American Power, Patterns of Rise and Decline; published in “Obama and the World” (Routledge Studies in US Foreign Policy)

The rise of China and the end of the American Century is a topic that has occupied policy makers, economists and investors throughout the past decade. While the continuing rise of China has recently been called into question by some, American decline still appears to be a foregone conclusion in the eyes of many analysts and commentators. However, any predictions about the shape of American decline require both a close examination into the nature of American power and influence today and a clear definition of what is actually declining. American leadership and power today is diversified across multiple areas of impact, and while these areas are all clearly interrelated, a shifting power balance across one or several does not necessarily result in a general “American Decline”. The following note attempts to define the nature of American power, look to history for lessons as to how the 21st century, widely termed the Asian Century may unfold, and highlight some of the issues that the US might seek to stave off any aspects of its decline that are of significance.

In the summer of 1897, Great Britain was celebrating the Diamond Jubilee of Victoria, the Queen Empress of the British Empire. At the time, she ruled over the largest empire the world had ever seen, comprising 20% of Earth’s landmass and an equal proportion of the global population. Britain’s Royal Navy controlled the high seas with more ships afloat than the next four largest navies combined and its merchants controlled global trade and the capital flows. At the same time, Britain’s GDP had already been overtaken in absolute terms by the United States and Germany, both of which produced more steel (and armaments) and were taking the lead in the creation of new industries like chemical and pharmaceuticals. At the apogee of British imperial power, strategists were already predicting its imminent decline.

Today, over a century later (and at the time of Queen Elizabeth II’s Diamond Jubilee) much has been written about America in Decline, the end of American Empire and America losing ground in the face of China’s rise. Looking at the publishers’ lists of new books on the topic, one would believe that decline, at least among intellectuals, “Anyone who tells you that America is in decline or that our influence has waned doesn’t know what they’re talking about.”
President Barack Obama
2012 State of the Union Address is a foregone conclusion. President Obama even felt the need to address the matter in the 2012 State of the Union address: While catchy in its pithiness, the phrase “American decline” does not exactly lend itself to precision, which makes an evaluation of the subject difficult. What is declining and how is it declining? Is American decline defined by being overtaken as the world’s largest economy by China, the general waning of influence of the US on international politics or by the closing of the military gap between it and the rest of the world? In order to discuss or evaluate the idea of American decline, a clear definition of decline is first required.

DEFINING DECLINE

Only 29% of the Chinese people feel that China is economically ahead of America according to a recent global survey by Pew. While 41 percent of the total surveyed said that China was the world’s economic power compared to 40 percent favouring the US. Everybody agrees that that the US today is still the world’s largest military, economic and political power, generating almost a quarter of the world’s GDP and nearly half of its military spending. Given the sheer magnitude of American power today, it is inevitable that the country will decline relatively to others in a dynamic world. China will surpass the US in terms of absolute GDP as early as 2020, but it will still be a developing country with low levels of personal wealth, an imbalanced economy and low levels of economic value addition. The analysis summarised in Table 1 is typical of analysis showing the rise of China’s power relative to America’s. The criteria is based on an index calculated from a country’s share of economic power (measured by GDP, trade and net capital exports) and clearly shows the expected growth of China and the relative macro-economic decline of the US over the next 20 years. Although economic and political power might well be related, the two are not perfectly correlated. Let us start at the end-product of US pre-eminence in political power. During the past 25 (or 50) years, American pre-eminence has driven global economic development, globalisation and integration, spread democracy (following the demise of communism in Eastern Europe), attempted to establish an international order based on universal human values, including the freedom of individual choice, personal liberty and the pursuit of happiness and worked with its allies to establish a code of conduct enshrined by global institutions such as the United Nations, International Monetary Fund, NATO, the World Bank, the Transatlantic Alliance and OPEC among others.

The test of a broader definition of power would need to weigh whether China’s economic rise (1) enables it to exert greater influence in these bodies, (2) undermines these institutions, or (3) enables China to replace these with others that are more in line with China’s interests and world view. We will take each in turn. Firstly, China’s influence in many of these bodies has increased as a direct consequence of America and its allies pursuing a policy of engagement. Secondly, with regards to institutions that allow for a veto to be exercised by the authoritative body, such as the UN, while China may have the ability to prevent resolutions of institution, this ability is no different from that of any member, regardless of relative economic strength. Finally, China has not introduced new international bodies and shows no sign of having the aim or influence to do so. The fact is that China does not seek to exert this kind of influence at this stage in its development programme. So, is there an absolute level of economic decline below which the US becomes irrelevant globally despite the prevalence of other factors? Answering this question requires a broader and deeper examination of American leadership in the world.

