A Future Capital Shortage?
It is well known that the United States continues to rely heavily on foreign capital to finance its budget and trade deficits. Writing in this summer's issue of The National Interest, Richard Rosecrance observed: "The Europeans [and their Japanese cohorts] have shored up American power against the force of financial tides, enhancing Washington's strength and resiliency. Without the help of Europe and Japan, the United States could not have undertaken or sustained its frequent international military operations. Lacking this financial shield, U.S. foreign and security policy would have been checked and doomed to failure."
It is not so clear that this pattern will continue into the future. Certainly, Europeans will continue to invest in American securities and stocks; the question, however, is whether they will continue to do so at the level needed to allow the U.S. to continue to operate at current levels. This, by the way, has nothing to do with politics. It is true that a growing number of Europeans oppose American interventionism throughout the world. But in the end, it is a matter of economics.
The creation of the Eurozone and the expansion of the European Union offer new opportunities for investment. West Europeans will want to expand their investments in the east, both to take advantage of lower labor costs but also to cultivate a pool of potential consumers. East Europeans are also looking for investment to help with their own budget deficits, as they struggle to meet spending targets for the next several years. Earlier this year, the Hungarian forint appreciated considerably against the euro, as West European investors took advantage of high interest rates in Hungary to pour in capital (although the appreciation of the forint also hurt Hungarian exports to the EU, one of the key motors for economic growth in Hungary).
The real question is whether China, with its large foreign exchange reserves, will want to assume part of Europe's traditional role. By summer 2003, China held about $346 billion in reserve, and nearly $120 billion in Treasury securities. China certainly has an interest in financing the trade deficit with the United States--after all, who else will buy the large amounts of jeans and CDs produced in Chinese factories--but it does not automatically follow that China will see it. Is it in Beijing's interest to finance the deployment of American military power around the world? China is rapidly acquiring a "seat on the board" of USA, Inc.--but without the same tacit understandings that Japan and Europe have shared with Washington for the past fifty years over the "division of labor" for the international order, China cannot be expected to act as a passive investor.
So, where will the additional capital come from? Savings rates have not increased in the United States; more and more Americans are stuck in the personal-debt trap. Higher oil prices may lead Middle Eastern states or Russian firms to buy American assets (Norilsk Nickel's acquisition of 51 percent of the shares of Stillwater Mining marks the single largest overseas public acquisition by a Russian firm), but this is not a long-term strategy for financing America's deficits. The U.S.'s extended credit-line may be coming to an end.
Arthur Eliason is an independent consultant in international business and economic affairs.