Strategic Asia 2006-07: Trade, Interdependence, and Security

The Superpower as Super-Debtor:Implications of Economic Disequilibria for U.S.-Asian Relations

executive summary This chapter examines why the ongoing refusal of the United States to live within its economic means poses challenges to U.S. domestic prosperity, dilutes U.S. credibility as a global superpower, and elevates U.S.-East Asian economic interdependence to uncharted levels of complexity. main argument: • Having accumulated so much external debt for so long, the United States is at—if not already beyond—the boundaries of prudent economic behavior. A paradox of American “exceptionalism” is that this situation reflects both U.S. weakness and strength. • Several Asian countries have become super-creditors due to over-reliance on exports to the U.S. market and under-reliance on internal growth. The compulsion of these countries to export and the U.S. craving for imports are complementary excesses. Imprudent dependence on a ballooning global balance of payments disequilibrium has created a precarious interdependence between the super-debtor and its Asian super-creditors. • Though the likelihood of an economic crisis caused by a rapid depreciation of the dollar is neither inevitable nor imminent, the danger is credible enough that governments should be taking the situation more seriously. policy implications: • The ability of the United States to endure the financial burdens of being the world’s sole superpower depends on “good” macroeconomic policy, a system that encourages innovation and the entrepreneurial spirit, a capacity for self-reinvention, and efficient capital markets. • By relying excessively on debt, the U.S. government has effectively abdicated short- to medium-term control over the dollar’s value to the mostly Asian super-creditors and profit-seeking speculators everywhere. • Washington has not yet allowed U.S. gratitude for the roles that Asian super-creditors play in stabilizing the dollar’s exchange rate to influence U.S. security policy relating to Asia. Less U.S. dependence on external borrowing would preserve the firewall separating economic and security issues. United States Stephen D. Cohen is Professor, School of International Service, American University, Washington, D.C. and Director of the International Economic Relations Field. His new book, tentatively titled Foreign Direct Investment and Multinational Corporations: Avoiding Simplicity, Embracing Complexity, will be published later this year. He can be reached at . The Superpower as Super-Debtor: Implications of Economic Disequilibria for U.S.-Asian Relations Stephen D. Cohen The United States has taken no meaningful action to contain ten years of steadily worsening, record-breaking trade deficits. The policy of inaction that by default has encouraged these deficits has been praised as a brilliant, wealth-maximizing strategy but also has been condemned as a dangerously irresponsible indifference to increasingly untenable international economic imbalances. Passionate believers in reliance on free market forces as the optimal strategy are unconcerned, remaining confident that the invisible hand of the marketplace will devise a more efficient solution than anything that politicians and civil servants can concoct. Believing that market imperfections inevitably make matters worse, skeptics are concerned that inaction by the U.S. government risks severe economic upheaval that, among other things, will harm Washington’s role in world affairs in general and in Asia in particular. This chapter argues that, on balance, the de facto U.S. pursuit of a familiar but risky short-cut to prosperity—massive borrowing and postponed sacrifices—poses a potential danger to U.S. economic and foreign policy interests as well as to the global economy. A cloud of uncertainty hovers over the “exceptionalism” label commonly affixed to U.S. economic prosperity and to the role that the United States plays in the world. The uncertainty is about mounting debt. An imminent threat to U.S. economic growth, global leadership, or military power can be inferred but not categorically demonstrated. The dependence of other 30 • Strategic Asia 2006–07 countries, especially in Asia, on exports to the U.S. market has never been greater. When approaching or having already passed the line of excessive borrowing, however, a superpower courts both economic instability and complications in its relations with foreign countries. The world’s sole superpower and biggest national economy is addicted to borrowing and consuming at the same time that foreign economies, mainly in East Asia, are addicted to lending and exporting. The result is an international economic order that has slipped into the uncharted waters of record balance-ofpayments disequilibria. The inherently intricate linkage between the domestic economy, the international balance of payments position, and the foreign relations of the United States has never been...