by Joseph Joyce
The U.S. Position in the World Economy
The election of 2016 in the U.S. saw the popularity of campaigning against international trade, foreign investments and immigration. Under the Trump administration the U.S. has implemented policies that mark a retreat from the globalization that was engineered during the 1990s and 2000s. What role has the U.S. played in the integration of global markets, and what happens if we withdraw?
Anthony Elson’s new book, The United States in the World Economy: Making Sense of Globalization, provides a thorough description and analysis of the position of the U.S. in the world economy. Elson, a former IMF staff member, shows that the U.S. retains a predominant position in international economic transactions. But the foreign sector is not as important for our domestic economy as it is for many other countries, and as a result its contributions to the domestic economy are often overlooked.
In international trade, for example, the U.S. share of global merchandise exports and imports lags China’s very narrowly, 11.46% versus 11.86% in 2015. But trade openness (the sum of exports and imports as a share of GDP) in the U.S. was 28%, lower than China’s openness of 40% and significantly less than Germany’s 86%. This disparity may explain the lack of attention paid to exports, while imports are seen as a threat. (One exception has been the agricultural sector, where China’s cutback of its purchases of U.S. soybeans and other products has forced the Trump administration to make payments to farmers).
Trump has cut back existing institutional arrangements, exiting the Trans-Pacific Partnership (TPP) and renegotiating the North American Free Trade Agreement (NAFTA). (However, its successor, the United States, Mexico and Canada Agreement (USMCA), does not substantively change the basic provisions of the earlier pact.) The administration actively uses tariffs as a tool of policy, often with little justification, and these inflict damage on the global economy. The U.S. agreement with China halts the scheduled escalation in trade measures but leaves in place tariffs that disrupt the domestic economy, leaving great uncertainty about the timing of the next stage. Training programs that could facilitate the movement of workers across sectors, on the other hand, have been underutilized.
Elson also documents the dominance of the U.S. dollar in international finance. The dollar is the most widely traded currency in foreign exchange markets. Currencies linked to the dollar represent about 60% of world GDP, which is much larger than the euro’s usage. About two-thirds of foreign central bank reserves are denominated in dollars; similarly, about 60% of global corporate debt is denominated in dollars. U.S. Treasury debt is the world’s safe asset, which allows the U.S. to fund its fiscal deficits more cheaply. But global finance only becomes relevant for many Americans in the event of foreign travel or study.
The one form of capital inflows that has attracted the attention of the current administration is foreign direct investment. The Committee on Foreign Investment in the United States (CFIUS) is a governmental interagency committee that reviews investments in the U.S. that may have national security implications. CFIUS has become particularly interested in Chinese acquisitions of U.S. firms that may allow access to U.S.-developed technology, and has broadened its scope to include property acquisition. There is also some discussion on tightening the access of Chinese firms to U.S. financial markets.
Immigration, on the other hand, is an issue that arouses great public interest, and in many quarters, opposition. Elson reports that the U.S. has the largest number of immigrants—44 million—than any other country, and this group represents about one-fifth of the global immigrant population. But the migrants’ share of the total U.S. population of about 14% is less than that of many other nations. Canada’s migrants, for example, represent about 22% of its population, while Australia’s migrant share is 28%.
The consensus among economists who have studied the impact of immigrants on the U.S. economy is that migrant labor is a complement rather than a substitute for native workers. Any negative impact on domestic wages falls mainly on prior immigrants. While local communities bear the cost of increased services such as education, there are fiscal benefits at the federal level that come from taxes on migrant labor. Elson points out that in addition to the “immigration surplus” that accrues to the complementary workers and the firms that hire them, there are also long-run benefits arising from the positive impact of migrants’ entrepreneurship and innovations on economic activity.
But opposition to migration is a bedrock issue for the administration. Not only does it seek to curb illegal immigration through a border wall, but members of the administration want to revamp many of the provisions that govern legal migration. For example, family-related immigration may be reduced in favor of “merit-based immigration,“ which is related to education. There is also opposition to the “diversity lottery,” which in recent years has allowed African migrants to enter the country. All these measures are under consideration as the native-born working population ages and there is a need for new workers.
The U.S., therefore, remains a major power in the global economy, but this position is often not understood at home. The benefits are often hidden, while the costs (sometimes fabricated) are widely publicized. Politicians find taking xenophobic positions, particularly on immigration, an easy way to court electoral support.
It is inevitable that the relative position of the U.S. in the global economy will continue to erode as that of other economies, particularly China’s, rise. But historian Adam Tooze of Columbia University writes that the two pillars of American power, global and military, remain in place. The primary threat to this hegemonic position, therefore, comes not from abroad but from shifts in long-established norms and policies. The international order abhors a vacuum, and an American retreat will be met by active counter-moves.