THE FACETS OF AMERICAN LEADERSHIP

We highlight five important facets of American Leadership, namely:

1. 1. Economic Leadership. As mentioned above, the tipping point of the US’s economic position relative to China will be reached between 2020 and 2030 by most measures. However, we may well be measuring the wrong things. Absolute size does not necessarily equal economic pre-eminence – beyond absolute GDP there are a number of additional factors which will continue to tip the scales of economic leadership in the US’s favour for some time:
      1. The US Dollar is the Global Reserve Currency. Despite signs of recent weakening of the dollar, the US Dollar remains the world’s major reserve currency, representing over 62% of global foreign currency reserves. Although the Dollar’s share has dropped from a high of 70% about a decade ago, mainly due to the introduction of the Euro, the recent global financial crisis has not reduced its attractiveness as the leading global reserve currency. The US Dollar’s position is a driver as well as a consequence of the country’s financial depth and provides it debt financing at an attractive cost of funding vs. other nations – and hence provides an on-going competitive advantage (The comparative interest rates for the US, China and India in the May monthly indicators – 0.25%, 6.31% and 8.00%, respectively – provide a good indicator of the difference between the US and two of the rising powers.) Clearly, the Rmb is not convertible and cannot be contemplated as a reserve currency by any of the world’s nations. Crossing the line of convertibility is the first step of a long process of establishing credibility.
      2. US Financial Market Dominance. The US remains the world’s most important and largest financial market. US listed companies represent 30% of total global market capitalisation and the US is home to the world’s largest bond market, with over US$35 trillion of debt outstanding (representing over 43% of global issuance.) The depth of its capital markets and the transparency of its regulations all ensure that the US will remain a, if not the, key destination for financing and investment for international corporates and investors for some time, regardless of the absolute size of its economy. Financial dominance is not decoupled from economic power of course, but a weakening of the latter does not automatically imply the loss of the former. The major Chinese indices have been tested during the global financial crisis and have not been found to be credible. In the past 12 months, when the GDP of China has risen 9.2% vs the US’s at 1.7%, the Shanghai and Shenzhen have fallen 15% each while the S&P has risen by 5% .
      3. US Financial Assets and Wealth. Tied to the two points above, the US in absolute terms remains the wealthiest nation by far, holding 39% of the world’s financial assets. The US is also the world’s largest source as well as destination of foreign direct investment with over US$3 trillion flowing into the US to date. Although China is the world’ second largest recipient of FDI at US$1.2 trillion to date, America’s level of FDI capital stock remains nearly three times as high as China’s and the structure of the US economy, its legal system and its support for the free flow of capital will ensure that it continues to receive the largest share of global investment for some time.
      4. Breadth of Economy. The United States has one of the world’s most diversified economies, balancing trade, consumption and investment with a high contribution from services (76% vs the global average of 63%) to GDP. Moreover, on a per capita basis the US generates near US$50,000 of GDP (on a purchasing power parity basis) the highest in the G8 and among the highest in the world. By comparison, despite the absolute size of the Chinese economy, it continues to lag far behind on per capita terms, with per capita GDP levels ranked 92nd globally on a purchasing power parity basis, below countries like Peru, Namibia and East Timor. More importantly the economy and the underlying society remains imbalanced, with among the smallest services sector in the world (at 43% of GDP), artificially low wages, low levels of consumption (at 35% of GDP vs. 70% in the US) and rising levels of income inequality (with the highest GINI coefficient of the world’s ten largest economies). China’s current slow-down is linked to these imbalances.
      5. Comparative Economic Value Addition. Finally, US industries and companies have high levels of economic value addition, driven by a wide range of factors including the development of intellectual property, the use of technology, high levels of capital investment and among the highest labour productivity in the world, with a US manufacturing employee creating US$104,606 of value annually compared to Chinese industrial worker producing US$12,642, a difference of over 8x. The size of the trade imbalance between the US and China belies a critical underlying difference in economic value add between the two countries. Looking at an example, the Apple iPad, a US$500 (retail price) product, is assembled in China and exported to the US. Although each iPad shipped increases the US-China trade deficit by a nominal US$250 (the whole price), less than 5% of this value is captured by Chinese companies, who provide important but low value assembly services. US-based Apple Inc. captures 30% of the value in the form of profits and the balance goes to the Japanese and Korean providers of hardware and components. The US’s productivity and the nature of its value addition remain in a different league to China’s, which still needs to industrialise a large number of its 700m peasants.
   2. Innovation Leadership. America also continues to lead the world in innovation. US citizens have won 299 of the 621 scientific Nobel Prizes awarded to date, a staggering 48% of the total . Chinese citizens, by comparison have won none. Among (mainland) Chinese-born, there have been four Nobel Prize winners, all of them in physics, and all of them following graduate studies and prize winning research conducted in the United States – as US citizens. While China by some measures may be overtaking the US in terms of number of international patents filed, America remains pre-eminent in terms of applied innovation. Of the world’s 15 largest companies by market cap, ten are American. More importantly though, four of these companies are technology companies (IBM, Microsoft, Apple and Google), of which three were founded within the past 30 years. While China also has two companies in the top 15, and ten companies in the top 100, all are state owned enterprises, oligopolists in domestic markets with no foreign competition (e.g. in energy, banking and communications.) The US has demonstrated like no other country in the world its ability to innovate, develop technologies, invent new business models and build new industries.

