4. COLLAPSES TRADE: Perception of unilateral US fiscal shock creates domestic demands for protectionism that undermine the WTO.

While the United States is the world’s largest economy and perhaps the only one capable of increasing global demand quickly, it is no longer large enough to be the single locomotive of the world economy or the global consumer of last resort. Because stimulus in any country will boost demand for both domestically produced goods and imports, the United States needs help from the other trade surplus countries to spur its exports and economic growth at a time when its spending and consumption are being diffused to help countries like China that are the world’s major producers. Absent such help, some observers say protectionist pressures could grow in the United States if the large U.S. stimulus increases U.S. indebtedness by far more than it increases demand for U.S. goods.44 Stated differently, if the U.S. economy after a year or two has little to show for running expansionary policies and incurring increased public debt—for example, unemployment remains high, there is little or no economic recovery, and the increased public debt begins to weaken the value of the dollar—the American public may ask why such a large share of U.S. stimulus spending is leaking abroad and generating jobs in countries that have not stimulated their own economies sufficiently to increase imports of U.S. products.46

The fiscal policies of the countries with large external surpluses, thus, are critical for the world economy to recover in a timely manner and, over time become more balanced in terms of spending patterns relative to production. In a deep recession, some analysts maintain that failure of the current account surplus countries to increase domestic demand in a substantial manner is a form of a beggar-thy-neighbor policy as they import demand from the rest of the world. According to this perspective, current account surplus countries are also exporting their unemployment to the rest of the world and “cannot be surprised if deficit countries even resort to protectionist measures.”47 Interestingly, the United States was the world’s largest current account surplus country in the 1930s, and, thus, was essentially in China’s position today.