Pax Americana is Here to Stay
Lost in much of the fretting (or boasting) about American declinism is the massive lead the American economy continues to hold over China, despite four decades of rapid growth for the latter.
Much has been said recently of America’s “decline” on the world stage, with frequent narratives on American global primacy ceding ground to an unstoppable and strategically focused China, and thus with it the larger rules-based international order Washington helped construct in the post-war period. Notions of the end of Pax Americana are almost treated as a given nowadays, with an acquaintance recently declaring in a work call “The US is over!”
The level of confidence expressed by many experts that America will be overtaken by China is puzzling, given that a perusal through relevant data suggests that Beijing is still a long way from supplanting America in the three key pillars of economic, technological, and financial prowess. It is true that the hostility of the Trump administration towards free trade, international institutions, and traditional allies has dismayed those of us who champion the merits of globalization and international cooperation, and paints an image of an America no longer interested in upholding the global rules-based international order (a huge source of frustration to many of America’s European and Asian partners who depend upon this order to safeguard their sovereignty).
However, we risk tunnel vision by focusing solely on the words (or in this case tweets) and actions of the president in lieu of the raw metrics of global power; particularly within the economic sphere. Daily media barrages of racial tensions, petty culture wars or inept governance should not make us susceptible to excessive American declinism. I believe that America’s economic, technological, and financial prowess, among the key pillars of global preponderance, will remain secure for the foreseeable future.
Too big to fail
Lost in much of the fretting (or boasting) about American declinism is the massive lead the American economy continues to hold over China, despite four decades of rapid growth for the latter. The total output of the US economy in 2019 was US$21.4 trillion, significantly larger than China’s output of US$14.3 trillion. On a per-capita basis, the division becomes more stark—US$65,280 to US$10,261 (at current US$).
America’s share of the world economy has remained virtually unchanged since 1980, when it accounted for 25.2 percent of world GDP. As of December 31st, 2018, the US share only dropped to 23.9 percent. Over the same period, Japan’s share of world GDP fell from 9.7 percent to 5.8 percent, while the European Union’s share fell from 34.6 percent to 22 percent. This suggests that China’s rise has been at the expense of other countries’ share of the global economy, rather than that of the US.
Can China ever catch up?
Furthermore, China’s economy had already been slowing since peaking at 14.2 percent growth in 2007, before dropping to 6.6 percent in 2018. As Derek Scissors of the American Enterprise Institute argued last year, the quicker China slows down, the less likely it will be able to catch up with the US. While the Chinese Communist Party (CCP) insists that China will experience a gradual slowdown, internal factors suggest a more rapid slowdown would not be out of the question. In the aftermath of the pandemic, China watchers warned that the CCP had doubled down on the debt-fuelled, state-directed investment strategy which characterized its response to the 2008 global financial crisis.
As observed by late Indian economist Deepak Lal, the aftermath of the big surge in public spending post-2008 saw industrial producer prices fall steadily after 2011. This deflation was partly attributed to the glut in production in major Chinese industries such as steel, coal, glass, aluminium, solar panels, and cement. While this may inflate China’s baseline output (and therefore GDP), the question is whether these add value to the economy.
This emphasis on massive infrastructure investments (conducted largely through state-owned enterprises) will arguably prove a drag on future growth. The crowding out of private investments makes it harder for China to transition from an investment-driven economy to a consumer-led one, a long-stated goal of the CCP. Household consumption as a percentage of GDP in China remains relatively low at 38.7 percent in 2018—on par with countries such as Algeria and Gabon and dwarfed by 68.1 percent household consumption in the US. A lack of competition also hinders productivity growth—data from the Conference Board found that China’s projected level of output per worker in 2019 was only 22 percent of America’s.
Inefficient in innovation
Productivity growth remains the engine of capitalism, and is more often than not driven by technological development. While much has been made of the so-called “tech war” between the US and China, the US largely remains at the forefront of technological innovation. The 2019 edition of the Global Innovation Index (GII), considered the most comprehensive measurement system of global innovation, ranked the US third worldwide, while China stood at a respectable 14th.
Furthermore, a February 2020 report by the Centre for Strategic and International Studies (CSIS) noted that while China has become more innovative since 2017, it still suffers from low innovation efficiency (meaning that the significant amount of resources it puts into innovation still produces a smaller level of outputs). The report warned that certain metrics used to demonstrate Chinese innovative excellence can be misleading. For instance, although China is the world’s largest patent producer, about two-thirds of the patents produced every year tend to be utility model patents (defined by the World Intellectual Property Organization as providing protection for “minor inventions” based on incremental improvements to existing products), while only a third can be considered “higher-quality invention patents.”
