What has most concerned me is how the United States, which since the Second World War has championed free trade and open markets as the basis for an international economic order designed to spread prosperity around the globe, is now so quick to adopt protectionist measures as soon as we feel threatened. The way the Unocal bid was negatively characterized in some segments of the American government and the decision of some members of Congress to propose legislation to impose arbitrary sanctions on Chinese goods was not only short-sighted and bad strategy, but also sent a very bad signal to the Chinese that we were not prepared to play by our own rules. One of our longstanding foreign policy objectives vis-à-vis China has been to encourage China to become more comfortable with a rules-based regime in conducting business; the CNOOC debacle certainly did not advance this goal.

China now holds nearly $1 trillion of U.S. reserves. They are going to use some of these holdings to acquire assets outside of China--in other parts of Asia, in Europe, in Africa, in Latin America and even in the United States itself. And perhaps some Americans are not fully aware of the positive ways China has deployed some of those reserves, ways that have benefited the United States. China is the second-largest holder of U.S. Treasury assets (at last count some $242 billion)--and this has helped us not only to finance our deficit but to keep our interest rates low.

This is why I cannot stress enough the importance for both the Bush Administration and Congress not to let bumps in the road or other parochial concerns derail the overall U.S-Chinese relationship or, for that matter, the U.S. relationship with other major powers. China is rising to great power status and is going to be a major player not only in East Asia but throughout the world. To pretend otherwise is extremely dangerous if the United States is to maintain its position of leadership within the global community of nations.

WE ALSO need to face up to some economic realities at home. The United States cannot continuously run a current account deficit of 6 percent of our gross domestic product. We cannot continue to be in debt to the rest of the world, to have our currency owned by everyone in the world. Until now, it has been possible to manage our fiscal and trade deficits, but this balancing act cannot last indefinitely.

If we do not wish to become a permanent debtor nation, we must even out or reverse current trade flows--but without resorting to protectionism. The United States needs to reinvent itself to some degree. Our political leaders must acknowledge that there are areas and industries where we are not efficient enough to compete with other nations. Instead, we should concentrate on our particular advantages: our technical innovation and our entrepreneurial culture. We are a very creative country; the way forward for the United States is to spearhead the next innovative revolution, to create the new products and services that the world will need and the United States can provide. If we fail to do that, the United States will suffer. We cannot survive as a nation of only service industries, of plumbers and electricians and other day-to-day jobs that cannot be outsourced.

This requires a concentrated effort to pass the legislation and fund the programs that encourage education and that lead to the United States producing more scientists and engineers and having an environment that encourages entrepreneurship and creativity in business. Turning around our trade deficit will not happen overnight.

It also means we need to rethink our system of controls on the export of those high-technology goods that are one strength of the American manufacturing sector. I remain concerned that we tend to interpret concerns about "national security" in too bureaucratic a fashion and that this has hurt our exports of such products. We do not do our firms and workers any favors by relinquishing market share to our French, German, Japanese and other competitors. The United States needs to regain its position as the global leader in the development and manufacture of high technology. Let us be clear: A significant number of high-wage U.S. jobs are dependent on high-technology exports to China.

Rebuilding our scientific-technical base is also critical if the United States is to address some of the other challenges of the 21st century. It is absolutely essential that we undertake a national project to become more energy independent. This, in turn, has profound ramifications for our relations with other states. Improving our energy efficiency or discovering new fuel sources, rather than relying on finite supplies of hydrocarbons, alleviates the possibility of a difference with China in the search for scarce resources.

My sense of urgency about ensuring the health of the American economy arises out of my belief that the massive inflow of capital that has funded our fiscal and current account deficits over the past few years may not be sustainable over the long run. It is very true that at the present moment in time there is no currency that will replace the dollar as the world's reserve currency. But this is not because of the strength of the American economy but because, politically speaking, the United States is one of the safest places in the world to invest. We remain the safe haven and so continue to attract investment. But if we continue to run a huge federal budget deficit and a growing current account deficit, we will at some point cease to be as attractive as we are today. I didn't agree with those economists who were predicting over the last several years that the dollar was in imminent danger of being replaced as the world's leading currency. At some point, however, that will change--once there is greater confidence about the political stability and economic vitality of another major state. I believe that over time a number of Asian currencies will become as attractive as the dollar.

I am concerned that these are not the issues being discussed by our political leadership and that the United States is abdicating its role as a global leader. There are a number of problems that require the United States to step forward and exercise leadership. In matters of world trade, the Doha Round has not been a booming success. Promises of aid for Africa have turned out to be little more than promises. We have transnational threats such as terrorism, environmental degradation and the spread of disease. We have an issue of global warming. I'm not a scientist, but I am concerned that the intensity and strength of natural disasters has grown. Ocean warming has occurred by several degrees of temperature, ice flows are melting in the poles--what is going to be the impact of that on the world's climate? There are a whole host of issues that are not simply matters of American national interest, but are global, planetary interests.

And make no mistake, if the United States does not lead, who will? The future of the European Union is a question mark. The proposed constitution was not enthusiastically embraced by Europe's population. More and more Europeans are dissatisfied with the euro, which, I might add, seems less and less likely to replace the dollar as the leading currency for global trade and finance. American leadership is essential to put together the broad-based coalitions necessary to tackle these problems. Our national interest is served by continuing to build up our relations with other states, creating a network of mutual interdependence, rather than ignoring problems or isolating ourselves from the rest of the world.

Abdication of our responsibilities and a confrontational approach to parts of the world are not the best way to advance vital U.S. interests, nor is a foreign policy approach that depends more on threats than on cooperation.

1 "American Posturing on China is Short-Sighted", Financial Times (July 18, 2005)

Maurice R. Greenberg is chairman and CEO of C. V. Starr & Co.

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