Uncertainty, Not China, is Replacing US Power

USA ChinaMy Comments: Do you lay awake at night, worrying about this? Me either.

But global political dynamics will influence our lives, and the lives of those we love, in ways that cannot be predicted. I’ve been part of the world of financial planning and investments for almost four decades and over that span, the extent to which we have invested our money outside the US has increased leaps and bounds. And going forward, that trend will continue.

Along with increased economic influence, what we used to call “emerging markets” now command global political influence. They are no longer teenagers, and fully capable of throwing their weight around. Much of it because we as a nation saw it as in our best interest following the end of World War II. We worked hard to help the rest of the world improve their standard of living. And it was OK that we got paid for it.

So to those who can only see gloom in front of them, help find a way for us to remain exceptional economically with a growing standard of living and equality. People who are afraid of immigration or try to stack the deck against minority voting are doing us no favors.

By Edward Luce / May 4, 2014 / The Financial Times

First things first. China is not about to replace the US as the world’s superpower. Last week’s news that China’s economy was close to overtaking that of the US on a purchasing-power basis marked a statistical milestone. But little more.

China is neither able nor ambitious to step into America’s shoes. It will be a decade or so before it overtakes the US in dollar terms. The story of our age is that the US is increasingly unwilling – and in crucial respects, unable – to continue in the role it has played for the past 70 years. After America comes multipolarity – not China. The question is, what type? Will it be based on a system of US-framed global rules? Or will it be “après moi, le déluge”?

The shift in geopolitics is already well under way at both ends of the Eurasian land mass. Last week Barack Obama returned from a four-nation Asian tour of China’s neighbours, all of whom fear an expanding regional hegemon. The US president spends much of the rest of his time trying to shore up unity among those living in Russia’s vicinity, from Ukraine westwards. They too fear an increasingly predatory regional power. Two generations ago George Kennan framed America’s famous “containment” strategy for the Soviet Union. Today, the US is stumbling into dual containment of China and Russia.

The demand for US leadership remains strong. But America’s ability to sustain a dual containment strategy is an open question.

The return of great power rivalry in Asia and Europe finds a close parallel in global economic shifts. The US remains much the top dog in dollar terms – the only measure that counts. Its per capita income remains five times that of China. It may take 40 years or more for China’s living standards to catch up. But the speed with which it is catching up is breathtaking. At the start of the century China accounted for barely 4 per cent of the global economy in dollar terms. Today it is about 12 per cent. The US has fallen from just under a third, to barely 20 per cent.

China will overtake the US sometime in the next decade. But it can never replace it. Therein lies the danger. The US will no longer have the capacity to uphold the global order, while China will always lack the legitimacy. In addition to being an autocracy, China is not built on immigration and has never sought to project universal values.

We are already in the early stages of a multipolar economic world. The postwar US global order was built around the international institutions that it launched – the UN, the International Monetary Fund, the World Bank and Nato. It was also founded on the successive world trade agreements that culminated in the Uruguay Round of 1994.

Since then the US has lacked the capacity to finish a new round. The Doha trade round is all but dead. Mr Obama’s big trade initiatives in Europe and the Pacific are foundering. Both were launched for defensive reasons – China was not included in the Transpacific Partnership and Russia is not part of the transatlantic talks. But the US lacks the clout to see them through.

The same applies to reform of the IMF. It is absurd that China’s voting share of the world’s top economic body is just 4 per cent – barely a third of its dollar weighting in the global economy.

Countries such as India, Mexico and Brazil are also woefully under-represented: Belgium still has a greater voting weight than either. Understandably they are beginning to drift away from the institutions the US built. To his credit, Mr Obama concluded the IMF governance negotiations that were begun under George W Bush and reached a deal to increase the emerging world’s representation. But even this marginal reweighting has been blocked by Congress, which is also blocking Mr Obama’s leeway to pursue his trade initiatives. The US is behaving like a declining hegemon: unwilling to share power, yet unable to impose outcomes.

The same influences are visible in America’s approach to tackling climate change. As the world’s richest country, the US cut a deal to subsidise carbon emission reductions in the emerging world. But the so-called “cash for cuts” strategy is missing a vital ingredient – cash.

Neither the US nor its partners will come up with anything like the $100bn a year in climate aid promised in the Copenhagen talks in 2009. Again, Congress is blocking America’s leadership.
Mr Obama is powerless to do much about it. Thankfully, China, India and others are beginning to see that energy efficiency is in their own interests. But they are making changes on their own initiative.

The die has not yet been cast. The US holds more cards than any other in shaping what the multipolar world will look like. It has more legitimacy than any potential rival – China in particular. But America’s ability to address these vast challenges is stymied by domestic paralysis. Central to this is the declining fortunes of America’s middle class – the foundation of its postwar global strength. Growing economic inequality across the US, and the political fallout in Washington, have killed the spirit of magnanimity that defined cold war American leadership. This loss is impossible to quantify. It is no less real for that.

America still has the power to set the tone of global engagement and negotiate outcomes that benefit both itself and the world. But it will require the US to retrieve the spirit of enlightened self-interest that once defined the nation. We must all hope that spirit is dormant rather than extinct.

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