America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
Three global transformations are well under way as we enter the 1990s. First, the reforms in the Soviet Union and Eastern Europe, if successful, will end the Cold War and most East-West confrontation, and will allow substantial reductions in military arsenals. Second, the salience of security issues will decline sharply; economics will move much closer to the top of the global agenda. The international position of individual countries will derive increasingly from their economic prowess rather than their military capability. The relative power of the United States-and, even more, of the Soviet Union-will fall; Europe's-and, even more, Japan's-will rise. Third, the world economy will complete its evolution from the American-dominated regime of the first postwar generation to a state of U.S.-European-Japanese "tripolarity." An economically united Europe will be the world's largest market and largest trader. Japan is already the world's largest creditor and the leader in many key technologies. Its GNP will exceed three-quarters of America's by the year 2000 at the growth and exchange rates that now seem likely.
International relations will look very different by 2000 as a result of these transformations. The hierarchy of nations will shift considerably. The Big Three of economics will supplant the Big Two of nuclear competition as the powers that will shape much of the 21st century.
The United States is the only superpower in both military and economic terms. It alone will remain in the top rank as the nature of world affairs changes. Indeed America may soon be the only military superpower. Such status, however, will be of decreased utility as global military tensions are substantially reduced and international competition becomes largely economic.
Moreover the United States is in relative economic decline, caught in a scissors movement between increasing dependence on external economic forces and a shrinking capacity to influence those forces. The share of international trade in the American economy has tripled over the last four decades, and is about as great as in the economies of Japan or of the European Community as a group. The United States has become the world's largest debtor country and will continue to rely on capital inflows of over $100 billion per year to finance its external deficits for the foreseeable future.
By contrast the American share of world output has been halved during the postwar period. America's share of world trade is less than the EC's, and its exports are not much greater than West Germany's alone. The global role of the dollar has fallen steadily as the Deutsche mark and the yen become more widely used in international finance.
In the short to medium term, America's international economic position is likely to decline further. Economic growth is now much more rapid in Asia and Europe, and seems likely to continue there at four percent a year or so through most of the next decade, compared to an annual growth rate of between two and two-and-a-half percent in the United States. Productivity increases in Japan and many other Asian countries are considerably higher than in America. Europe is buoyed both by the onset of economic unification in the West (almost certain to go beyond "completion of the internal market" to an Economic and Monetary Union, or EMU) and by economic revival in Eastern Europe. By 2000, the Big Three economies will be more alike than different on most key counts: levels of GNP and external trade, and degree of dependence on international trade and financial flows.
A central question for the world of the 1990s and beyond is whether the new international framework will produce conflict over economic issues or a healthy combination of competition and cooperation. History suggests that there is considerable risk of conflict, which may even spill over from the economic sphere to create or intensify political rivalries. Such a pattern contributed to the breakdown of global order prior to 1914 and again in the interwar period. Now is the time to create a global framework to avoid such tensions in the future.
The world must adjust to this fundamental shift in economic relationships among its major countries as security arrangements change. Ironically, the end of the Cold War could sharply heighten the prospect of a trade war. Throughout the postwar period, the overriding security imperative blunted trans-Atlantic and trans-Pacific economic disputes. The United States and its allies, particularly West Germany, frequently made economic concessions to avoid jeopardizing their global security structures. Cold War politics in fact sheltered the economic recoveries of Europe and Japan, and America's support for them. The United States seldom employed its security leverage directly in pursuit of its economic goals; indeed, security and economic issues remained largely compartmentalized in all of the industrial democracies.
Removal of the "security blanket" could erode this separation. Indeed the United States and others could be tempted to use security issues to seek economic advantage. Such a policy would make it considerably harder to maintain cooperation in both the economic and security dimensions. At the same time, since East-West confrontation has provided the rationale for much of America's international engagement throughout the postwar period, ending the Cold War may suggest to some Americans that the country should largely withdraw from such engagement, including in the economic domain.
In short there is an intimate interaction between the basic international political and economic transformations: removal of the security blanket increases the risk of economic conflict, which could erode security ties. The ultimate paradox of the twentieth century would be a realization of the Marxist prophecy of an inevitable clash among the capitalist nations just as the political conflict spurred by Marxist ideology is waning. The "end of history" might not be so dull after all.
