China Expands. Europe Rises. And the United States . . .
By FRED KAPLAN
Published: December 26, 2004
IT'S a risky business to predict the decline of the American empire. Ask Paul Kennedy, the Yale historian, who issued such a forecast in his 1987 book, "The Rise and Fall of Great Powers," only to witness an almost immediate American resurgence.
Yet the signposts, at the end of this year, are ominous. As an economic power, the United States no longer sets the rules, much less rule the game. As a military power, it vastly outguns the rest of the world, but has a harder time translating armed might into influence.
On March 1, the European Union announced that it was raising import tariffs on a long list of American products, and would go on raising them each month until Congress repealed a subsidy for American exporters that had been ruled illegal by the World Trade Organization. Congressmen railed against this intrusion but finally gave in. Americans realized that, in the global economy they largely created and for 60 years dominated, they could no longer do whatever they wanted.
Last month, China's president, Hu Jintao, embarked on a 12-day tour of Latin America, and wound up making commitments to invest $30 billion in the region. China is now Brazil's second largest trading partner and Chile's largest export market. In trade, technology, investment, education and culture, China has been displacing the United States all across Asia, and is now starting to do the same in America's backyard.
There is nothing necessarily alarming about an expansive China or an emergent Europe, except perhaps that they coincide with a growing American dependence on both.
The United States government spent $650 billion more this year than it raised in revenue, and financed the deficit largely by borrowing from foreign central banks, mainly those of Japan and China. They have been willing creditors because American consumers send much of the money right back by purchasing foreign-made products. It's a neat balancing act, to a point. But the American accumulated debt to foreign investors has now swelled to $3.3 trillion - 28 percent of gross domestic product, nearly double the share of four years ago.
In the 1990's, the United States admonished Mexico and Argentina to get their economic houses in order. This month, the Chinese premier gave Washington a strikingly similar lecture.
These imbalances are not inherently disastrous. The Chinese get something out of the deal, a ready consumer market for their overheated production lines. If they stop lending to the United States, it would cause a deep recession here, but then Americans could not buy as many of their goods, and the recession would ricochet right back to Asia.
It's a variation on the old joke: If you owe the bank $1 billion, the bank owns you; if you owe the bank $1 trillion, you own the bank.
But what if another trillion-dollar customer walked into the bank? The bankers might be more willing to foreclose on the debtor, knowing that they could pick up business from the new tycoon.
The European Union, in many respects, is looking more and more like this new tycoon. Its currency, the euro, has risen in value by 35 percent against the dollar in the last three years.
Again, that is not necessarily bad. In theory, a falling dollar makes American exports cheaper, attracting demand that then boosts the dollar; a rising euro crimps European exports, which then lowers the euro; equilibrium is restored. In reality, this process unfolds slowly and shakily: in October, for instance, American exports rose, but American imports soared, too.
A more serious consequence of the dollar's fall is that the euro has become more rewarding for foreign investors, and they are reacting accordingly. In 2001, Middle Eastern oil-producing countries kept 75 percent of their currency reserves in dollars; now the figure is 61 percent, with much of the rest in euros. Chinese and Russian central bankers are also shifting reserves. This trend, at some point, could set off a spiral: the dollar declines, causing further sell-offs, leading to a further decline, and so on.
When the dollar has fallen in the past, the United States was a net creditor and there was no serious rival currency. Neither condition holds true now. As The Economist recently put it, "Never before has the guardian of the world's main reserve currency been its biggest net debtor."
Financiers and diplomats are beginning to ask: How much longer will the dollar remain the world's principal reserve currency? One could also ask, how much longer can the United States remain, as Madeleine Albright put it, "the indispensable country" of world politics?
This year, the United States spent nearly as much on its military as all other countries combined. No other nation possesses, or aspires to, anything like the reach of American armed forces.
Yet, if someday the United States finds that it can no longer count on foreigners to bankroll its deficits, it may also find that it can no longer afford a globe-spanning military. The war in Iraq has already stretched America's forces to the limit. In the 1970's and 1980's, when Pentagon strategists spoke of a two-front war, they envisioned having to fight simultaneously in, say, Germany and Korea. Today, they mean Mosul and Falluja.
About 40 percent of the American troops in Iraq are from the National Guard and Reserves, "weekend warriors" who never figured on serving long combat tours. As a result, Guard recruitment has fallen by 30 percent. If there is no large Guard and Reserve, there is no large Army. In short, not only has the Iraq war been harder than many imagined, it has also made going to war elsewhere a less practical option - and a less credible threat.
The economic trends are worrisome because they stem not just from market forces but also from politics. As T. R. Reid notes in his new book "The United States of Europe," the euro "was specifically designed to challenge the global hegemony of the dollar." Similarly, China's rivalry with the United States in Asia and Latin America isn't a side effect of economics; it's an explicit ambition.
These challenges will take decades to unfold, and may not succeed. China may recoil from its manufacturing boom and its excesses; Europeans could revert to age-old continental tensions. The United States may revive itself through changes in policy.
Meanwhile, power is not transferring so much as dispersing. It may turn out, if trends continue, that no country or bloc of countries possesses the combination of economic and military power needed to reward the good, deter or punish the bad and impose international rules, order and security.
A multipolar world can be a chaotic place. The danger is not so much that the United States may lose power, but that the globe's new rivals may fail to strike and manage a balance of power. End-of-the-year Cassandras traditionally predict doom, gloom and anarchy. This year they're looking less preposterous.
