As it becomes a debtor, US loses global clout and protectionism grows
Dr. Richard L. Drobnick worries about the long-range implications for the United States of becoming a debtor nation. If the US doesn't stop sinking into debt, ``our political and economic clout will go down,'' says the director of the International Business Education and Research Program at the University of Southern California.
Dr. Drobnick maintains that those countries that are net lenders to other nations are listened to in world affairs. Britain's creditor status, he continues, was one aspect of that country's power in the first part of this century. British influence declined in the post-World War II years partially because that war had drained it of overseas assets and dragged it into debt. Fast-mounting debts could cause the US to lose economic independence, too, Drobnick says.
For example, if the dollar declines rapidly in value, the Federal Reserve System may feel impelled to raise interest rates 2 or 3 percent to entice foreign lenders to keep their money here, Dr. Drobnick speculates. Otherwise, it will be more difficult to finance the budget deficit and a rapidly declining dollar could result in faster inflation. Higher interest rates could result in slower sales of housing and consumer durables.
``United States domestic monetary policy will be run by, or strongly influenced by, foreigners,'' he warned in a telephone interview.
Americans have not been ``paying their own way'' in the world since 1982, says Drobnick. As a result, the nation's post-World War I tradition of being a net supplier of savings to the world will have been reversed. He calculates that the net international investment position of the US will have plummeted from a 1982 peak of $169 billion to a 1985 official value that may range between minus $30 billion to $70 billion. In other words, by the end of this year foreigners will have loaned or invested in the US $30 billion to $70 billion more than Americans have loaned or invested in other nations.
Actually, Dr. Drobnick figures, such an official number will understate US debts to foreigners. Between 1970 and 1983, there was about $140 billion of unreported inflows of funds into this country. These represent a statistical discrepancy in the international accounts of the United States. If much of this inflow was foreign-owned money quietly entering this country for financial security or other reasons, then the US is an even greater international debtor -- perhaps by as much as $80 billion to $100 billion.
That means the US would be the world's largest debtor nation by the end of 1985.
Indeed, C. Fred Bergsten, director of the Institute for International Economics in Washington, calls this change in the American financial position ``the second debt crisis.'' He says that by 1989 US external debt could reach $1 trillion, exceeding the $810 billion total external debt of all the developing countries in 1984.
Mr. Bergsten speaks of ``the same complacency and conspiracy of silence'' marking this debt crisis as occurred during the buildup in debt of the developing nations. The US trade deficit, he says, fosters protectionist pressure that threatens the world trading system.
Dr. Drobnick goes further. In a study for the American Council of Life Insurance, he envisions a ``possible scenario'' where today's multilateral free trade system collapses, leading to preferential trading blocs.
At present, most big trading nations belong to the General Agreement on Tariffs and Trade (GATT) and adhere to the most-favored-nation principle. A concession on tariffs or trade barriers one country makes to another automatically must be granted to other GATT members. (There are exceptions for common markets or free-trade areas.) If this system were to dissolve, Drobnick sees formation by 1990 of:
An American bloc, consisting of the United States, Canada, Mexico, Central America and Caribbean nations, Korea, Taiwan, Israel, and Saudi Arabia.
A European bloc, including the European Community with expanding ties to resource-rich former colonies.
A Japanese bloc that consists of Indonesia, Malaysia, Philippines, Singapore, Thailand, Australia, New Zealand, and Iran, as well as Japan.
The Russian bloc, including the East European members of Comecon, and India.
An unaffiliated grouping of China, the Latin American nations, and other developing countries.
This bloc system, Dr. Drobnick says, would be characterized by ``reduced economic interdependence, slower economic growth, and the philosophical acceptance of regions of prosperity and promise coexisting alongside regions of poverty and despair.''
He hopes that the US will take steps to prevent the development of such an unhealthy economic system. He would like the US to tackle its budget deficit, believing this would knock down interest rates, make the US less attractive for foreign capital, and thereby push down the value of the dollar. In turn, that would boost US exports and discourage imports, thus reducing protectionist pressures and the chance of a bloc system occurring.
Also, he says, the US, like other countries, should take into account the impact of economic policy on the dollar and on international competitiveness. ``We should have international impact statements as part of policy deliberations,'' he holds. A Thursday column