This risk of economic conflict is already acute. Japanese politician Shintaro Ishihara has predicted that "the 21st century will be a century of economic warfare." Such conflict is most likely to surface between the United States and Japan.
Japan's position is clearly changing. Its global current-account surplus fell from $87 billion in 1987 to $57 billion in 1989, a figure representing less than two percent of its GNP. The growth of Japan's imports from the United States during the same period was six times greater than the growth of its exports to the United States. Manufactured goods now comprise more than half of total Japanese imports. Japan has displayed a willingness to continue financing a large portion of America's deficits, even when the dollar was falling steadily during 1985-87, and to contribute substantially to global funding needs elsewhere (Third World debtors, foreign aid recipients, even Eastern Europe). The image of an omnipotent "Japan, Inc." was eroded considerably in early 1990 by the sharp decline of Tokyo's stock market and the yen, and the apparent inability of the Japanese authorities to stop it.
Yet American frustration with Japan remains high. Japan's bilateral trade surplus with the United States remains large, and may soon start rising again because of the weakening of the yen over the past two years and slower Japanese growth. There remains much exasperation over the Japanese market's seeming impenetrability to many imports and most foreign direct investment. A major concern is Japan's concentrated pursuit of superiority in a wide range of strategic high-technology industries, including many in which the United States retains a substantial competitive advantage.
The debate has taken an ominous new direction in both countries. In America, many who consider themselves internationalists-including many mainstream economists-have come to agree that Japan is "different" and should be treated differently. The latest negotiating effort between the two countries, the Structural Impediments Initiative, addressed some of these differences, but it is unlikely to produce rapid results. If it does not, this will strengthen the view that a new strategy is required.
Attitudes are changing in Japan as well. Dismay bordering on disdain is coming to dominate Japanese reactions to America's continued failure to correct its budget and trade deficits, raise the national savings level, improve the education system and boost competitiveness at the company level. At the same time, the fragility of Japan's political system and a redirection of its policies to improve domestic living standards provide powerful pressures for turning inward. Hence Japan may not accept another round of "bashing" from America.
With respect to Europe, fears are widespread that a truly united continent will see itself as so self-sufficient, and be so preoccupied by regional developments, that it will have little interest in promoting global economic cooperation. Indeed the European Commission's own study of the unification of the European market predicts that imports from outside the community will decline in almost every sector as a result of the removal of remaining trade barriers.1 Blueprints for EMU suggested by the European Commission and by Bundesbank President Karl Otto Pöhl refer to the outside world in only the most cursory fashion.2 These concerns are heightened by the prospect of a broadening of Europe's economic union to embrace Eastern Europe, which will undoubtedly seek extensive preferential access to the West European market and thus further inhibit liberalization of the EC's global policy.
One motive for European unity is restoration of global leadership for the continent, to reclaim the limelight enjoyed by virtually all of its member countries during earlier periods of history. In a world dominated by economic issues, the quest for economic leadership could be a major driving force.
This drive could be healthy if, supported (or led) by convergent policies in the United States and Japan, it could propel Europe toward a cooperative leadership position in the global economic structure. But Europe could also swing in a confrontational direction, as it has with its current policies on agriculture and aircraft. The West German model of close ties between banks and industries, sometimes with government support, is an approach that could arouse foreign ire. France's historical mercantilism is clearly still alive, as demonstrated by its repeated efforts to hold Japanese competition at bay. The involvement of East European countries could add to dirigiste thinking in the EC. If market-oriented Great Britain were to opt out of the EC during this critical transition period, the risk of confrontation would be enhanced.
Finally, America's confidence in its international economic position has been shaken. Trade "hawks" have argued, with some success, that the reduction in the security imperative now opens the way for unilateral actions to promote U.S. trade interests. And it is true that the United States can now afford to be less solicitous of its allies-American leverage is enhanced, to an extent, by the declining need to place overriding priority on political cohesion and thus to mute its economic demands.
