In 1984, when Ronald Reagan proclaimed “Its morning in America”, indeed, it was. The US’ share of the global trade stood at 25%; the dollar was king, China was an undeveloped country trying to raise the standard of living of its billion-plus citizens, Europe was a patchwork of competing economies and U.S military power could be counted on to keep the threatening Soviet juggernaut in check. Almost three decades later, a great lot has changed. The U.S’ share of the world economy currently stands at 19% and the mighty dollar is derided by other nations as a has-been; China has surpassed Japan as the world’s second largest economy, once fragmented Europe is now the world’s largest economic entity, and countries such as Brazil, India and South Korea are grabbing a larger piece of the pie.
As the global economic crisis indicates, the dawn of the post-industrial society put forward by U.S economists in the 1990’s was premature because manufacturing countries, primarily China and Germany, have done better in weathering the storm. Many iconic U.S brands that once symbolized the US’ industrial prowess are now manufactured overseas (outsourcing), while many developing countries are fast catching up in the U.S-dominated high-end exports. As a result, two-third of the U.S economy relies on domestic consumption, the service industry and federal spending, leaving the country with a chronic account deficit that makes it the world’s largest debtor nation (13.8 trillion and counting). The U.S’ entrepreneurial spirit is slipping away; it is the Chinese and Indian entrepreneurs that are now creating innovative products for mass consumption.
At the G-20 Summit in Seoul last November, Washington’s emphasis on having China bolstering the value of its currency (the renminbi) as a means to reduce the U.S account deficit and boost export did not address the real issue, which calls for a fundamental reorganization of U.S economic policy. Incidentally, the high-end goods the U.S expects to sell to China may cause more harm than good to U.S industries, since the Chinese will insist on technology transfer, in effect cheaply acquiring the means of production and denying U.S companies of further sales. What does NASA, the jewel of U.S technological prowess, expect to gain from cooperating with China’s budding space program? When NASA administrator Charles Bolden visited China last month (Oct-21-26), the trip was certainly not about a common effort to catch wandering extraterrestrials or congratulate the Chinese on their spatial achievements, but an earnest attempt at peddling wares on behalf of U.S corporations.
The Federal Reserve Bank was right when it decided not to engage in another round of quantitative easing (a monetary policy used by central banks to stimulate an economy by increasing the money supply), as has been advocated by many economists. It would have boosted consumption but not productivity and precipitated a devaluation of the U.S dollar. How would China, which has almost 2 trillion in dollar-nominated reserves, react to a steep reduction of its holdings? Beijing can move toward Washington’s stance by letting its currency appreciate in value, which may cause a drop in Chinese exports and precipitate workers discontent in China, or spearhead a revolt to replace the U.S dollar as the world’s leading currency. Were the second scenario be the case, the Japanese and South Koreans, not wanting to offend their big and economically powerful neighbor, may support the Chinese or move toward a Euro-type Asian currency with China. This is not a farfetched theory, since such move will protect their holdings and prosperity, although it carries the risk of both nations becoming China’s vassals.
Clearly, the economic center of gravity, a position the U.S held since the end of WWII, is slowly shifting, not yet shifted, but, in as little as 10 years, it might be too late for the U.S to redress the situation. Three decades ago, any stimulus plan, Reagan or Obama-style, would have worked, since the U.S economy was the engine that propelled global trade. Presently, it is no longer the case, as most countries now look to China’s expansive market to sell their goods, which is why a modest stimulus package to revive that country’s economy worked, while the almost three times bigger but highly leveraged U.S economy failed to respond to a similar scheme.
Military power is a derivative of economic might and not the other way around. With its economic might in decline, the U.S is becoming more militaristic while the Chinese, determined not to follow the mistakes of the defunct Soviet Union, are taking the opposite path. With its vast and expanding market, China is poised to play the role played by the US at the end of WWII when it was the final destination for most of the world’s manufactured goods. It is therefore incumbent upon U.S policy makers to jettison the notion that American economic supremacy will last forever and start learning the lessons of history.
Who could have, in 1988, predicted that a disorganized and theocratic Iran reeling from a devastating war with Iraq (1980-88) would become an assertive regional power at the beginning of the 21st century, capable of challenging U.S supremacy in the Persian Gulf? No one, not even the Chinese or the Iranians, wants to see a precipitous decline of U.S power which could prove calamitous to world peace and security. The ball is in Washington’s court or rather its politicians.
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