Pivot to Asia is great but we need to rebalance the US first

We don't have to wait for President Barack Obama's next best-selling book to see that national security and trade with the region that is home to nearly two-thirds of humanity drove his ambition to become America's first "Pacific President."

In his speech to the Australian Parliament in Canberra on November 17, 2011, he said that "in the Asia-Pacific in the 21st century, the United States of America is all in" as a matter of a "deliberate and strategic decision."

Feeding on leaks and indiscretions, many observers have pointed out that this "pivot to Asia" was also born of frustration with an excessive and unproductive commitment of national resources to intractable Middle Eastern and European imbroglios, while America's competitors were concentrating on security loopholes and lucrative business operations in the fastest-growing segment of the world economy.

But some of these same observers are now blaming the worsening Middle East political and security landscape, and the predictable unraveling of flimsy European arrangements, on Washington's alleged "pivot to Asia" distractions.

I shall, therefore, put to the side assertions that a "pivot to Asia" is all about confronting, containing and encircling China.


So, let's take a look at economics. To see the enormous business opportunities that are slipping through our fingers in East Asia, I shall use a counterintuitive example of Japan's brilliant geo-economic strategy. I know that will rile the usual Japan-bashers, and those who are criticizing the country's lack of structural reforms and its allegedly dim-witted monetary policies. I'll ignore that, too, because these people don't realize that Japan's global businesses have made that economy virtually bullet-proof.

Yes, while Uncle Sam was dozing on its unique superpower laurels, lulled by the "end of history" fairy tales, his rising-sun partner was busy producing what America wanted to buy and consummating, with gusto, the economic conquest of Asia.

By the time the Uncle eventually woke up and shook his head, the smart and nimble-footed far-eastern ally was laughing all the way to the bank with a fortune (net international asset position) of $3.28 trillion (at Friday's yen-dollar exchange rate), and counting.

Asia also became Japan's largest – and practically unassailable - business venture, taking 53 percent of its exports last year, in spite of slightly declining sales to China. A vivid picture of all that is a sight of an ocean (not a sea) of Japanese cars and motorbikes, with small Chevys and Fords being odd rarities, in Asia's booming and congested cities.

And to borrow that neocons' formula, Japan's "full spectrum dominance" of Asian economies is not limited to cars; it now goes as far as (a world-beating) Asian communications and social network software, medical technology, pharmaceuticals, cosmetics, beauty products … I recently watched in disbelief as, in an East-Asian shopping mall, the wares of famous French cosmetic shops from Place Vendôme and Faubourg Saint-Honoré were heavily discounted at vulgar sales stands, while the Japanese competitors were operating in glowing, state-of-the-art beauty shops. And these were not local knockoffs; they were certified French originals.

This hat-off Japanese success is a product of smart business strategies and practices. I believe that there is no truth to the idea that Asia is a "naturally captive market" for the Japanese, with an implied anti-Western subtext. It's all very hard work and a 24/7 customer service, the kind of stuff I used to see when IBM engineers were coming in the middle of the night to get the machines back up in our Columbia computer lab.

Do the homework, Washington!

The fact that the South Koreans and the Chinese are now ferociously taking the fight to the Japanese in East Asian markets is only showing who the real competitor is.

We want to be part of that game, don't we? In fact, we must be part of the game, but we have to do some work at home before our smart lawyers snow us to rely on the "fair trade" of free-trade agreements.

Last year, we ended up with a net international investment position of -$7.4 trillion, indicating an increase in our net foreign liabilities of $337.1 billion over the previous twelve months. And during the "pivot to Asia" period (i.e., from 2012 to 2015), the U.S. trade deficit with the Pacific Rim countries increased by 19.7 percent to $458.6 billion.

Not much to show for our "pivot to Asia?" True, but here is more bad news. In the four years that we were pivoting to Asia, major East Asian economies were growing at average annual rates of about 4 percent, while we limped along at a growth rate of 2.1 percent. And that is not too bad, because our physical limits to growth continue to keep our (noninflationary) growth potential at 1.6 percent.

What should we make of these numbers?

First, it is clear that business should be at the center of our "pivot to Asia" – a rapidly developing market of 4.4 billion people representing nearly two-thirds of the world population.

Second, Washington should take a close look at the reasons why we are running a half-a-trillion dollar deficit – 60 percent of our total trade gap – with the fastest-growing segment of the world economy. That is not what the economic theory would tell us. Indeed, it should not be surprising for us to have trade deficits with slow-growing economies like Japan and Germany, but systematic and increasing trade deficits with world's growth champions are very strange events.

Third, the incoming U.S. administration must understand that we are going nowhere with our pathetic 1.6 percent noninflationary growth potential. That, emphatically, does not mean stepping on the Fed to print more money.

Think of it. How can we, with that growth rate, (a) run a politically and socially viable economic system, (b) retain the leadership of the world economy, (c) maintain our country's security and (d) remain a credible force in world affairs?

Given the political will and wisdom, we could successfully manage all these issues. And that would be the rebalancing of the U.S. that we urgently need.

Investment thoughts

America's "pivot to Asia" remains an excellent economic idea.

But, sadly, for most people, that's not what the pivot means. An unfortunate perversion of what President Obama called a "deliberate and strategic decision" now simply means a dangerous military confrontation with China. The question is: Do these people understand that the logic of such a confrontation implies a war between the two countries capable of unleashing on each other hundreds of supersonic nuclear warheads from land, sea, air and aerospace?

Since no person of sane mind wants the end of the world, Washington and Beijing will eventually find a mutually acceptable modus vivendi. In fact, they are working on it, despite the headline-grabbing apocalyptic nonsense peddled by crazy loons.

Meanwhile, to successfully compete in world economy, and to shape the global security architecture, the U.S. has to restore its economic vitality. That is the only way to deal with our social and political problems, and to defend our national interests in the world arena.

Please remember: Even if our wisdom and courage were to fail us to do that in an orderly and timely manner, resource constraints would soon force us to make the necessary policy choices under increasingly costly and difficult conditions.

I apologize for the philosophical shortcut, but here is what Sir Winston Churchill, a long-time observer and practitioner of the U.S. political scene, had to say about all that: "You can always count on Americans to do the right thing - after they've tried everything else."

So, who knows, with divine help we are probably staring now at "the right thing."

Does that sound to you that betting against America is still a bad idea?

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