The death of Apple’s founder Steve Jobs unleashed a flood of tributes on China’s internet as well as a lively discussion around why China has been unable to bring forth a Steve Jobs of its own yet. While China has announced its ambition to lead globally in the development of clean energy and is currently building the world’s largest capacity across wind, solar, and hydro power, there were no Chinese companies among the top 25 filers of clean energy patents in 2011 (while the US had nine, including the top two filers). The US lead in innovation is deeply ingrained in its higher education, its corporate culture, its venture capital industry and in a society that values and supports independent thinkers and individual achievement (see the leader in the May edition of the Sign of the Times, “China and the Freedom Advantage”). Looking at the state of China’s largest growth industries, such as digital media and the internet, it is unclear whether China has or will have the potential to compete with the US in innovation without some fundamental shifts in its political risk appetite, which seems unlikely in the short term.

1. Military Leadership. Another area in which the US will continue to dominate the world for the foreseeable future is military power. The US contributes almost 50% of global military spending (not unlike the British Navy in the 1890s) and has the world’s largest navy and air force as well as the most advanced army in terms of technology. US military might spans the globe, with over 70 international military bases and the only true blue water navy in the world, capable of projecting power into other nations’ waters. US military spending is such that even on a per capita level, the United States has the second highest defence outlay in the world . This dominance, in addition to providing the US with the concrete ability to use military action as a tool of policy, allows it to shape and influence regional power balances globally to its own interests. In addition, the US is the biggest supplier of arms in the world at US$19.9bn compared to China at US$0.9bn . Although the projection of global power also implies global vulnerability, the US’s military pre-eminence has been and will continue to be a key instrument of national power, increasing Asian defence budget’s notwithstanding.
2. Alliance and Multilateral Leadership. The US has also strategically augmented its strength through the participation in and leadership of supra-national organisations, including the IMF, World Bank, NATO and others, although the level of US influence and participation in each varies from case to case. In some cases such as NATO, the US has an undisputed leadership position while in others, such as the IMF and the World Bank, it is the first among equals, often with outsized voice or participation rights (e.g. the US today has 4x the number of voting rights as China in each of the World Bank and IMF). Further, the US was instrumental in founding institutions in which it (arguably) does not enjoy preferential rights such as the World Trade Organisation and the United Nations, but continues to wield outsized influence or soft power in these bodies, despite often being at odds with the majority views of organisations (e.g. vetoing Security Council resolutions on Israel or failing to ratify the Kyoto Protocol). US participation in and leadership of these supra-national organisations strengthens its position globally and integrates it more closely with its allies. Only the US combines both the international clout as well as the will to wield long-term power in supra-national and multi-lateral organisations today, and as a result has a created a network of strategic allies around the globe. China, on the other hand, by virtues of, ideology, policy and geography, on account of the Western focus of the others, has been described as the “world’s loneliest superpower” . China’s allies, in the Middle East and Africa in particular, do provide much needed natural resources to fuel China’s rise but do not earn it international respect and often cost it power with the established leaders.
3. Cultural and Soft Power Leadership. Finally, and perhaps most importantly, the United States leads the world in soft power. Its culture (music, entertainment, literature, social media etc.) is broadcast around the world and its consumer products are even more global. The United States, and the American way of life, has exercised its fascination on subsequent generations of immigrants for over 200 years now with little sign of abating. It is telling that China has more students at US colleges than in any other foreign country, numbering 157,558 in the 2010-11 academic year. Even more telling, by some counts almost 75% of the children of current and retired minister-level Chinese officials have acquired either green cards or US citizenship. By comparison, few are the American citizens studying at Chinese universities and non-existent are the children of US officials who have applied for Chinese passports. America’s and China’s “performance” in Pew Global Attitudes Survey, which has been surveying international opinions for over a decade, is a corollary of their respective levels of soft power. While all countries surveyed, barring India, China and certain Middle Eastern countries, have a positive view (defined as over 50% of population having a “very favourable” or “somewhat favourable” opinion of the country) of the United States, China was unfavourably viewed by a diverse set of countries including Brazil, India, Germany, Japan and Mexico. Moreover, more often than not China’s image has trended downward in most countries during the past decade.

