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In a 'rebalanced' world economy, a diminished US role?

American consumers can no longer borrow madly to buy so many goods from abroad. Shoppers in emerging nations must be the next engine of growth, some argue.

By Staff writer / October 13, 2009

A worker stands at a container terminal in the port of Dalian, China, in September. China and the US are at a fulcrum of global trade patterns that have become increasingly unbalanced and perhaps unsustainable. China is awash with cash, enabling a $1.5 trillion foreign investment position. For the United States, a tide of imports is built on borrowing from abroad: net foreign ownership of US assets has reached $3.5 trillion.

Elizabeth Dalziel/AP

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Back in the golden days of 2004, American consumers were the fuel for a historic expansion of the world economy.

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Ringing up sales of everything from GPS navigators to gasoline, they drove US imports to a record level. The United States devoured $500 billion more in imports than it exported – single-handedly enabling booming trade surpluses for countries from China to Japan to Germany. For several years, the world economy clicked along at 5 percent growth, as Americans paid for this consumption binge partly by pulling unprecedented amounts of equity out of their homes.

You know how the story ends. A financial crisis and a deep recession curbed home-equity borrowing and erased any notion that US consumers will provide the chief path to global growth anytime soon.

That means the search is on for a new, more sustainable model for world economic growth – one that avoids the pitfalls of what policymakers now call "global imbalances."

Already, the imbalances have been partially corrected by the harsh hand of recession. American consumers can no longer soak up extra output from Asian factories the way they did earlier this decade.

But this leaves two big questions related to rebalancing the world economy:

Who or what will fill the hole left as US consumers retrench? And how can nations – especially the US and China – avoid a repeat of the kinds of imbalances that set the stage for the great recession?

These urgent questions have an important subtext: a longer-term shift in economic power from advanced nations to the emerging countries.

For the US, this doesn't necessarily portend a period of decline, policy experts say. But challenges lie ahead. Belt-tightening for government, restraint by consumers, strategies that revive exports, the need for artful financial diplomacy – these could become themes in a new economic chapter for America.

The recession has become a catalyst for the world to focus on imbalances and the ongoing shift in economic power, but these aren't the kinds of issues that can be resolved at a single summit. Still, important signs have emerged in recent weeks:

• US Treasury Secretary Timothy Geithner has been working hard on the pivotal US-China relationship – both to nudge changes by Beijing and to reassure China, a major creditor, that the US will get its own house in order. After a US-China economic dialogue two months ago, Mr. Geithner summed up the outcome: "China will rebalance toward domestic demand-led growth," he said. "President Obama has committed to lowering federal deficits to sustainable levels once recovery is firmly established." For both nations, such achievements will be a tall order.