Five years into the global economic storm, America's traditional allies, the European Union and Japan, are struggling. Developing economies are reshaping the global dynamic but also face big challenges. The United States is the one country that could lead the modernization of the international system so as to supply security, economic opportunity, and prospects for liberty. America's own strategy for economic revival cannot be limited to the nation's borders. And its future foreign policy—its projection of power and principle—must be grounded in the emerging economic order.
President Obama has said he admires Ronald Reagan's transformative thinking. If so, he should ask for an assessment of Reagan's second-term innovations on currency and monetary affairs, trade, debt, and development. Reagan advanced a new international system to match the revival of capitalism after the oil shocks and stagflation of the 1970s. America's success in the 1980s contributed both to the end of the Cold War, by persuading the Soviet Union it could not keep up, and to two decades of exceptional global growth.
The new US international economic strategy should have five parts. First, this country should strengthen its continental base by building on the North American Free Trade Agreement (NAFTA) with Canada and Mexico. Together, the three partners could boost energy security, improve productivity, and give North Americans an edge in manufacturing and other industries that are already experiencing rising wages in East Asia. A politically acceptable immigration policy, and a push for educational innovation using new technologies and competition, could lead to a more prosperous, populous, integrated, and democratic future for the hemisphere.
Second, the extraordinary monetary policies of late, led by the Federal Reserve's continued near-zero interest-rate policy, are taking us into uncharted territory. Central banks have tried most every tool to stimulate growth; if Japan is any warning, the next tactic is competitive devaluation, which risks a new protectionism. "Currency manipulation" could become a danger that reaches far beyond the debate about Chinese policies. The world economy will need at some point to withdraw the drug of cheap money and negative real interest rates. The United States should anticipate these dangers.
The International Monetary Fund (IMF) also could help set standards about exchange-rate policies and serve as a referee that blows a whistle, even if it cannot penalize. The IMF and the World Trade Organization (WTO) should anticipate this risk and give effect to the existing WTO agreement that economies must "avoid manipulating exchange rates... to gain an unfair competitive advantage."
Third, the United States needs to break the logjam on opening markets. As the leading world economy, America should initially try to strengthen and increase international trade through the WTO. As my colleagues at the Peterson Institute have pointed out, there are gains from the stymied Doha Round of trade negotiations that should be harvested now: ending agricultural export subsidies; limiting food export controls; eliminating tariffs and quotas for almost all exports of the poorest countries; facilitating customs and clearance procedures; and improving the transparency and speed of the system for settling disputes.
Next, the United States needs to keep the WTO current with a vastly changed world economy. The past WTO agreements are valuable for all 158 WTO members. But some economies want to go further by reducing barriers in important sectors such as the services trade, environmental goods and services, government procurement, and the digital economy.
The services trade, for example, is vital for boosting innovation, productivity, and jobs in developing and developed countries alike—but regulatory, licensing, zoning, and other barriers to services are often equivalent to a 30 percent tariff or higher. Because liberalization in the WTO has been stuck, countries have turned increasingly to bilateral and multilateral free-trade agreements, some of which have addressed these newer topics. The US should foster the WTO principle of world-wide liberalization by adopting standards in various industries and sectors that would be open to all economies that reciprocate. The WTO also needs new rules for fair trading by state-owned enterprises.
Yet the United States also should use free-trade agreements to open markets. Trade competition advances structural reforms and growth without bigger government and more spending. The Obama administration has talked about trans-Pacific and trans-Atlantic accords. Yet it has failed to close even one new free-trade agreement. Ron Kirk, the president's trade representative, said in 2009 that the administration did not have "deal fever." In fact, it has been "deal delinquent."
Fourth, gender equality is not only fair and right—it is smart economics. No economy can reach its potential if it overlooks the talents of half its people. The United States should lead in identifying structural barriers in countries that hold back girls' and women's health, education, credit, jobs, and entrepreneurship.
Finally, the United States needs to match growth priorities of developing economies. President Obama should expand the global food-security initiative he announced in 2009 to boost agricultural productivity and production across the value chain, including through the private sector, in sub-Saharan Africa and other poor regions. Infrastructure investment could increase global demand today while building productivity for tomorrow.
The United States can lead a push with middle-income economies to develop public-private infrastructure models that move from "one-offs" to a deal flow. The zero returns for savers from US monetary policy can make infrastructure investments attractive.
In addition to offering financing, the private sector can improve the design, operation, and maintenance of infrastructure. As the state of Indiana has shown, the federal government could profitably use public-private partnerships for its infrastructure, too.
The administration has talked about some of these topics. But it is oddly passive, as if it were hesitant to lead. State Department speeches are not enough. To carve out an international economic strategy, the new secretary of the Treasury needs to choreograph policies across all US departments and with multilateral economic institutions. The United States had better wake up: International economic strategy is the new foreign policy.