All sides recognize a self-interest in keeping the game going--avoiding a global meltdown that might ruin everyone. But the anticipated benefits from this cooperation are very different: The US consumes in the present, through indebtedness that it must repay from future production; the others accumulate financial wealth now and expand their industrial capabilities to produce in the future.

The Bush Administration must convince its major trading partners, especially China and Japan, to stay at the table and keep lending huge sums even as it encourages the dollar's decline in the hope of boosting US exports, discouraging imports from Asia and Europe and thus shrinking America's trade gap (with little success so far).

The poker game ends when one major player or another decides it has gotten the last dollar off the table and it's time to go home. Creditor nations naturally have the upper hand, like any banker who can call the loan when he sees the borrower is hopelessly mired. But the decision to exit might be dictated by necessity more than bad faith. China, for instance, is booming, with a banking system riddled with bad loans to its domestic enterprises. If a banking crisis developed, Beijing might have no choice but to sell off its US bonds and use the capital at home to stabilize its financial system or to assuage political unrest among its unemployed masses. Tokyo has for some years anticipated an eventual American reckoning but hoped to keep the United States from doing anything rash until the Asian sphere was strong enough to prosper on its own, without depending so heavily on American consumers.

What might be done to avoid the worst? The necessary first step is for American politicians to cast aside the propagandistic claims advanced by multinational business and finance and endorsed by policy elites and orthodox economists. For decades, globalization advocates insisted, for example, that the solution to America's trade deficits was more "free trade." Each new trade agreement has been heralded as a market-opening breakthrough that would boost US exports and thus move toward balanced trade. That is not what happened--not after NAFTA (1993) and the WTO (1994), nor after China normalization (2000). In each case, the trade deficits grew dramatically. (Yes, it's true that since the early 1970s US export volume has grown by more than five times, but import volume has grown by eight times.) Economists have also claimed that ending deficit spending by the federal government would eliminate the trade gap. Yet when the federal government's budget did finally come into balance in 1999, the trade deficits were exploding. This discredited explanation is nonetheless being recycled, now that huge federal deficits have been spectacularly revived by the Bush Administration.

The humbling reality is this: Across three decades, only one economic event has been guaranteed to produce balanced US trade: a recession. When the economy is contracting, people naturally buy less of everything, including imports. Look at the chart: On the four occasions when the line of exports briefly converged with the line of imports, the country was in recession. Each time economic growth was restored, the trade deficits resumed. A more ominous contradiction occurred during the 2001 recession: The trade gap was so enormous it persisted throughout. This suggests that American dependency on foreign producers has advanced to a dangerous new level.

The failure of conventional explanations for trade deficits leads, logically, to an unorthodox conclusion: The source of the deficits (and growing indebtedness) must be embedded in the trading system itself, independent of shifts in macroeconomic conditions, and so it is there we must also look for solutions. The national ambitions and competitive energies of globalization, at least as currently practiced, persist in developing new productive capacity--more factories--faster than they generate rising incomes and adequate demand to absorb the surplus of goods. This leads inevitably to falling prices and stiffer pressures for cost reductions. The convenient remedy--somebody, somewhere has to shut down factories--has typically begun by closing America's and moving its high-wage production offshore for cheaper labor.

American production usually goes first because the US government does not resist and US multinationals gain from the transaction, even if the US labor force does not. Indeed, the multinationals are major actors in generating America's trade deficits, since they "export" and "import" within the firms themselves--shipping components and materials back and forth between their overseas subsidiaries and US-based plants. Trade is commonly described as between nations, but fully half of US foreign trade, excluding oil, is composed of these intra-firm transactions. This reality explains the interconnection between trade deficits and job losses: When an American company moves production to Mexico or China, it still counts the output as its own, but its labor costs are reduced drastically while its foreign-manufactured products becomes imports, adding to the trade deficit and accumulating foreign debt. For years, advocates have dismissed worries about deficits in manufactured goods by pointing to the smaller but growing surplus in services. As more service jobs are offshored, however, that surplus is shrinking rapidly too, declining from $90 billion to $60 billion over the past seven years.

Of course, other advanced economies face the same global pressures and engage in the same sort of dispersal when required, but their governments (and societies) do not yield so willingly. Through industrial policy and numerous informal barriers, America's European rivals have managed to avoid both trade deficits and the thirty-year stagnation of wages that US industrial workers have suffered. Only in America do the experts believe these consequences have no meaning for overall prosperity. Only in America has the government put the interests of multinationals ahead of citizens.

A decisive President, one who grasped the gravity of the situation, would start by bringing up a taboo subject--tariffs--and inform the world that the United States is prepared to impose a temporary general tariff of 10 or 15 percent on all US imports. Every multinational would have to rethink its industrial strategy, because some of its production might be stranded in the wrong country. Import-dependent retailers like Wal-Mart would be seriously disrupted, too.

The idea of tariffs is so alien to conventional wisdom it probably sounds illegal. Actually, a nondiscriminatory general tariff is permitted under the original GATT agreement for a nation to correct grave financial imbalances--exactly the problem America is facing. Richard Nixon stunned the world in 1971 when he abruptly announced a 10 percent import surcharge, devalued the dollar and unilaterally discarded the Bretton Woods monetary system. America needs a bit of Nixonian nerve.

With a general tariff, the practice of wage arbitrage--shifting high-wage jobs to low-wage nations, then selling the goods to the US market--would no longer be a free ride. If the US market were less wide-open, globalization could continue, but countries and companies would need to disperse production on different assumptions. They might finally confront the central dilemma of inadequate global demand versus the permanent overabundance of supply.

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