U.S.-Japanese economic tension has already intensified, and U.S.-European economic confrontation could erupt as well. Any significant downturn of the U.S. economy could trigger an outbreak of protectionism. Renewed growth in the external deficit could discredit the strategy, crafted in 1985-87 by then Secretary of the Treasury James Baker and the other finance ministers of the Group of Seven leading industrial nations, to respond to trade pressures primarily through currency changes and macroeconomic policy cooperation-particularly since such cooperation has already virtually disappeared. A new financial crisis or failure of the several ongoing trade negotiations, bilateral and multilateral, would intensify the tendency to "blame the foreigners."
How might such economic conflict evolve in the 1990s and beyond in a world dominated by nonmilitary concerns and three great economic powers? One possibility is the emergence of blocs, each centered on one of the Big Three. There are widespread perceptions that the world is already headed in this direction. An economic bloc already exists in Europe and will clearly broaden (to include more countries) and deepen (to encompass more functions) over the coming decade.
At the moment, however, the development of blocs in Asia or the Americas seems unlikely. Asian trade is split in three directions: within the region, with the western hemisphere, and with Europe and the Middle East. Most Asian countries thus focus primarily on expanding multilateralism and their global relationships. Annual income disparities within the region are huge, ranging from over $20,000 per capita in Japan, through South Korea and Taiwan at about one-fourth that level, to Southeast Asia at much less and China at a few hundred dollars; hence meaningful economic integration is virtually impossible. Politically, no country in the region wants to enter a bloc led by Japan unless all other avenues are effectively closed.
Similar considerations pervade the Americas-except perhaps for Canada and Mexico, because they depend so heavily on trade with the United States. The rest of Latin America has diversified trade, a far different standard of living and a historical antipathy to entangling ties with the "Colossus of the North." Moreover, nearly every country in the hemisphere is a debtor and needs financial help from the rest of the world. Closer consultative arrangements among the Americas might be desirable, but an economically significant bloc is no more likely than in Asia, barring a substantial breakdown at the global level.
However, to head off eventual self-fulfillment of the prophecies that trading blocs will develop, it will be essential to reinvigorate global economic cooperation and its institutions. This is one key reason, encompassing both economics and politics, to place a high priority on achieving such cooperation. Another reason is to provide time for Europe to achieve its ultimate aspiration of political union, which would render concerns over that "bloc" as obsolete as concerns about preferential treatment within the United States of America.
The second question affecting potential economic conflict is how each of the Big Three would relate to the others. At present the economic powers frequently find themselves aligned with different partners on different issues: America and Europe seek to open Japan's markets for manufactured goods; America and Japan push Europe to avoid any new discrimination against outsiders; Europe and Japan criticize the United States on its budget deficit and trade unilateralism. Shifting coalitions generally provide a healthy basis for systemic stability, if they occur within a framework of agreed international rules and institutional arrangements.
Historian Robert Gilpin notes, however, that "almost all [students of international relations] agree that a tripolar system is the most unstable configuration."3 History and game theory both suggest a strong tendency for each of the parties in such an arrangement to fear that the other two will line up against it permanently, leading each to adopt excessive policies. Given the inevitable self-perception of vulnerability on the part of each of the three parties, two will, in fact, tend to ally against the third under conditions of rough tripolar equality-possibly to create their own "bi-gemonic" dominance.
In the United States, there is a widespread view that conflict among the Big Three would evolve into an alliance between America and Europe against Japan. Japan would be viewed as an outlier on both trade and investment issues, and thus a target for the other industrial, and perhaps many developing, countries. Racial overtones would be widely perceived even if unintended.
A second possibility is that the United States and Japan would band together against a united Europe. If Europe is the only true bloc, and thereby becomes the world's largest and most powerful economic entity, the other global actors may need to coalesce against it for traditional balance-of-power reasons. Such an outcome would be much more likely if Europe were to turn inward and to discriminate overtly against outsiders.
Americans need to be aware, however, of a very plausible third possibility: a European-Japanese nexus. These regions are likely to enjoy higher growth rates than America during the coming critical transitional period-perhaps by a substantial margin. Their economic policies, especially toward international issues, have tended to be more stable and predictable. They will thus offer attractive markets and business partners for interpenetration, via both trade and investment, as reflected in the recent linkup between Mitsubishi and Daimler-Benz to conduct joint aerospace research and possibly cooperate in automobile production.
