Magazine article Foreign Policy

On the Economy, Be Careful What You Wish For

Magazine article Foreign Policy

On the Economy, Be Careful What You Wish For

Article excerpt

HALFWAY THROUGH 2011, we've already seen an extraordinary year of volatility: turmoil across the Middle East and North Africa, the eurozone's ongoing fiscal crises, Japan's triple disaster, the killing of Osama bin Laden. Yet these dramatic events have obscured a slow-moving, underlying shift of much greater long-term importance: global rebalancing. In its simplest form, rebalancing means this: a reset of the global economy shifting the balance of accounts between the world's established and emerging powers or between its biggest consumers and biggest savers. That alone, of course, is a transition of landmark historic significance. Yet it is far from the only consequence, for rebalancing is not lust an economic story, but one that will result in a seismic shift in the international balance of power, in every region of the world.

And I have bad news for the United States: Rebalancing won't be the relatively pain-free process some in Washington hope. Faced with an increasingly ugly bilateral trade deficit, many of the most senior U.S. officials--including many who should know better--have repeatedly called on the Chinese leadership to empower Chinese consumers to buy more Chinese-made products and to allow the renminbi, China's currency, to appreciate to help them afford it. The FOREIGN POLICY Survey results reported here also suggest Washington is on solid ground: Nearly 100 percent of the leading economists consulted told the magazine they think the renminbi is undervalued.

But in reality it's hard to imagine a better example of "be careful what you wish for."

At a moment when Western-led globalization is under threat from a new brand of emerging-market mercantilism, this sort of decoupling will produce a lot of pain. This is what's happening already in many areas of the fast-transforming global economy--but unfortunately, U.S. leaders aren't doing much to prepare for this transition, perhaps because they're in denial about its inevitability and its implications for American power. Talk of "winning the future," whether from President Barack Obama or his Republican rivals, allows Americans to believe that all their country needs is to become more "competitive." But rebalancing means that the U.S. economy can't simply grow its way back to the pre-financial crisis era of American profligacy. Instead, it will have to thrive in a new world in which U.S. primacy is no longer a given.

In years to come, U.S. diplomats will have to do more than jet around the world twisting arms and cutting deals. They'll have to find creative solutions to transnational problems that involve multiple players who don't necessarily accept U.S. leadership. American power has always been a mix of hard and soft forms of persuasion: a blend of liberal values, military muscle, and economic leverage. Those values endure, even if the United States itself might not always be loved in foreign capitals. It's the third element of power that is fast waning: the paramount position of the United States in a global economic order built to its advantage. For decades, American consumers have been the engine of growth around the world, and the U.S. economy remains by far the world's largest, two and a half times the size of China's. But the latest projections from the International Monetary Fund forecast that China will surpass the United States by 2016. And China is far from the only rising power on the horizon.

American consumer purchasing power will continue to be an important variable for global growth and the economic health of many countries, but Americans won't have as much money to spend. The financial crisis pulled huge amounts of money from the pockets of U.S. consumers by, among other things, deflating the value of their biggest asset: their homes. And the loss in U.S. purchasing power will be felt in every economy that depends on access to U.S. markets. That's exactly why Chinese policymakers are now working to decouple--not because Washington wants them to, but because excessive long-term dependence on U. …

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