The current economic meltdown doesn’t end at the U.S. border – and neither should the solution, argues Reginald Dale.
Four years into the Uruguay Round, the last great set of multilateral negotiations that reshaped the world trading system, a member of Congress asked the U.S. Trade Representative’s office why the United States was spending so much time negotiating with Uruguay. The legislator was blissfully unaware that the Round involved more than 120 countries and owed its name to the location of its formal opening ceremony, an exclusive Uruguayan beach resort.
There is sadly only one source for this story, so it should be treated as unconfirmed. But it has the ring of truth in light of, let us put it politely, the inattention to the workings of the global economy that prevails in many political circles in Washington.
As the world plunges into a wrenching economic and financial crisis, which is bound to have severe consequences for the United States and virtually every other corner of the planet, this inattention is back with a vengeance, and it is even less excusable. Most of political Washington sees only the American aspect of the crisis and is focusing solely on providing a cure for the U.S. economy, ignoring the global scale of the problem and the manifest need for international solutions.
Here is a great chance for President Barack Obama to start fulfilling his promise to restore U.S. global leadership. Unfortunately, however, he has been one of the worst offenders. In not one of his numerous comments on the crisis has Obama placed the economic tempests buffeting America in an international context. Among the many subjects he has failed to mention are: imports and exports; the dollar; the stalled Doha Round of multilateral trade negotiations; the global extent of the crisis; the plight of the poorest countries; the need to concert stimulus action with other governments; the very real risk of a worldwide outbreak of protectionism; the complex U.S. commercial and financial relationship with China which many economists think helped cause the crisis; and the dangers of introducing new U.S. financial rules and subsidies to industry without coordinating them with similar moves by other countries.
These are astonishing omissions at a time when it is clear to much of the rest of the world that the far-reaching problems of the global economy cannot be solved without American leadership. For all the talk of U.S. decline, America still accounts for one quarter of the world economy, dominates the major international financial institutions, the International Monetary Fund and the World Bank, and is the only country with the capability and, one would like to think, the determination to protect the free-market capitalist system – the main generator of U.S. and global prosperity – at a time when it is under widespread attack, even from some of America’s European allies.
Ah, you might say, but Obama is President of the United States, not of the world (despite impressions in some quarters to the contrary); his first responsibility is to safeguard the livelihoods of American citizens and, anyway, the crisis started here. When he has plugged the leaks in America’s foundering ship of state, he can look to the ragged fleet of other stormed-tossed vessels on more distant waves. This is first and foremost a domestic emergency.
There are many problems with this line of argument, which is essentially political rather than economic. First, America’s problems cannot be solved in isolation. The United States needs prosperous markets for its exports, willing foreign investors in its capital markets and an open international economy in which its companies can thrive and obtain the resources and raw materials, not least oil, that are vital to America’s well-being. Second, virtually every international economist agrees that the various stimulus measures and regulatory changes around the world, planned or already introduced, must be coordinated to have the desired effect.
Perhaps Obama should after all have attended the summit meeting of the G-20 group of major economies in Washington in mid-November, from which he stayed away – either out of delicatesse toward his predecessor George Bush or because he did not want to be committed by the group’s deliberations. The G-20 at least recognized the global dimensions of the problem; in the words of IMF chief Dominique Strauss-Kahn, “governments spoke with one voice,” pledging among other things to coordinate their fiscal stimulus measures.
Now, the G-20 has since been widely criticized for failing to keep its promises. One would certainly be hard pushed to find anyone in Washington arguing that the U.S. stimulus package should be coordinated with what is happening in, say, France. Nevertheless it should be obvious that such emergency measures must not work against each other. It won’t help, for example, if every government pours money into its major industries, cancelling out each other’s subsidies, or introduces different new rules that turn the international financial system into an impassable maze of conflicting restrictions.
Alternatively, if the United States unilaterally cracks down on its, at least hitherto, world-leading financial services industry and other countries do not follow suit, it risks a massive outflow of capital from American markets that could inflict serious, long-term damage – just as many believe occurred after the 2002 Sarbanes-Oxley Act, tightening U.S. corporate accounting and other standards, which boosted London as an international financial center at the expense of New York.
The greatest threat, however, is another risk identified by the G-20 leaders, an international outbreak of protectionism as governments desperately struggle to save jobs and keep their companies in business. One would have thought that the enormous dangers of this primrose path had been definitively proved by the disastrous “beggar-thy-neighbor” policies that intensified and prolonged the Great Depression. But a number of G-20 members have already broken their vow not to enact new protectionist measures.
The worst possible development would be for the United States to set this global wrecking ball in motion again, as it did with its notorious Smoot-Hawley tariff legislation and the Buy American Act in the 1930s. Free traders are rightly horrified that Congress is actually trying to strengthen the Buy American Act in the latest stimulus package. This move is infinitely worse than mere “inattention” to the world outside; it is playing with a fire that could devastate the entire global economy. It does, however, give Obama a chance to kill two birds with one stone: he could both demonstrate his command of global economics and assert American leadership by vetoing any bill that contained this monstrosity. That would hugely increase his standing at the next G-20 summit, in London in April, which this time he does have to attend.
Reginald Dale is Director of the CSIS Transatlantic Media Network and a former senior editor and columnist for the Financial Times and the International Herald Tribune.