Brian Stewart
In key sectors such as semiconductors, Chinese equipment and device manufacturers are still heavily reliant on US-manufactured semiconductor components and technology according to Jonathan Curtis of Franklin Templeton Investments, a state of affairs they will not be able to change anytime soon. In other areas, such as e-commerce platforms and new-electric vehicles, China has been more successful.
Without a major boost to productivity, China will instead have to rely on the sheer size of its market. However, current demographic projections suggest that’s a looming problem for China. A recent forecast by the United Nations World Population Division projected that the number of working-age Chinese (aged 15–64) will fall by about 42.8 percent between now and 2100, while the number of Americans of working age will rise by about 14.2 percent.
What about purchasing power?
Okay, you may say, the US still leads in terms of sheer economic output. But what if we adjust GDP by purchasing power parity (PPP)? Doesn’t that already show China as having overtaken the US? In fact, comparing the US and China through PPP can be misleading according to Scissors.
Scissors notes that while applying PPP is sensible in that prices for similar items vary across borders, they are also problematic in that prices often vary within borders. It is generally uncommon for prices to remain constant between, say, populated urban areas and smaller rural towns. As well, the measurement of PPP requires open markets to eventually force the prices of similar products to converge. However, this often does not hold when it comes to the trade in goods and services (even between linked economies such as Chinese provinces), and more so for investments goods—especially for countries with restrictions on the movement of capital such as China.
Furthermore, GDP does not necessarily measure the size of an economy, but annual economic activity. As already discussed, not all economic output adds value to an economy. Scissors argues a better indicator of the size of an economy is national wealth—the value of real estate, stocks, and other assets (which accumulate over time). By this metric, the US remains far ahead of China, with Credit Suisse’s estimations of America’s total household wealth in 2019 standing at US$106.0 trillion, compared to China’s US$63.8 trillion.
The Greenback is still supreme
The US Dollar remains the settlement currency of choice for the majority of international payments, with data from financial services network Swift showing the US$ being used in 45.78 percent of international payments in May 2020 alone, while the renminbi only saw usage in 1.22 percent of cases.
As noted by Gideon Rachman of the Financial Times: “The slogan on the greenback is ‘In God we Trust.’ The world’s appetite for dollars sends back the implicit message—’In America we Trust.’ If that trust survives coronavirus, so will American primacy.”
American financial infrastructure remains robust, even in the worst of times. In a time of great uncertainty in the international economy, investors continue to flee to US Treasury Bills, not Chinese bonds. Wall Street remains the financial trading center of the world, with the New York Stock Exchange alone worth US$23.12 trillion in market capitalization in March 2018—nearly 40 percent of the world’s total stock market value. By comparison, the world’s fourth largest global exchange, the Shanghai Stock Exchange, only measured at US$5.01 trillion. Even when combining the three independent stock exchanges of the PRC—Shanghai, Shenzhen, and Hong Kong—China remains dwarfed by the US.
The 27th edition of the Global Financial Centres Index (GFCI 27), which provides evaluations on the competitiveness of major global financial centres, ranked New York first with a 29-point lead over Shanghai (ranked a respectable fourth). New York also ranked first in all five metrics of competitiveness used for the GFCI model, namely business environment, human capital, infrastructure, financial sector development, and reputation.
Contrary to the narrative of the US being left behind in the burgeoning field of Fintech while China races ahead in developing cashless payments and digital currencies, the GFCI 27 ranked New York first in competitiveness in fostering the Fintech industry (overtaking Beijing from the previous year). With Silicon Valley and Wall Street having long dabbled in the development of financial innovations, the US private sector stands in a good position to spearhead the development of safe and secure digital currencies, according to former US Secretary of the Treasury, Henry M. Paulson, Jr., while developing the necessary controls against usage in illicit activities.
As Paulson points out, the rapid development of Fintech in China—including digital payment systems and a pilot digital renminbi project by China’s central bank—will most probably not pose a serious threat to the global dominance of the US Dollar: “A digital RMB would still be a Chinese RMB. No one is reinventing money.”
We’ve been here before
I think it is premature to start composing obituaries for the American global project. Indeed, this isn’t the first time the demise of America has been predicted. In the 80s, it was seen as inevitable that Japan, with its rapid post-war economic growth and superior model of state-led industrial capitalism, would overtake an Uncle Sam weary from imperial overreach, stagflation, and social instability. In a possibly prophetic parallel to Martin Jacques’ 2009 bestseller When China Rules the World, in 1979 a Harvard sociologist wrote Japan as Number One, while a 1990 US government study warned the Japanese were either leading the US or rapidly catching up in the majority of emerging technologies at the time. What followed instead were two decades of economic underperformance.
While the rise and fall of great powers is a historical given, the significant lead held by the US in economic clout and national wealth, technological innovation and global finance alongside China’s internal challenges of low productivity, demographic decline, and chronic underconsumption, suggests to me that Pax Americana is here to stay for the foreseeable future.