America still enjoys both breadth and depth of power. It could be argued that its soft power is actually the greatest source of its strength in the world: its values and culture, policies and institutions are found to be attractive and aspired to by people around the world. America’s ideals and its soft power are the ultimate instruments of its success in attracting and enabling human talent, upon which all of its economic, financial and military successes actually rest. As long as the United States can continue to maintain its fundamental attractiveness to large parts of the world, it will continue to acquire the human capital required to reinvent itself and maintain a leading position globally.

SCENARIOS OF DECLINE

We have examined other examples from history to determine the potential pattern of American decline. Throughout history, countries, dynasties and other political groupings have risen to dominate their known worlds, held on to increasingly tenuous positions in the face of growing external competition and internal pressures and subsequently declined back to their historical positions or fully disintegrated in the face of a rising power. This framework has held true across geographies and eras, whether the Romans in the Mediterranean Basin in antiquity, the Mughals on the Indian Subcontinent, the Mongols in Eurasia in the Middle Ages, or the British globally in the 19th century. Looking at the rise and fall of past empires we can see that these movements, although they unfolded over different periods of time, follow a pattern. They were rarely instantaneous and that declines, absent catastrophic disruptions, generally occurred over prolonged periods. The chart on the right captures the rise and fall of five major empires throughout history from the year of their founding to the year of their termination. While there is clearly some correlation between the size of an empire and its rate of development, the more interesting positive correlation is between the rate of an empires growth and that of its decline. It seems that empires, such as the Arab, Mongol and British, which rose very rapidly also fell very rapidly. The implication for America of course is one of timing. By most measures the 20th century has been the American Century, one in which the US has expanded within and dominated (to varying degrees) the global order. It stands to reason that the stability of institutions and systems will continue to sustain American power for a good deal of the 21st century. Looking at past empires again, we have extrapolated growth and decline profiles to make a series of estimates about the rate and timing of a potential American decline. Measuring the change of the US share of global GDP provides the clearest proxy for predicting US power in the world, as the United States (its last territorial acquisitions having been made in 1898, in the wake of the Spanish American war) making landmass an imperfect corollary to power, and soft power is difficult if not impossible to measure consistently over time.

Predicting US power and its potential decline also requires assumptions around the starting point of US dominance, as well as assumptions as to the timing of its peak and point of decline. Given the diversity of America’s leadership today, it makes sense to view US dominance through both political and economic lenses.

