President Obama called today for "concerted action" around the world to jump-start the global economy and coordinate reforms abroad with US efforts to ward off a repeat of the recent near meltdown in financial markets.
"We can do a really good job here at home with a whole host of policies, but if you continue to see deterioration in the world economy, that's going to set us back," Mr. Obama said Wednesday morning. "It's very important to make sure that other countries are moving in the same direction because the global economy is all tied together."
In reality, the global economy is all tied up in knots.
Part of the problem is obvious. The global recession is cutting demand for all products, including imports. As one nation cuts back on buying foreign goods, it finds its exports also plunging because everyone else is trimming imports, too.
It's a process that some have dubbed "deglobalization."
The less obvious problem is that the current arrangement of global trade doesn't work so well anymore.
Step back a moment and the problem comes into better focus. The United States can't forever be the world's vacuum cleaner, sucking up imports and spitting back dollars. The danger is that China and other nations hoarding those dollars decide enough is enough, unload those dollars, and the greenback's value plunges.
That's why some analysts are calling for a new trade order.
"The old trading patterns simply won't work anymore," wrote Robert Samuelson in a January column for the Washington Post. "If China and other Asian nations try to export their way out of trouble, they're likely to be disappointed."
In recession, the world won't buy their products.
Paths to recovery
The solution, Mr. Samuelson and others argue, is that Asian nations should move from being export-dependent to developing their domestic markets. Translated, that means Asian consumers should save less and buy more, while Americans do just the opposite.
China could help things along by allowing its currency to appreciate, which would make Chinese goods more expensive and US goods less expensive.
Indeed, some of these things have already happened. But they've had little impact so far. For example, China's currency has appreciated strongly against just about every major currency, including America's (up 17 percent), since July 2005. But its imports have plummeted as its economic growth has slowed by a third in the past year. And last year it stopped further appreciation of the yuan.
Beijing's announced stimulus plan could help – something Obama wants to see more of across the globe. But China may not get much bang from that buck.
"It has reached the point of diminishing returns," concluded a January briefing paper from Brown Brothers Harriman, private US bank. China is "investing too much and being terribly inefficient."
European nations are balking at US calls for them to expand their stimulus efforts, saying they want to see what the effect of their current spending.
A new arrangement?
A more radical solution would be a new trade agreement among the major nations.
"We need an international cooperation where trade is balanced," said Dimitri Papadimitriou, president of the Levy Economics Institute, in an interview. Nations would agree to control trade imbalances, with big importers like the US exporting more, and big exporters like China exporting less.
The challenge, he added, is that such measures "are very unpopular. They could be misinterpreted as protectionist."
And even if the idea gains traction among world leaders, current international institutions are set up to discourage bad trade practices but not really to control trade.
However it takes shape, the new trade order will take some time to emerge.