The Curious Capitalist
G-20 Lesson: Why the U.S. Must Lead by Example
By Zachary Karabell Wednesday, Nov. 17, 2010
Rarely has a trip by an American President overseas gone quite as badly as Barack Obama’s swing through Asia. Yes, visits with Indian and Indonesian leaders were productive and the U.S. cemented its position as a vital element in East Asia’s balance of power. But these were not enough to offset the trip’s centerpiece, the conclave of the G-20 group of leading economies in Seoul, where U.S. dominance in global economic affairs was questioned, challenged and rejected.
The G-20 summit revealed that the world after the financial crisis will not be the same as it was before — one led by the U.S. Today, no one leads. Instead, we are in for years of shifting coalitions and alternate visions of the proper route to economic stability and prosperity. The U.S. will find that its ideas face formidable opposition. (See pictures of Obama’s Asia trip.)
Attitudes have shifted because the structure of the global economy is shifting. From the time of the Bretton Woods agreement in 1944 through to 2008, the U.S. was the world’s most dynamic economy, its most significant military force and a beacon of free-market ideology. Now, it retains its military predominance but on other fronts its model is being questioned. At the Seoul summit, President Obama proposed new guidelines for global economic governance, including targets for how much a country’s current accounts of trade and capital could go into surplus or deficit — on the grounds that excesses of one or the other lead to instability. The U.S. also called for a more coordinated global currency policy, with the unstated but clear target being China and its undervalued renminbi. All of those suggestions were rebuffed. It didn’t help that on the eve of the summit, the Federal Reserve unveiled a new round of monetary pump-priming to the tune of $600 billion — more of what is known in the business as quantitative easing. That led to Obama being lectured by leaders, from Brazil’s to Britain’s to China’s: The U.S., they said, could hardly call for currency reform elsewhere when it was itself potentially devaluing the dollar to help American jobs and exports.
Obama rejected those claims, saying that the goal of U.S. policy was to provide more liquidity to a sluggish domestic economy. But after decades of ignoring alternative perspectives, the U.S. has accumulated reservoirs of distrust. Who are you to tell us how to order our houses, others responded, when you can’t manage you own? Who are you to set limits on our economies? We have listened to your lectures for decades. No more. (See pictures of the recession of 1958.)
The rejection at Seoul would have been worse if the underlying American ideas had been good. But they weren’t. The call for limits to trade surpluses and a managed regime of currencies rehashed macroeconomic orthodoxies of the past, ones that have proved too brittle to deal with today’s world. The banking rules in effect pre-2008 hardly prevented the crisis, and the mantra of deregulation proved problematic. China’s modern success to date is a product of breaking with conventional wisdom; if China 20 years ago had embraced the prevailing economic wisdom — make your currency convertible, open your capital account and let global markets loose on your domestic economy — it would have looked like Russia instead of the juggernaut it has become. In that sense, the summit was a success: better to have no plan than a bad plan.
But something else happened as the world was rebuffing around the G-20 table: South Korea and the U.S. failed to conclude a free-trade pact that has been years in the making, mainly because of opposition from the U.S. auto industry, which argued that South Korea is allowed too much unfettered access to American markets and doesn’t permit enough access for U.S. carmakers. (Watch TIME’s video “Can the Lithium-Ion Battery Save the U.S. Auto Industry?”)
This failure is critical: the U.S. cannot plausibly stand as an apostle for the free flow of goods, capital and ideas if it cannot conclude a pact with one of its closest economic partners — and one of the world’s most dynamic economies. Moreover, to be blocked by an auto industry that has demonstrated its difficulty in adapting to global competition is even more disturbing: the industries of the 20th century are scuttling the commercial prospects of the new ones of the 21st.
No matter how much Obama says that he listens to others, the fact remains that Americans approach the world with an expectation that they will dictate the contours of international arrangements. That is no longer feasible. The U.S. cannot both reject the South Korea trade pact and then urge the world to follow its lead on global economic integration. Unless the U.S. addresses it own internal imbalances, the rest of the world will do what it is already doing: go it alone and implement solutions that don’t depend on U.S. approval.
As if to make the point, the G-20 was immediately followed by an Asia-Pacific Economic Cooperation summit in Yokohama that saw nations from Chile to New Zealand to Singapore start to weave together their own trade bloc. Small steps, but a potent symbol. The U.S. is by far the largest economy in the world. But unless it changes the way it interacts with others, it will find itself on the outside of a vibrant global economic system.