USC Professor Sees Shift Away From U.S. : Tokyo Called Pace Setter for Financial Policy
International financial power has shifted from the United States to Japan and a faster-than-expected correction of America’s trade imbalance will not change the fact that Tokyo, not Washington, is determining world financial policy, USC Prof. Richard Drobnick told the American Chamber of Commerce here Monday.
Drobnick, who serves as a consultant to the Commerce Department, said Japan “is replacing the United States . . . the way the United States replaced Britain more than 40 years ago.”
“World financial policy,” he went on, “is (now) set by the Bank of Japan. It’s not set by the U.S. Federal Reserve at all.” The American central bank may still take the lead in financial negotiations, he said, but “the weight of the bargaining, the weight of the leverage, is moving here.”
“Everybody should know that,” he said. “Everybody should understand that. . . . Our leaders, however, don’t seem to be recognizing these changes.”
Drobnick argued against what he called the conventional wisdom that the United States will not bring into balance until 1997 or 1998 its global trade deficit, which reached $171 billion last year. If the imbalance lasts that long, he said, the net American foreign debt will approach $2.5 trillion, a level that “the world financial community would not tolerate.”
Instead, Drobnick predicted that American trade will come into balance at about $350 billion in both exports and imports by 1992, although possibly a year or two later.
Open Markets
He said depreciation of the dollar, slower income growth in the United States and reduction of the federal budget deficit, not protectionism, will be the factors causing the turnaround.
Drobnick, who directs the International Business Education and Research Program at USC, predicted that the dollar will continue to decline against both the Japanese yen and the West German mark, “but even more so against the Taiwan dollar and the South Korean won .”
America’s trading partners, he said, will have to open their markets and spur their domestic economies to absorb $400 billion to $500 billion in U.S. exports a year by the late 1990s in order to allow the United States to earn funds to repay the foreign debt that it will have accumulated by then.
If they do not, he predicted, the United States will be forced to impose across-the-board penalty tariffs against countries that refuse to adjust their exchange rates. He named Taiwan and South Korea, which are currently resisting currency appreciation, as two possible targets.
Failure to correct the American trade deficit, he said, will lead to “financial collapse.”
Although U.S. exports from Taiwan and South Korea will continue to increase, he said, the pace of growth will slow significantly, forcing both nations to stimulate domestic demand to take up the slack.
Japan, Drobnick predicted, will bear the lion’s share of the burden of the turnabout in the U.S. trade imbalance and will see its own trade surpluses diminish. Nevertheless, he said, Japan’s current accounts surpluses, which include receipts of interest and dividends from Japan’s burgeoning overseas investments, will continue to average about $70 billion a year from now until 1992.
Integrated Economies
As a result, by 1992 Japan’s net foreign assets, which stood at $308 billion at the end of 1987, will approach $700 billion, he said. And that figure, he noted, is five times greater than America’s peak international creditor position of $140 billion in 1981, a position that was achieved over a period of 70 years.
Even if the United States succeeds in balancing its trade by 1992, by then it will have accumulated a net foreign debt of nearly $1 trillion, compared to about $540 billion expected by the end of this year, Drobnick said. He predicted that West Germany and Taiwan, followed later by South Korea, will emerge as major creditor nations.
The economies of Asia and the United States, he said, “will become more integrated into the financial and economic structure of Japan.”
“Resentment and friction” will naturally occur in the United States, he said, as Americans “belatedly awake to the reality of reduced independence in managing our national economic policies. He added: “The United States will be continually struggling to generate trade surpluses that will be sufficient to service the debts built up during its 1980s consumption binge, (while) Japan, as the world’s premier creditor nation, will sit in judgment on America’s efforts to maintain its credit worthiness.”
Asian leaders, he said, “shudder at the prospect of a peaceful repeat . . . of (Japan’s) 1930s vision of an East Asia Co-Prosperity Sphere done by economic and financial integration” into a hub dominated by Tokyo, but “are becoming resigned to the lack of alternatives.”
