U.S. Stature Wanes : High Price of Change for a Dollar

Buried in the many chronicles of the recent stock market collapse is a humbling new theme about the United States’ role in the world: It is dependent upon foreign countries in ways that are novel and disturbing for a superpower.

These concerns--arising from persistent budget deficits and the nation’s habit of buying far more from other countries than it sells to them--are reflected in a weakening dollar that has become a disruptive force in financial relations throughout the world. They have reduced America’s stature from a nation that lends money to one that borrows it.

But the dollar’s fall may spark a change that is more than economic, one with historic implications. With the currency at its lowest point since World War II--an event that catapulted this country into world economic supremacy--many observers now question whether that preeminence is ending and the current difficulties signal a new era of waning U.S. political, social and economic influence throughout the world.

The sagging dollar reduces the real value of U.S. foreign aid for many countries. It forces up the cost of maintaining a far-flung military presence. And it sparks continuing concerns that foreign countries will back away from their U.S. investments, which this country now requires in order to stay solvent.

In addition, the need for a continual flow of foreign investment in Treasury securities makes the United States much more beholden to foreign confidence in its policies than before. When foreigners worry about protectionism in Congress, for example, the American public now pays for it in the form of higher interest rates.

Perception to Overcome

And when Administration officials attempt to convince other nations to adopt certain policies--to stimulate their own economies, for example--they must overcome the perception that the United States doesn’t have the right to make such recommendations, because its own economic house is so obviously in need of repair.

“The Reagan Administration is one of the final chapters in American influence abroad,” argues Harvard economist John Kenneth Galbraith. “No question. We’re going to see that in a dozen different ways.”

While many would consider that indictment too severe, the point is made somewhat differently by Robert Dunn Jr., an economics professor at George Washington University: “It’s a little hard for anyone to take us seriously at the moment--when we owe the rest of the world 400 billion bucks.”

There are, of course, profound differences between this country and the debt-ridden Third World clients of the International Monetary Fund. The United States remains wealthy and a magnet for investors throughout the world. Unlike other debtor nations, it has the privilege of repaying loans in its own currency, which remains enormously influential. It leads the world in the creation of jobs and still ranks as the strongest country on earth.

But at the same time other economies now compete with the United States for world leadership, and in some respects have eclipsed it. These developments have implications for future standards of living, defense obligations and how the nation is seen by its rivals and by its own citizens. Consider:

- Last year, West Germany led the world in exports, the first time the United States finished second in this category in the postwar era, according to the Commerce Department. Germany exported $243 billion worth of autos, machinery, chemicals and other products. The United States barely clung to second place, with $217 billion in exports, just ahead of hard-charging Japan at $211 billion.

- The nation also has lost ground as a financial power. In a survey of the world’s largest banks by the American Banker, a trade newspaper, no U.S. bank ranked in the top 10 in 1986. Only one--Citibank of New York--ranked in the top 25. Each of the seven largest banks in the world was Japanese.

- In 1985, the amount of private investment in the United States exceeded the amount of U.S. investment abroad. That hasn’t happened since 1914, according to the Commerce Department.

‘Art of Interdependence’

The consequences may be great for the style of U.S. behavior in the world. “I think what will be required of the new generation of American leaders will be skill in the arts of interdependence,” said John David Maguire, president of the Claremont Graduate School. Maguire, whose background is in theology, defines interdependence as “diplomacy, compromise, negotiation, trying to find common interests--in contrast to a situation where you impose your self-interest, narrowly defined.”

Since early 1985, U.S. officials have reasoned that the nation’s self-interest was in a cheaper dollar. The idea has been that it would make U.S. goods cost less than the foreign competition. And while there have been some encouraging signs that U.S. manufacturers might benefit from the trend, the lower-valued dollar is troublesome as well.

Few observers see much chance that the most dire consequence--massive abandonment of U.S. investment by foreigners--will occur. By plunging this nation into a steep recession, such a move would also harm Japan and other countries that rely on an affluent American public to buy their products.

But the consequences of the weak dollar and the big debts affect America’s relations with other countries in very real ways. Treasury Secretary James A. Baker III has tried without much success, for example, to convince the Germans and Japanese to promote economic growth, so they will buy more American goods.

“There’s this long-held view that the real problems are made in Washington, not Bonn or Tokyo,” said Robert M. Stern, an economist at the University of Michigan. “When he (Baker) and others try to put pressure on the Germans and the Japanese, they’re inclined not to listen.”

An episode last spring provides a telling example of the growing limits on U.S. economic influence--and how attempts to exercise power can sometimes backfire. The United States sought to punish Japan in March for unfairly “dumping” computer chips in this country at below fair market value. But it hit a dilemma: Fears of Japanese retaliation ran rampant through the world’s financial markets. The fear hit home--and U.S. home buyers--with astonishing force.

U.S. interest rates were forced upward, as investors debated the wisdom of buying U.S. Treasury bonds, and focused on fears about the dollar and other weaknesses in the economy. By late April, American home buyers were paying more than 11% for fixed-rate mortgages, compared to 9% before the sanctions.

There is little evidence that the Japanese actually mounted a boycott of U.S. securities, points out Colin Lawrence, a senior international economist with Drexel Burnham Lambert in New York. But what is remarkable is the extent to which perceptions of American vulnerability rebounded in a painful way.