Perhaps most important, doubt about America's future dynamism is widespread in Europe and Japan (and other parts of Asia). Europeans and Japanese may come to feel that the United States will reform its domestic policies only if they join together to provide external pressure to do so. Any major protectionist steps by the United States would feed these doubts and drive the two together. Helmut Schmidt and Valéry Giscard d'Estaing created the European Monetary System in the late 1970s partly as a buffer against economic instability emanating from America. Similar linkups between Asia and Europe are clearly possible in the 1990s and beyond.
The emergence of any of these possibilities as permanent configurations would be extremely destabilizing for global politics as well as economic affairs. The region targeted by such an "alliance" would almost certainly turn inward as the external pressures strengthened domestic forces already seeking such a course: protectionists in America, regionalists in Europe, traditionalists in Japan. The target area would probably seek to form (or expand) its bloc of nearby supporters, and the other areas would retaliate in kind. All economies would suffer, and there would be a genuine risk of trade warfare.
There is good news, however. The Big Three enter the new era as political allies with strong security ties and democratic governments. Their cooperation over the past four decades, while uneven, has largely avoided major crises and has proven superior to all historical antecedents. The extensive interpenetration of companies and financial markets throughout the three regions militates against a breakdown of cooperation. Thus there is hope that a new era of interaction between economics and security could be very different from the pre-1914 and interwar periods, when the struggle for world economic leadership coincided with political hostility.
The bad news is that the world economy has enjoyed prolonged periods of stable prosperity only when under the hegemonic leadership of a single country-the United Kingdom in the latter part of the nineteenth century and the United States in the first postwar generation.4 It has never experienced successful "management by committee."
But there will be no new hegemon to supplant the United States. Neither Japan nor even a fully united Europe could achieve anything like the global dominance, even in the economic sphere alone, that is needed to support such a role. Hence effective international economic cooperation will depend on the achievement of joint leadership by the Big Three economic superpowers, just as nuclear deterrence was maintained by the Big Two military superpowers. There is simply no alternative.
The postwar economic powers have proved exceedingly adept at responding to crises with sufficient skill to avoid lasting economic effects. But there have been a number of close calls: American leadership nearly faltered in responding to the Mexican debt crisis in 1982, enormous protectionist momentum was permitted to build in the United States before dollar adjustment and credible trade policies were launched in 1985, and extensive financial disruption resulted from the plunge of the dollar in 1987. Moreover the movements of globalized financial markets could now overwhelm the efforts of individual governments, or even several countries acting in concert. New sources of conflict among nations could well result from contemporary changes in global politics and economic capabilities.
The system no longer provides strong defenses against such threats. As a result, currency misalignments and instability have become endemic; large trade imbalances persist; protectionism and neomercantilism have intensified; Third World debt remains unresolved; policy cooperation is ad hoc and fragile.
To restore effective systemic defenses, America, Japan and a uniting Europe must join to provide collective leadership. The Big Three need to start acting as an informal steering committee for the world economy-reinvigorating the existing institutional structures, creating new ones and initiating concrete steps to utilize them consistently.
Such leadership must rest on firm internal foundations in each area. The United States has to make the difficult adjustment from hegemon to partner. It can do so only by restoring its international competitive economic position and, at a minimum, halting a further buildup of foreign debt. These changes would be even more essential for the United States if cooperative global management should turn out to be unattainable. In that case it would become necessary to defend the country's interests aggressively in a world economy characterized by widespread confrontation and even hostility.
The United States will have to increase its government spending in some areas directly related to the country's international competitiveness. Examples include expenditures on education, research and development, export finance and direct help for key industries. It is eminently logical to use part of the "peace dividend" that may result from lessened defense outlays to finance these expenditures, since they will be aimed at achieving many of the same national goals-preserving America's world role and national security-as the military programs that will be cut.
