NCPA - National Center for Policy Analysis

Diplomatic Rifts Aside, U.S. Interests are Closely Tied to Those of Europe

March 20, 2003

Some public commentators speculate that the deepest interests of the U.S. and Europe are diverging. But cooler heads recognize that, in economic terms, the nations of the developed world have never been so dependent on one another.

That's true in terms of investment, trade and government relief programs. Experts caution that increasing frictions among allies will exact an economic price on which few people are focusing.

  • Consider that our current account deficit must be financed by foreigners to the tune of as much as $500 billion a year.
  • Foreign investors own 36 percent of American government debt, up from 17 percent as recently as 1984 -- and foreigners hold 18 percent of our corporate debt.
  • As for the flow of goods, American imports have risen sharply -- to 17 percent of gross domestic product, from about 5 percent in 1970.
  • We incorporate no small share of imported materials into the products we make -- with, for example, more than 66 percent of materials in our footwear and leather products originating abroad.

At the same time, American producers need foreign markets -- just as foreign enterprises need access to ours.

Some observers warn that this interdependence of trade and capital flows is in jeopardy. They cite the fact that deteriorating relations between President Vicente Fox of Mexico and President Bush over Iraq and terrorism have already resulted in a cooling of important discussions about changes to trade and immigration agreements. And there is a long agenda of trade grievances and needed changes around the world -- both among rich countries and between nations rich and poor.

Source: Jeff Madrick (Cooper Union and New School University), "Economic Scene: American Unilateral Bravado Regarding the War Would Be Misplaced and Could Be Costly When It Comes to the Economy," New York Times, March 20, 2003.

 

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