Economic Dominance Model. Economically, the US began witnessing rapid GDP growth and development during the middle of the second half of the 19th century. This development was  driven by the growth of railroads, the opening of the US West, industrialisation and steel production and a large influx of immigrants to the US. From approximately 1875 onward, the US consistently grew its share of global GDP from approximately 8% to a peak of 35% immediately after WWII, which quickly dropped to 25% in the mid-1950s. Since then US share of global GDP has trended down slightly to just under 22% now. In our economic model, US expansion would have taken place between 1875 and 1950 with the subsequent period representing a steady state plateau. Based on these assumptions, and looking at the growth curves of 15 previous empires, US power would begin to decline around 2030 and its decline would be complete by the end of the century. Taking only the five largest empires in history, decline would begin as early as 2015 and terminate around 2090. These calculations are based on applying the median growth curves to US power rather than their absolute size. On average, the empires examined typically managed to maintain periods of dominance for about 100 years in absolute terms before beginning to decline. On this basis, given that US dominance was “Based on an economic model, US power would begin to decline around 2030 and its decline would be complete by the end of the century.” established after the close of the Second World War, US power would continue unabated until the middle of the 21st century. Thereafter, America’s power would begin a long and prolonged decline into the middle of the 22nd century.

Political Dominance Model. Looking at political power provides a different starting point and trajectory of American power. Politically, the US did not begin exercising political power until the 20th century. While an argument can be made for Rooseveltian foreign policy starting in 1900 as the beginning of US political leadership, a safer date would be the US involvement in WWI and subsequent role in the restructuring of Europe. American political leadership continued to grow in the interwar years, during WWII and through the Cold War, culminating with the fall of the Soviet Union, a period that was (somewhat rashly, in retrospect) deemed the “End of History”. The logic above resultantly gives us a start date for American power of 1917-1918 and a peak date of 1989-1992. Applying the growth curves of 15 previous empires to these assumptions results in a much longer period of continued US leadership. Taking into account the relatively quick rise (from 1918 to 1990), the analysis suggests the plateau would last until 2065 and the decline would be complete by 2130. If we look to the growth curves of the five largest empires again, the plateau lasts to 2051, and the decline is completed a decade earlier in 2121.

However, it is important to realise that this calculation rests on the double assumption that US power peaked in 1992 and that it will continue to enjoy a period of stability before declining. Clearly, major external shocks change the speed and pattern of decline. In the face of America’s war on terror and the global financial crisis, many would argue that American decline is imminent or has set in already. If we were to, say, choose 1917-1918 as the starting point for American power and choose a date in the past decade, which contained 9/11, the war in Iraq and the global financial crisis, (2001 for illustrative purposes) as the turning point of decline, a very different estimate of American power emerges. In this case, the peak of American political power would be assumed to have set in during the 1950-1960s - in line with the US’ actual economic peak as measured by share of global GDP. Given“Based on a political model and taking into account 9/11, the war in Iraq and the global financial crisis, American decline may have begun in 2001 and would be complete between 2055 and 2065” the short and sharp rise of American power in this model, the decline post 2011, is equally rapid. Under this model the fall would be complete between 2055 and 2065, depending on whether one applies the curve of all 15 or just the five largest empires. This implies that a significant portion of the decline to come will occur in the near future and that we will be witnesses to the dislocation caused by the collapse of a great power.

PRESERVING THE POWER BASE

In 2010, 18% of global foreign direct investment went to the US and 11% went to China and India. If the major correlation of share of capital flows was based on a proxy of GDP (a big assumption but one that is broadly indicative of the real long term rise in economies) and structural economic and political readiness was established alongside GDP growth (again a big challenge and assumption), based on current expectations of the rise and fall of GDP, the US share by 2050 would drop to 14% while China and India’s share would rise to over 30% of the global capital flows. If capital changed hands in such large amounts, power would too. The geo-politics of economic power require the US to address some fundamental issues and assumptions.

It is becoming increasingly clear that the US has made strategic errors in allowing certain critical territories to slip from its grasp and certain assumptions to remain unchallenged. The US has neglected three critical territories. The first is the Greater Pacific region, that is, the Pacific region expanded to include India, which is one of the most dynamic commercial regions of the world and a strategic bloc for China to control. It is only recently under the Obama Administration that the claim to the region has been reiterated . The second is the cross-section of the world that has oil, minerals and commodities, in particular, Africa and Russia but also parts of Latin America, South Asia and the Arctic. Third is the “commercial high ground”, that is, the execution of regional or world-changing projects and endeavours. It has been a long time since President Kennedy set the race to put a man on the moon. China in the meantime is learning fast and building railways from Beijing to Lhasa, a 35km 6-lane sea-bridge and a dam that can be seen from space.