Elimination of the overall budget deficit, however, remains crucial for foreign policy as well as economic reasons. The budget deficit is the chief cause of the trade deficit, which in turn requires the United States to borrow huge sums abroad and thus adds greatly to its external dependence and its insecurity. In addition, as long as the United States drains resources from the rest of the world, it cannot be a net financial contributor to other countries. Indeed the United States competes with others for scarce world savings. Hence America's greatest contribution to recovery in Eastern Europe or the Third World would be correction of its own fiscal position.
President Bush got it backward in his inaugural address when he asserted that "the United States has the will but not the wallet." The reality is that this country has plenty of wallet but a deficiency of will. The United States is both the richest nation in the world and the least taxed. If the peace dividend and other expenditure cuts do not finance the needs of the coming years, revenue increases will be essential.
Changes of this nature call for fundamental alterations in American attitudes. The traditional mind-set in this country, derived from nearly a century of global dominance and a virtually self-sufficient continental economy, has been to adopt whatever public policies and corporate strategies fit the domestic environment. The rest of the world was largely ignored in the formation of policy.
There are a number of stunning recent examples of this abiding phenomenon. The Tax Reform Act of 1986 ignored the international position of the United States and probably made it harder for American firms to compete abroad. Budget policy, as just noted, remains the underlying cause of the huge buildup of foreign debt. Foreign exchange intervention policy ignored the decimation of much of American industry and agriculture caused by the soaring dollar in the first half of the 1980s. The Export-Import Bank, America's only effective governmental tool for promoting overseas sales, ran out of money in 1988 when such sales were finally booming.
Americans will have to start viewing themselves as part of an integrated global economy, and pushing their government and firms to behave accordingly, if they are to prosper and remain world leaders into the 21st century.5
Japan faces the opposite problem. As in the United States, a small minority recognizes the basic change in the country's international position and seeks new policies. (Such arguments inspired the Maekawa Commission reports, for example.) For Japan, this requires adopting the mind-set of a huge creditor country that is confident of its ability to compete throughout the world. It means dropping Japan's perception of itself as a vulnerable island nation that must "export or die" and protect its own market and firms against "powerful outsiders." Indeed, participation as an equal partner in effective tripolar management of the world economy could provide a new rationale for Japanese foreign policy and might have considerable appeal to Japan, as it would play to the country's obvious comparative advantage.
Japan has already begun to change impressively. But much more is needed quickly: further increases in imports of both manufactured (including high-technology) products and agricultural goods, a conspicuous expansion in the presence of foreign investors, eschewal of infant industry protection and industrial policies, additional reductions in its trade surpluses with the rest of the world and especially with the United States. Japan has repeatedly demonstrated an enormous aptitude for reform, as in its responses to the two oil shocks and the doubling of the yen in 1985-87. It can clearly do so again if convinced that such change is a national imperative, although the historical record suggests that continued outside pressure will be needed to galvanize such a strategy.
Europe faces a distinctly different problem: maintaining an outward, global orientation and beginning to operate as a unit in the world arena while completing the enormously complicated task of forging a truly unified regional economy. The key is probably the extent and speed of unification itself. Smooth completion of the process by the mid-1990s, for example, should generate enormous self-confidence in Europe and an appetite for moving simultaneously on global reforms. By contrast, internal divisions and failures could sap both the capacity and will to look outward.
Fortunately German unification seems likely to speed the process. It will intensify the desire of France, most of the other countries, and Germany itself to achieve Thomas Mann's call for "Europeanization of Germany instead of Germanization of Europe" through full economic integration of the continent. The inevitable engagement of the East Europeans may create a two-speed Europe for a while, but the previous EC membership of several less industrialized countries was already pushing in that direction.
The substantive key is EMU, which now seems likely by mid-decade. The continental countries outside Germany have made a fundamental decision to link their currencies to the Deutsche mark, and need EMU to provide political legitimacy for a European zone of monetary stability. Germany has lost the ability to modify its exchange rate vis-à-vis the rest of Europe, since the other countries follow virtually all of its currency and monetary moves, and so sees a compelling need to complete the transition to a full monetary union that will produce a "Germanization of European money rather than a Europeanization of German money." The unification of Europe for trade policy purposes made possible the liberalizing leaps of the Kennedy and Tokyo rounds of the General Agreement on Tariffs and Trade (GATT); EMU should make possible similar leaps in global monetary affairs.
