The United States as a Debtor Nation
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William R. Cline
09/19/2005
Download the data from all tables and figures in the book. (excel, 1MB)
In the absence of US fiscal adjustment and a further correction of the dollar, the current account deficit is headed to $1.2 trillion by 2010 (7½ percent of GDP) and net US foreign liabilities to about $8 trillion (50 percent of GDP). According to CGD/IIE Senior Fellow William R. Cline, the rising trade deficit and associated borrowing from abroad are now financing a decline in personal saving and rise in the government deficit. This imbalance will increasingly put the US economy-- and hence the world economy and especially developing countries-- at risk.
Cline argues that the longer the adjustment is delayed, the greater will be the future cutback imposed on US households' living standards, and the more damage could be done to the global economy from a wrenching adjustment involving high interest rates and US recession, and perhaps a major outbreak of trade protectionism. For the poorest among the developing countries, especially in Africa, a wrenching global adjustment could more than offset the gains from recent debt relief and pledges for more aid.
The author's recommendations would require significant political will. The dollar needs to decline by as much as another 20 percent, and the fiscal deficit needs to be eliminated, to bring the current account deficit down to a sustainable 3 percent of GDP-- which would keep net foreign debt from rising beyond 50 percent of GDP. Asian currencies that have not yet appreciated significantly against the dollar, especially the Chinese renminbi, will need to rise sharply, and central banks should stop intervening to prevent this rise, Cline argues. An "Asian Plaza Agreement" may be needed to coordinate these currency adjustments, he says.
The United States already has swung from the world's largest creditor to debtor nation, from net foreign assets of %2011 percent of GDP in 1970-75 to -22 percent by 2004. A surprising number of other industrial countries have also followed such a trajectory, including the United Kingdom and the Netherlands, and industrial countries with falling net assets have tended to have higher growth. If the United States delays external adjustment until it is forced, the result is likely to be recession and high interest rates, which would damage developing country exports and boost interest payments on their external debt.
Cline notes that, whereas the euro has completed most of the "optimal" appreciation above the 2002 base, Japan has carried out far less and several key Asian economies have completed almost none of the desired exchange rate realignment (including especially China but also Hong Kong, Taiwan, Malaysia, Singapore, and others). He also suggests, however, that an Asian Plaza Agreement to coordinate exchange rate realignments in that region may be necessary given the reluctance of any country in isolation to appreciate sharply and lose competitiveness. Such a coordinated realignment could appropriately accompany a large one-step revaluation of the Chinese renminbi.
Finally, Cline suggests that if market-based and voluntary policy adjustments fail to achieve the needed exchange rate realignments, the United States may find it necessary to pursue countervailing duties against countries refusing to permit their currencies to appreciate, within the framework of WTO provisions that exchange rate practices should not "frustrate" GATT commitments, and supported by IMF principles that countries not "manipulate" exchange rates. In a recent National Journal article, Clive Crook calls the book "the most thorough and up-to-date look at the issue."
Buy the book and download a chapter
The book was launched on September 19, 2005, at a luncheon hosted by CGD President Nancy Birdsall and C. Fred Bergsten, the director of the Institute for International Economics. About 100 economists, policy makers and journalists attended the event. For press inquiries, contact Tony Kopetchny.
William Cline, CGD President Nancy Birdsall and Director of IIE C. Fred Bergsten at the book launch reception.