The dollar and the Dow have dived. Serious imbalances in the US economy are now evident. The current account deficit is nearing unfinanceable proportions. The US economy could only grow at an above-average, yet disinflationary, pace while the rest of the world remained stagnant. That’s no longer the case. Global growth is accelerating. So the dollar is no longer the currency of choice. And a weak dollar is synonymous with rising commodity prices and resurgent inflation. And it’s not just the US economy and financial markets that are becoming paralysed. I reckon 2000 will be a year of US foreign economic policy paralysis. At its heart lies the presidential campaign. The impact on international relations could be severe. Those with Russia are already becoming strained. A deal on Chinese World Trade Organization accession may be missed, undermining Zhu Rongji and China’s reformists. Trade tensions with the EU will escalate. And no action will be taken to support the dollar.
In the run-up to the US presidential election, foreign economic relations is the area in which the Republicans can differentiate themselves most clearly from what they regard as the “dovish” Democrats. Their basic premise is clear – the candidate who stands up for US interests (rather than America’s place in a stable and prosperous world) will be the one who gets the votes.
Indeed, there are signs that a tougher, more partisan approach to international economic policy is already having a serious impact. Initially, relations with Russia and China are where the fallout could be most significant. But those with the EU and Japan could become increasingly strained too.
The first controversial issue is Russia. This is vulnerable territory for Al Gore, who has been responsible for day-to-day US relations with Moscow over the past few years. And it’s largely on his recommendation that the West, via the IMF, continued to support the Kremlin.
The IMF first gave money to Russia in 1992. But disbursements were always justified on political, not economic grounds. The Kremlin promised reforms, but rarely implemented them. And yet the IMF always delivered.
Out of the blue, however, the IMF has decided to delay the latest tranche of Russian funding – clearly under duress from Congress. There is no justification for this on the grounds of capital flight, which is anything but a new issue.
Less capital is being lost from Russia than at any time in the past five years. Capital flight has fallen by two-thirds since its 1997 peak. During a year in which Russia is set to record its biggest current account surplus since the collapse of communism, non-repatriated export revenues could have soared. But they’ve collapsed – precisely because the authorities have tackled the problem head on. Indeed, the central bank has often introduced tougher legislation than the IMF considered appropriate.
But it suits the US Republicans to use the money-laundering issue to score off Gore. After all, if he’s squandering taxpayers’ money on Russia as VP, goodness knows what he’d do in the top job!
This hardening of attitudes comes at a critical time for Russia. The West should really be intensifying its support for reforms in Moscow. Against all expectations after the 1998 crisis, the economy is growing again, inflation is coming under control, the rouble is rising in real terms and the race for Duma and presidential elections is being led by centrists.
With a centrist administration in power, Russia would have a great opportunity to impose broad-ranging reforms. Above all, there’s a chance that the rule of law could finally take hold, driving a virtuous circle of burgeoning growth, prosperity and democracy.
China is another potential victim of the US Congress. Getting a deal on WTO-accession is critical for two reasons. First, successful entry ensures that China is fully engaged in the global trading system and will abide by its regulations. Second, it shores up Zhu Rongji, China’s pro-reform prime minister.
At face value, the Republicans would argue that they’ve simply moved the China-trade debate on, rather than focusing on their traditional hobby-horse of MFN-renewal. But if the West (for which, read the US) fails to reach an agreement on China’s entry soon, a great opportunity will have been lost. Zhu will be humiliated at home and ultimately lose influence in favour of the conservatives.
Trade friction between the US and the EU is also intensifying. Restrictions on US hormone-fed beef products and banana exports have prompted counter-sanctions. And all the time, there’s pressure on Europe to dismantle its Common Agricultural Policy.
This month’s talks in Seattle could easily descend into farce. Neither the EU nor the US seems prepared to give ground. The new European Commission will want to defend its territory vigorously, while the US Democrats have to show voters at home that they’re no “soft touch”.
David Roche is president of Independent Strategy, a research firm based in London. www.instrategy.com
