Global Policy Forum

By Elizabeth Becker

The United Nations said today that the twin deficits of the United States were putting the global economy off balance, posing one of its biggest challenges this year. In its report on the World Economic Situation and Prospects 2005, the United Nations echoed warnings already issued by the International Monetary Fund and other financial institutions saying that the United States could not continue to carry its huge debts to finance its budget deficit.

The American trade deficit is a global problem in part because the United States is the fastest-growing economy among industrial nations and, together with China, is largely responsible for helping pull the world economy out of the doldrums. But whereas China has been an economic engine by its huge growth in manufacturing and exports, the United States has pushed growth by consuming far more goods than it exports.

The report said the global recovery reached its zenith at the beginning of January 2005, with the gross world product increasing by 4 percent last year compared with 2.8 percent in 2003. Over all, the developing economies, including China and India, are doing better than the industrialized nations, according to the United Nation report.

"We have a very peculiar mix that is almost unprecedented," said José Antonio Ocampo, the United Nations under secretary general for economic and social affairs, in an interview. He said that mix included high commodity prices, high oil prices and a lack of major disorder in the financial markets, which routinely hurt the more vulnerable developing countries. The biggest problem facing the developing world is the money they have to give rich nations for old debt repayments and the money they are spending to accumulate international reserves to protect against a future financial crisis. Much of those reserves are made up of United States Treasury obligations, which in turn are underwriting the United States debt.

Despite the earlier warnings, the American debt has deepened; the nation's trade deficit is expected to reach a record $600 billion for 2004. The Bush administration has promised to restrain spending in its new budget and has called on China to revalue its currency against the dollar to make Chinese exports more expensive, which in turn should help shave the United States trade deficit.

But the United Nations report said the problem is more complicated. Depreciating the dollar may spur growth in the United States and spur more consumer spending on foreign goods. But a greater drop in the dollar could hurt the very economies of Europe and Japan that need to grow in order to purchase American exports and help right the huge American trade imbalance. The result would be more of the same for the United States trade deficit.

Instead, the United Nations report urges all the major industrial countries to work out a solution that will help the United States reduce its trade deficit by spurring their own economies to grow faster, especially Japan and the countries of Europe. "What we really need is a major advancement in cooperation among the advanced economies to help the U.S. get out of this problem," said Mr. Ocampo.

Treasury Secretary John W. Snow already plans to ask for immediate help from his wealthiest trading partners at a meeting next week in London of the Finance Ministers and Central Bank Governors of the Group of seven most advanced industrial nations. Mr. Snow said in an interview that he would tell these countries that if they are concerned about the American trade deficit they should purchase more American goods and services.

For their part, the Europeans will argue, instead, that the countries should make a coordinated effort to stop the drop in the dollar, a move that would help spur their own growth but one the administration opposes. Earlier, Rodrigo de Rato, the managing director of the I.M.F., told the industrialized nations they should all to focus on getting their economic houses in order.

The United States has amassed a debt without precedent. The International Monetary Fund calculates the American current-account deficit - the broadest expression of the trade and financial flows into and out of a country - stands at $631 billion, or 5.4 percent of the nation's gross domestic product.

Japan and China both have trade surpluses, as do most of the wealthiest European nations. The exceptions are Britain, which has a current-account deficit equivalent to 2 percent of its gross domestic product, and Italy, with a current account deficit of 1.1 percent of its gross domestic product.

"The message of our report is that the industrialized countries all have their own problems that will hurt growth," Mr. Ocampo said. "The U.S. has its deficits while Europe and Japan are slow in recovering. But the most challenging is the U.S. twin deficits."

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