Foreign Economic Policy for the Next President

C. Fred Bergsten

From Foreign Affairs, March/April 2004

Article preview: first 500 of 4,889 words total.

Summary:  Even in a time of terrorism and war, no successful foreign policy can neglect the global economy. The next U.S. administration will therefore need to balance the country's books, liberalize trade, and reduce its reliance on foreign energy. Above all, Washington must shore up domestic and foreign support for globalization, so that it can continue to benefit the United States and the rest of the world.

C. Fred Bergsten is Director of the Institute for International Economics. He was Assistant Secretary of the Treasury for International Affairs from 1977 to 1981 and Assistant for Economic Policy to the National Security Council from 1969 to 1971. Copyright (c) 2004, Institute for International Economics.

*Editor's note: This is the first in a series of commissioned essays on foreign policy concerns for the next president.

THE DANGERS OF ROLLBACK

At a time when U.S. foreign policy is dominated by war, terrorism, and weapons of mass destruction, economic concerns are often relegated to the back burner. But in reality, economic policy must be an integral component of any successful foreign policy. Some of its elements, such as the suppression of terrorist financing and support for reconstruction efforts in Iraq and Afghanistan, bear directly on the most central national security concerns. The linkage, however, is much broader, because most countries, rich or poor, large or small, depend heavily on the global economy for their prosperity and their stability. Hence, economics ranks at the top of their list of concerns. To continue to be relevant to the rest of the world, the United States must engage effectively on these issues.

As the sole military superpower, the United States may often be able to undertake unilateral initiatives for the sake of national security. But in economic policy, unilateralism is simply not an option. No government, Washington included, can ignore market forces. The European Union's economy is now as large as that of the United States, and the euro has begun to challenge the dollar for global financial leadership. The United States relies on foreign investors -- including the monetary authorities of competitor Asian economies -- to finance massive external deficits, and it depends on oil imported at prices set by producers in other countries. Cooperation is therefore a necessity in the realm of international economics. Indeed, because of the close connection between economics and other international issues, economic policy often restrains the unilateralist tendencies in U.S. foreign policy as a whole.

Foreign economic policy is also critical to the health of the domestic economy. Over the past generation, the share of trade in U.S. GDP has tripled, to about 30 percent, and over the past decade, the competitive stimulus provided by rapid globalization has helped spur a dramatic increase in productivity, thus contributing to faster growth and job creation as well. On the financial side, foreigners' willingness to invest more than $500 billion a year in the United States funds massive trade deficits and makes up for low domestic savings rates. Overall, the reduction of trade barriers over the past 50 years has raised the annual income of the average family by $2,000.

But for the past decade, U.S. foreign economy policy has been mired in stalemate. For eight years, Congress refused to authorize the president to negotiate new trade agreements. When it finally did so in 2002, it was thanks only to a series of protectionist concessions on the part of the Bush administration. Legislation to replenish the International Monetary Fund (IMF), meanwhile, languished for more than a year at the height of the Asian financial crisis. It was rescued only by the intervention of a farm bloc seeking new funding for sales to major overseas markets.

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