Some observers, including Europeans who want an outward-oriented continent, argue that new global economic initiatives are premature until Europe has completed its regional structure. But the EC seems able to negotiate the Uruguay Round in the GATT while continuing to complete its internal market. It is imperative that EMU be made compatible with stable global monetary arrangements-and thus there is a strong case for devising them in parallel. It would in fact be dangerous to wait until Europe is fully organized to work out the needed international reforms, both because the delay itself could produce serious conflict and because some of the most desirable avenues for global progress could be foreclosed.
If the Europeans were unwilling to negotiate on this timetable or if a unified Europe resisted joining the global initiatives suggested here, perhaps to seek economic hegemony on its own, the United States and Japan might have to proceed bilaterally for a time. America and Japan already took such a step in creating the initial currency "reference ranges" with the Baker-Miyazawa agreement of October 1986, which was subsequently generalized at the Louvre Accord in February 1987. The U.S.-Japanese Structural Impediments Initiative probably heralds similar talks at the global level, as already suggested in several communiqués of the Group of Seven.
But an American-Japanese Group of Two would be decidedly inferior to a Group of Three that included Europe. It could create negative reactions in Europe and feed perceptions that a U.S.-Japanese bloc was being formed. On the other hand, as with monetary arrangements in 1986-87, U.S.-Japanese bilateralism could be a useful tool to increase the proclivity of the Europeans to cooperate, by indicating that the other economic superpowers would be willing and able to proceed without them.
The overall result of these internal changes would be a considerably different Big Three: a newly competitive America, a newly internationalized Japan, and an economically integrated Europe.
Absent such internal developments, each area will lack the internal self-confidence or the international respect needed to play its part in global leadership. But achievement of these crucial changes in each of the Big Three can be promoted, perhaps decisively, by the adoption of new international policy commitments and specific steps to implement them.
First, political leaders of the Big Three need to recognize publicly the dramatic changes in the global environment and declare their intention to construct and maintain a stable international economic order based on shared leadership and mutual responsibility. Such a commitment should be enunciated at the Houston summit this July, the first of the 1990s, to set the essential political framework and begin to define the needed initiatives.
Such a commitment would obviously be credible only if it encompassed effective follow-through steps to translate principle into practice. Money and trade would be the most essential components of such a package. The Big Three should start the process by launching the construction of a new international monetary regime to replace the Bretton Woods system that collapsed in 1971-73. No system worthy of the name has existed since that time, with enormous costs for the world economy. But stable and effective monetary arrangements are as crucial to the world economy as national monetary stability is key to each individual country.
The preferred course is to build in evolutionary fashion on the "reference ranges," the "economic indicators" to guide policy cooperation that were agreed upon at the Tokyo summit in 1986, and the European Monetary System itself. The key countries would set zones for their currencies that, given reasonable consistency of domestic policies, would avoid large current account imbalances (and thus limit both financial risks and protectionist pressures). The zones would be shifted in response to differences in national inflation rates and to major changes in the world economic environment, such as large jumps in oil prices, but the countries would otherwise pledge to adopt new policies as needed to preserve them. Over time, the zones could be narrowed if experience with the system suggested the feasibility of doing so, perhaps leading ultimately to a regime similar to Bretton Woods or the EMS.
The details would of course take time to develop. In any event, global negotiation should proceed in parallel with the European regional effort. Moreover the new regime should be implemented only when actions have been taken that promise correction of today's continuing trade imbalances.
On trade, the immediate key is a successful completion of the Uruguay Round that would convincingly resume market liberalization and refurbish the credibility of the GATT. Realization of the Uruguay Round's full agenda would move significantly in these directions by expanding international disciplines on agriculture and safeguard measures, broadening the rules to encompass services and intellectual property rights, reintegrating textile trade into the GATT, and improving the process for settling disputes. A strong push from the Houston summit will be essential to achieve these results, just as the summits of the late 1970s were decisive in galvanizing a successful conclusion to the Tokyo Round.
