop the foreign build-up of obligations against American assets is, despite the appearance of the words "trade" and "investment," purely a macroeconomic issue involving domestic consumption versus domestic savings. As long as a country consumes more than it produces, it will experience a trade deficit and a corresponding reliance on foreigners to finance it. Trade protection and investment restrictions, strategic or otherwise, cannot alter this; neither can vigorous efforts to open external markets for products or capital. Japan-bashing or EC-bashing in trade, or Exon-Florio regulations for investment, can affect the composition of the imbalances, but not their magnitude. The fact that the greatest threat to America's power in the international system is "made in the USA" should in no way detract from its importance to neorealists. Since 1980 the United States has consumed almost $1.5 trillion more than it has produced, while two of the prospective "challengers" alone, the Germans and the Japanese, have accumulated more than $1 trillion in future demands on our assets. Reversing this Paul Kennedy-esque trend would strengthen U.S. freedom of action (present and future) in comparison to an America becoming more indebted to or owned by foreigners . It would foster external respect, rather than creeping contempt. But it cannot be accomplished by external assertiveness. It can only be accomplished by altering our internal consumptionisavings ratio. This distinction will have profound implications for neorealist predictions about stability among the major powers (discussed below). ENHANCING THE COMPETITIVENESS OF AMERICAN FIRMS AND WORKERS The second threat to America's position in the international system, weak growth in the performance of American firms and workers in comparison to the corresponding growth in the performance of foreigners, has been...