Globalization: The Foundation of America's Economic Power

The U.S. economy is showing clear signs of improvement. With unemployment falling, consumer confidence rising and personal debt ratios returning to normal levels, it's no wonder last week's revised first-quarter GDP report showed consumer spending doubled from the previous three quarters. The current annual growth rate of housing investment is 14%. At the same time, home foreclosures have dropped by 25% compared with the first quarter of 2012, and house prices have risen for several months. Business investment remained weak, but corporate profits were higher and the stock market kept hitting new highs. Affected by the upbeat report data mentioned above, there was little volatility in the market when Federal Reserve Chairman Ben Bernanke recently mentioned that the Fed may cut its bond-buying program to keep interest rates low earlier than expected.

As usual, the government remains the biggest drag on economic growth. GDP would have grown at a healthy annual rate of 3.5% had it not been for misguided sequestration cuts by the central government, tax increases, and ongoing layoffs by local and state governments. Still, things continued to improve, enough to bring the deficit down sharply over the next two years. With Europe in a double-dip recession, the United States is once again the engine of global growth.

Much of this apparent turnaround is due to the Federal Reserve, as well as a certain element of luck, as well as business attitudes and orientations. In particular, more than Europe, the US policymakers and business community have devoted the past two decades to globalized market input, which has become a key factor in its economic revival. Among them, the role of exports cannot be ignored. In addition, years of continuous participation in global market competition have created a myth of more efficient and innovative U.S. industry.

Bill Clinton played a big role in this. Not only did he clearly express the need for the United States to actively participate in the world market, but he also convened a bipartisan majority to enact the North American Free Trade Agreement (NAFTA), create the WTO, and allow China and other large developing economies to join the world trading system. Various measures such as these are the realization of the above point of view. The "Byzantine" strategy of American multinationals may be world-renowned for minimizing U.S. taxes, but it has contributed to their years of investing in foreign markets at higher interest rates than their major competitors. Once in foreign markets, they have to compete with low-cost producers who know the local market better. This intense competition has made American multinational corporations look for ways to improve efficiency and innovate, which are essential qualities for them to operate in the American market.

The fact that the U.S. trade deficit has fallen is evidence of this. For example, in the first quarter of this year, the U.S. trade deficit fell by $22 billion from the same period last year. This may seem extraordinary, and generally speaking, stronger growth than in Europe and Japan means a higher U.S. trade deficit, as imports increase and exports decrease. True, imports rose, but so did most exports, including high-tech products that accounted for 19 percent of total U.S. exports. However, the main reason is globalization. American companies that have built factories around the world for years now have access to fast-growing markets in developing countries.

Think about who the U.S. trades with. The traditional major markets of Europe and Japan currently account for only 25% of U.S. exports. They are now replaced by 32% of NAFTA partners, with Canada at 19% and Mexico at 13%. Another 12% went to Latin America, 7% to China, and 13% to non-Japanese countries in Asia. In fact, U.S. companies export almost half of Europe's trade in Africa and the Middle East.

President Obama is doubling down on globalization. During his last term, he got Congress to pass new free trade agreements with South Korea, Colombia and Panama. During this term, he is working on trade agreements with Pacific Rim countries and other EU countries. The previous agreement, the Trans-Pacific Partnership (TPP), began in 2010. Currently, President Obama is working to get all interested parties — Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, as well as the United States — to complete the agreement within a year. This is an ambitious time-point, as the TPP will lower or remove many of the harsh domestic barriers to free trade. These include regulations and barriers with state-owned enterprises and government procurement operations and in the service industry, as well as health and safety regulations for foreign competitors. Moreover, if the United States and 10 other Pacific Rim countries can successfully conclude the TPP, Japan and South Korea are also likely to join, which will further expand their influence.

Completing a free trade agreement with Europe within the president's remaining two-year deadline is equally difficult. Here again, the areas covered will include some of the most difficult issues of the 21st century, such as regulations for the domestic service industry and health and safety, labor and environmental protection, agricultural subsidies, data privacy, and antitrust policy. These problems are not only exceptionally difficult for the policy-oriented countries of continental Europe, but also for the United States. However, German Chancellor Angela Merkel and Britain's David Cameron endorsed President Obama. Regrettably, French President Francois Hollande was not enthusiastic about this, and European Parliament President Martin Schultz warned that any agreement should "have the European model at its core", especially for "labour and social rights".

Both of these agreements will test the patience and political boundaries of all parties. But the whole process will keep America on the path of free international trade that has driven economic prosperity for more than 65 years. And, if successful, the outcome would not only reassert America's position as the global economic leader—the new agreement would also permanently increase the incomes of tens of millions of people in the United States and abroad and the sales and profits of tens of thousands of American and other foreign companies .

From Newsweek Translator Du Yanfei

Note: Robert Shapiro is the president of the economic consulting firm Sonecon, an adviser to the International Monetary Fund, a senior Obama administration official, and a businessman under Bill Clinton Deputy Minister.