More Susceptible

“It made the market more susceptible to bad news,” said Samuel D. Kahan, chief economist at Kleinwort Benson Government Securities Inc. in Chicago, who notes that interest rates jumped last spring immediately after a particularly discouraging trade deficit report and also after a worrisome report on inflation.

Indeed, the trade deficit, measured at about $156 billion last year and running at a similar clip for 1987, seems to hold particular sway over the markets, with a negative report arriving the week of the recent stock collapse, to cite one example. “We have been buying from Germany and Japan and selling them bits and pieces of IOUs,” added Lawrence. “That’s what this game is all about.”

Many say that the game is one in which debt-laden American consumers and their debt-laden government have been living beyond their means. There are no simple ways to pay it off. Because the debts are payable in dollars, the United States could mint a batch of extra money--an option unavailable to poorer debtor-nations--but this would spark inflation. A severe recession would reduce the trade deficit because Americans would buy fewer imports.

Outside of inflation and recession, however, the debts will be paid off in the form of more modest living standards, unless there are unexpected gains in productivity. “It means we’re going to have to consume a smaller share of what we produce,” maintains Lawrence B. Krause, a professor of international relations at UC San Diego. “You don’t get loans from abroad without having to pay them back.”

While the dollar’s plunge has raised doubts about whether foreigners might start to unload their investments in U.S. securities, some analysts note that Americans also can abandon their own currency. The increasingly linked financial markets have created a situation in which investors can speculate all over the world.

“I have lots of colleagues who are busy speculating against the dollar today--this very day,” said Robert Z. Lawrence, an economist at the Brookings Institution in Washington. “It’s not just the foreigners.” He added that “potentially, the entire U.S. money supply could be converted into foreign currencies--that’s how big the threat is.”

Before things ever got that bad, it’s likely that officials would come under public pressure to correct the situation. There is a certain point at which either one of two things could happen: Either the U.S. public demands a reduction of the deficits and is willing to make the necessary sacrifices, or when “the foreigners aren’t willing to put that much foreign exchange in here” because interest rates are too low, said Robert S. McNamara, a former World Bank president and defense secretary in the 1960s.

It all adds up to a novel situation for the proud superpower that for decades has served as the locomotive pulling other economies forward throughout the world. “We’ve never studied it,” said John R. Petrocik, professor of political science at UCLA. “It’s never been a problem before.”

Indeed, some find it ironic that the problem has gotten so severe during the tenure of a President known for proud, patriotic rhetoric. The situation contrasts sharply with the 1970s, when the public reacted bitterly to signs of America’s limitations, symbolized most painfully by the Iranian hostage crisis during the Carter Administration.

“It was a national embarrassment,” recalled Robert Dallek, UCLA history professor. “Everybody understood what it meant. It had visible, measurable consequences. But talk about vulnerability in terms of economics and it’s something that people just aren’t sensitive to.”

‘Great Irony’

Dallek, author of “Ronald Reagan: The Politics of Symbolism,” continued: “The great irony, it seems to me, is (that under) the most patriotic, nationalistic President we have had in this century . . . we have once again become dependent upon foreign nations.”

How far the dependence will extend depends largely on the effectiveness of efforts at reducing the budget and trade deficits, efforts that so far have gained little confidence.

C. Randall Henning, an international political economist, points out that the United States is currently on a course where its foreign debt will approach $800 billion by the end of the decade. Should that continue into the early 1990s, with the debt exceeding a trillion dollars, a situation develops in which the country becomes politically vulnerable.

“It might be possible, for example, that the Europeans or Japanese might be able to extract a security commitment in exchange for agreeing not to withhold the flow of capital, continued investment in the United States,” said Henning, who is studying the political consequences of the U.S. debt at the Institute for International Economics.

Some observers note that current economic difficulties may create pressures that go to the heart of U.S. influence abroad. McNamara acknowledged in an interview that “it is possible that there would be a sufficiently high . . . deficit that there would be pressure to reduce our troops in Europe and pressure for protectionism.” The dollar’s decline also makes it more expensive to maintain a far-flung military presence.

The U.S. military commitment in Europe is “something about which there are going to be more discussions--no question about it,” said Galbraith. “Many things in the economy are hard to predict. The consequences of the loss of confidence in the dollar that we’ve had in the last few weeks are not.”

Despite such concerns, some counsel that it would be a mistake to underestimate the United States, which enjoys rich natural resources that, for instance, Japan does not, and has a huge, affluent, employed population.

The United States remains a military superpower and, “It’s hard to really imagine the Japanese exercising a command over us, barring a radical change in Japanese foreign policy,” said John S. Odell, an international relations professor at the University of Southern California. “The implications of this change should not be exaggerated,” he said.

Charles Wolf Jr., director of international economic policy research at the RAND Corp. in Santa Monica, points out that the reason so much foreign investment comes to the United States is that the nation continues to be seen as a land of economic opportunity. “It is no more accurate to think of the United States as dependent on foreign financing as it is to think of the Japanese and Germans as dependent on the United States as a place to invest their extra savings,” he said.

“Foreign investors--governments and people--are looking for places to put their dough that will be safe and remunerative--and the United States is attractive to these governments and people.”

It doesn’t have to stay that way, however. And to a growing number of analysts, the very prosperity that Americans now take for granted is ultimately threatened if the debts are allowed to grow much bigger. “There’s nothing that says that America has to be richer than other countries,” said Krause of UC San Diego. “National power comes from hard work, savings, investment and good policy. If we don’t work hard, if we don’t save, if we don’t have good policy, we won’t reverse this.”