The US has also allowed three important assumptions to go unchallenged. The first is the assumption of inevitability – of the decline of America – and is a dangerous and self-fulfilling one. In accepting inevitability, American policy makers and leaders implicitly make policy that brings about the decline of their own nation and given the dependency of their allies, they place these nations at risk too. In their calculations they forget that the Soviet Union could have eclipsed America but did not, that the EU was hailed as a Superpower that has not materialized as such and that Japan was expected in the 1980s and the 1990s to rise to dominate the world but did not. The world and especially America cannot afford to enter into such dangerous thinking. The second assumption is that capitalism has failed. There is no doubt that the global financial crisis has damaged the credibility of the US as a leader of capitalism and undermined its most recent brand of banking and finance-led capitalism. That this was a failure of a recent brand of financial engineering as opposed to capitalism itself has not been demonstrated by the resurgence of the US economy. The third assumption is that carbon-based fuels are sufficient to meet our needs is also dangerous in a consumerist world that is expected to reach 9 billion people by the turn of the century. The discovery of shale gas provides a “bridge” to a new energy not a way to renew a superpower. The discovery of functionally superior energy sources creates the basis for subjugating or leapfrogging America just as America could leap-frog the British Empire by becoming the oil Superpower over Great Britain’s coal-powered empire.

In order to maintain and defend its pre-eminence in the world, America will need to focus both inward to serve its domestic constituents well and outward to effectively manage relationships with its allies and partners. The divisiveness and partisanship in American politics that began since the wars following 9/11 and continued through this administration’s tenor is unprecedented in recent memory and threatens to limit the effectiveness of America’s leadership and response to global (and domestic) developments. The inability to agree the response to the US budget deficit led to the de-rating of the US in the summer of 2011 and undermined the capital markets further. Unless its leaders can rebuild a consensus to effectively govern and legislate, the country will not only corrupt its domestic politics it will lose it moral authority in the eyes of the world and gradually undermine its influence on a wide range of international issues. The US has some way to go in re-building and enhancing global trust in its leadership position, which suffered greatly during the Bush administration. While President Obama entered office with a measure of international goodwill, and has been seen to have enhanced the perception of the US, the administration has been unable to reverse the trend line of decline in the US’ position as a trusted global leader.

To retain its supremacy, Americans would, conscious of what made America powerful in history, renew that power in the light of global developments. This is a longer topic for another time.

CONCLUSION

Turning the clock back to Queen Victoria’s Jubilee, we can confidently say with the benefit of hindsight that imperial strategist’s fears of imminent decline at the time were premature. It took another twenty years and the devastating impact of the First World War to push the British Empire into terminal decline and yet another twenty plus years and an even greater war to complete the fall of power. Whatever happens to the US, it will not happen overnight.

Based on the past, our model places the beginning of the decline of American power as early as 2001 and as late as 2065. This implies an end of power at the earliest by 2055 and at the latest at 2130. Luckily, as the ad says, “The past is not a certain measure of the future.” Our analysis demonstrates that America is the only nation with the breadth and depth of leadership to be the superpower. It is clear that China’s extraordinary rise has the potential to be an asset to the world but China is not yet well-placed to surpass American power. The Chinese people are very clear that they have a long way to go to rival a nation which they perceive as pre-eminent. It is the west that has developed a frenzy about the fall of America. It is worth noting that at the end of the first decade of the twenty-first century, America, China and India together accounted for over 40% of the world’s population, about 37% of the world’s GDP, 33% of the world’s fertile land, over 36% of the world’s oil consumption and 20% of world trade. In the long term, the sharing of economics and power is likely given these statistics. However, in determining whether the world should want a pre-eminent America, one has to examine whether the collapse of American power is likely to deliver enhanced peace, prosperity or freedom any time soon, whether the European Union or China or India are ready to deliver a better world order or whether some form of consensus-based world order is possible. These may well be end states for the future but, in the meantime, reasserting American leadership appears to be a requirement for global stability. Closely tied to American leadership is economic growth and stability. If the US’ economic recovery post the global financial crisis is not sustainable we may well find ourselves in a lost decade made more risky by the EU’s (in)ability to resolve its debt crisis and the on-going slowdown of China’s economy.

Barring a catastrophic disruptive event (which is not impossible given what we have witnessed since the turn of this century), American power is set to remain the most powerful force in the world for a long time to come.