Much more is needed, however, to make the needed leap in the effectiveness of global trade arrangements. The Big Three should thus push for the implementation of four sweeping new reforms by 2000: (1) elimination of all tariffs on all industrial trade; (2) a complete ban on all quantitative trade barriers including "voluntary export restraint agreements"; (3) a sharp expansion in the independence and mandate given the GATT to police the system; and (4) creation of an instrument similar to the GATT for investment issues to provide a stable framework for international corporate activities (and help resist protectionist pressures in this area, notably in the United States).6 An even bolder approach would be agreement to finally establish the "International Trade Organization," to cover all these issues and many more, that was originally intended to be the comprehensive "third leg" of the postwar economic system (along with the International Monetary Fund and World Bank).
These proposals should be taken up promptly after the conclusion of the Uruguay Round. The so-called bicycle theory posits that trade policy either moves steadily toward liberalization or topples in the face of protectionist pressures. Launching a new negotiation toward such major steps would keep the "bicycle" moving forward without delay, avoiding the post-negotiation malaise that permitted substantial protectionist pressures to flourish after the conclusion of both the Kennedy and Tokyo rounds. It would also help ensure the outward orientation of the EC by maintaining its engagement in multilateral trade bargaining through to the culmination of its new regional compact.
Initiatives by the Big Three to reform and dramatically improve the international monetary and trade regimes along these lines, as well as to make substantial changes in their internal economic structures, would clearly mark the beginning of a new era of collective leadership of the world economy. It would indicate that each area was fully aware of the new global environment, in both political and economic terms. It would show that each could adopt a new mind-set: for America, a willingness to share power with others; for Japan, an acceptance of international responsibility; for Europe, a willingness to act jointly on global economic and monetary, as well as trade, policy.
Thus the Big Three could assert control of issues that will inexorably emerge as central to world events if the Cold War does in fact dissipate. They would preempt the risk that removal of the security blanket and economic rivalry itself would generate severe international conflict. They would create an orderly framework for managing some of the elements that will dominate relations among them in the years ahead.
The continuing erosion of the present economic regime, and the failures of recent cooperative efforts, do not bode particularly well for the ambitious reforms proposed here. However, the history of international economic management is replete with cycles of backsliding that eventually grew so serious that the political leadership of key countries was forced to undertake large-scale initiatives to get back on track.
For America, there are important strategic reasons to launch new initiatives. The United States still retains enormous economic power. It is enjoying an extended period of growth, job creation and deregulation that is widely admired-and financed-by the rest of the world. America's security preeminence will remain vital through the East-West transition period, especially in Asia (including Japan), where the security situation has not changed nearly as much as in Europe. The United States has much closer relations with both Europe and Japan than either has with the other, enhancing its ability to shape the evolution to a new world economic order.
The value of America's bargaining assets, however, is likely to fall further in the years ahead. It thus behooves the United States to move sooner rather than later to further construction of a new system that will promote global economic and political stability, as well as its own national interests. Initiatives to do so would indicate that the United States had both the intellectual capacity and the political will to try to shape the historical transformations now under way and is ready to assert continuing international leadership in the post-Cold War era.
2 See Report on Economic and Monetary Union in the European Community, prepared by the Committee for the Study of Economic and Monetary Union, Commission of the European Communities, April 12, 1989; also see "Basic Features of a European Monetary Order," a lecture presented by Karl Otto Pöhl, Paris, Jan. 16, 1990.
3 War and Change in World Politics, Cambridge: Cambridge University Press, 1981, p. 235.
4 See Charles P. Kindleberger, The World in Depression, 1929-1939, Berkeley: University of California Press, 1973.
5 A detailed strategy of "competitive interdependence" for the United States is presented in C. Fred Bergsten, America in the World Economy: A Strategy for the 1990s, Washington: Institute for International Economics, November 1988.
6 A Free Trade and Investment Area among OECD countries has been proposed by Gary Clyde Hufbauer in "Beyond GATT," Foreign Policy, Winter 1989-90. A similar GATT-wide structure would be far superior, however, because it would include at least the more advanced developing countries and strengthen (rather than cripple) the GATT as an institution.