The unprecedented international imbalances of the first half of the 1980s have fundamentally altered the structure of the world economy. The United States, the creator of the postwar economic system and home of the world’s key currency, has become the largest debtor nation ever known to mankind—and its red ink will continue to flow at least into the 1990s. Japan, widely viewed as a developing country only a generation ago, has become by far the largest creditor—and its massive buildup of foreign assets will continue expanding rapidly as far ahead as one can predict. The actions taken to date to correct these imbalances have gone only about half the distance needed, so there is now no prospect for their early elimination—and very little for steps to cope with the structural transformation they will bring. The forces set in train by these historic changes will dominate the course of global economic events for the next five to ten years, and may go far to influence world politics as well.
The trade deficit of the United States reached about $150 billion in 1986. By the end of this decade the net indebtedness of the United States will substantially exceed half a trillion dollars and the country will be paying tens of billions of dollars to foreign investors in servicing costs. America’s oil imports may again rise sharply, certainly in terms of volume and perhaps price as well. To restore balance the United States therefore must improve the rest of its yearly current-account balance by approximately $200 billion. The vast bulk of this improvement will have to come in trade in manufactured products, the very sector decimated by the overvalued dollar in the first half of the 1980s.
The trade surplus of Japan is running close to $100 billion a year. By the early 1990s, Japan will be a net creditor of at least half a trillion dollars—mirroring to an astonishing degree the American red ink. Japan’s annual investment earnings will
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