By FRED KAPLAN
Published: December 26, 2004
IT'S a risky business to predict the decline of the American empire. Ask Paul Kennedy, the Yale historian, who issued such a forecast in his 1987 book, "The Rise and Fall of Great Powers," only to witness an almost immediate American resurgence.
Yet the signposts, at the end of this year, are ominous. As an economic power, the United States no longer sets the rules, much less rule the game. As a military power, it vastly outguns the rest of the world, but has a harder time translating armed might into influence.
On March 1, the European Union announced that it was raising import tariffs on a long list of American products, and would go on raising them each month until Congress repealed a subsidy for American exporters that had been ruled illegal by the World Trade Organization. Congressmen railed against this intrusion but finally gave in. Americans realized that, in the global economy they largely created and for 60 years dominated, they could no longer do whatever they wanted.
Last month, China's president, Hu Jintao, embarked on a 12-day tour of Latin America, and wound up making commitments to invest $30 billion in the region. China is now Brazil's second largest trading partner and Chile's largest export market. In trade, technology, investment, education and culture, China has been displacing the United States all across Asia, and is now starting to do the same in America's backyard.
There is nothing necessarily alarming about an expansive China or an emergent Europe, except perhaps that they coincide with a growing American dependence on both.
The United States government spent $650 billion more this year than it raised in revenue, and financed the deficit largely by borrowing from foreign central banks, mainly those of Japan and China. They have been willing creditors because American consumers send much of the money right back by purchasing foreign-made products. It's a neat balancing act, to a point. But the American accumulated debt to foreign investors has now swelled to $3.3 trillion - 28 percent of gross domestic product, nearly double the share of four years ago.
In the 1990's, the United States admonished Mexico and Argentina to get their economic houses in order. This month, the Chinese premier gave Washington a strikingly similar lecture.
These imbalances are not inherently disastrous. The Chinese get something out of the deal, a ready consumer market for their overheated production lines. If they stop lending to the United States, it would cause a deep recession here, but then Americans could not buy as many of their goods, and the recession would ricochet right back to Asia.
It's a variation on the old joke: If you owe the bank $1 billion, the bank owns you; if you owe the bank $1 trillion, you own the bank.
But what if another trillion-dollar customer walked into the bank? The bankers might be more willing to foreclose on the debtor, knowing that they could pick up business from the new tycoon.
The European Union, in many respects, is looking more and more like this new tycoon. Its currency, the euro, has risen in value by 35 percent against the dollar in the last three years.
Again, that is not necessarily bad. In theory, a falling dollar makes American exports cheaper, attracting demand that then boosts the dollar; a rising euro crimps European exports, which then lowers the euro; equilibrium is restored. In reality, this process unfolds slowly and shakily: in October, for instance, American exports rose, but American imports soared, too.
A more serious consequence of the dollar's fall is that the euro has become more rewarding for foreign investors, and they are reacting accordingly. In 2001, Middle Eastern oil-producing countries kept 75 percent of their currency reserves in dollars; now the figure is 61 percent, with much of the rest in euros. Chinese and Russian central bankers are also shifting reserves. This trend, at some point, could set off a spiral: the dollar declines, causing further sell-offs, leading to a further decline, and so on.
When the dollar has fallen in the past, the United States was a net creditor and there was no serious rival currency. Neither condition holds true now. As The Economist recently put it, "Never before has the guardian of the world's main reserve currency been its biggest net debtor."
Financiers and diplomats are beginning to ask: How much longer will the dollar remain the world's principal reserve currency? One could also ask, how much longer can the United States remain, as Madeleine Albright put it, "the indispensable country" of world politics?
This year, the United States spent nearly as much on its military as all other countries combined. No other nation possesses, or aspires to, anything like the reach of American armed forces.
Yet, if someday the United States finds that it can no longer count on foreigners to bankroll its deficits, it may also find that it can no longer afford a globe-spanning military. The war in Iraq has already stretched America's forces to the limit. In the 1970's and 1980's, when Pentagon strategists spoke of a two-front war, they envisioned having to fight simultaneously in, say, Germany and Korea. Today, they mean Mosul and Falluja.
About 40 percent of the American troops in Iraq are from the National Guard and Reserves, "weekend warriors" who never figured on serving long combat tours. As a result, Guard recruitment has fallen by 30 percent. If there is no large Guard and Reserve, there is no large Army. In short, not only has the Iraq war been harder than many imagined, it has also made going to war elsewhere a less practical option - and a less credible threat.
The economic trends are worrisome because they stem not just from market forces but also from politics. As T. R. Reid notes in his new book "The United States of Europe," the euro "was specifically designed to challenge the global hegemony of the dollar." Similarly, China's rivalry with the United States in Asia and Latin America isn't a side effect of economics; it's an explicit ambition.
These challenges will take decades to unfold, and may not succeed. China may recoil from its manufacturing boom and its excesses; Europeans could revert to age-old continental tensions. The United States may revive itself through changes in policy.
Meanwhile, power is not transferring so much as dispersing. It may turn out, if trends continue, that no country or bloc of countries possesses the combination of economic and military power needed to reward the good, deter or punish the bad and impose international rules, order and security.
A multipolar world can be a chaotic place. The danger is not so much that the United States may lose power, but that the globe's new rivals may fail to strike and manage a balance of power. End-of-the-year Cassandras traditionally predict doom, gloom and anarchy. This year they're looking less preposterous.
