November 8, 2016: The Day American Hegemony Died

30.01.2017

America’s capacity to assert leadership has weakened in a number of spheres in recent decades despite the absence of significant enemies. Geopolitically, countries will cease to plan on the basis of American military protection. Regional blocs will gain increasing control over the air and sea spaces that surround them, albeit usually with the leadership of a power that is unlikely to follow the US path of seeking to expand control in their area to the entire globe.

The United States was the dominant world power for seventy years after the end of World War II. Its power rested on technological and economic leadership, a military edge that since the end of the Soviet Union is unprecedented in world history, and a network of allies that extends throughout the world. We can call American power hegemonic because its allies and even many of the countries it intimidated and dominated accepted the global principles the US championed: (1) never-ending efforts to remove barriers to the flow of capital around the world, (2) decolonization and respect for the borders, though not always for the elected governments or dictators, of sacrosanct national territories, and (3) freedom of navigation on seas and in air space, the collective commons that would be guarded by US military might. American efforts to prevent or undermine alliances that were not led by the US finally achieved success in 1989 with the fall of the Soviet Union and the unraveling of the Warsaw Pact.

America’s capacity to assert leadership has weakened in a number of spheres in recent decades despite the absence of significant enemies. Despite its overwhelming military advantage, the US was defeated in Vietnam and Iraq. American military power is mainly destructive. It can bomb other countries but recent disasters in Afghanistan and Libya demonstrate that the US is unable to use its military to impose the governments it wants in other nations. The US military, the American policymakers and diplomats who operate under the Defense Department’s umbrella, are increasingly reduced to ad hoc tactics in lieu of devising a new strategy that would acknowledge the limits of American military power. Threats are issued or implied. Protection from real and imagined enemies (increasingly that means China for Asians, and Russia for Eastern Europeans) is offered, even as neither the givers nor the receivers of those assurances have any feasible plan for how, if American bluster and bluffs are insufficient, such protection can be delivered without ending in catastrophic war.

US economic power has been in decline since the 1970s. Its technological leadership now is confined largely to software. Manufacture is increasingly done elsewhere in the world or depends on chains of production that span multiple countries. American wealth comes from its ability to draw in, and speculate with, surplus capital from around the world. As with military might, the American advantage is based on perception. As long as the dollar is seen as the most stable currency and US government bonds as absolutely safe, money from other countries will continue to flow to the US The US is in competition for financial capital with tax havens, most of which are located in British overseas or crown territories. Such havens are merely legal fictions. Wealth is not buried in vaults under the Cayman Islands. Rather, money deposited there is immediately re-deposited in accounts in real banks with real assets in the US or Britain. As long as the US has the largest economy, is the largest source of safe government debt, and has strong legal protections, it will be the main site for the long-term investment of such money.

Trump’s election has called into question the assumptions that sustain America’s system of alliances and its safety as a place to invest money. While it is too early to know how erratic or bizarre Trump’s policies will be, the nature of his cabinet appointments and early Executive Orders indicate that he will seek to reopen trade agreements (he already has withdrawn the US from the Trans-Pacific Partnership), undo regulation of financial firms, and rearrange long-standing alliances in Europe, Asia and Latin America. His plans for tax cuts and increased military spending, like Reagan’s, will not be offset by domestic budget cuts and therefore will cause dramatic increases in the budget deficit. The current Republican Congress will not follow the examples of the Congresses of the 1980s, which followed the Reagan tax cuts with later tax increases that reduced deficits in part. The Trump deficits will widen until there is a financial crisis or until another Democratic Administration comes to power and, like Obama and Clinton, cleans up the messes left by Republican governments that disingenuously claim concern about the debt that will be “left to our children.”

How will governments and investors around the world react to the Trump Administration? They will seek to protect themselves from disorder. They will organize themselves into regional blocs that will strengthen mutual defense treaties and create free trade zones. Such decisions will, at least in part, insulate their economies and territories from erratic and dangerous American policies. This will strengthen regional powers that have the ability to offer military protection and that have economies strong enough to absorb goods and provide stable currencies. Few countries can offer both, and no country or even set of countries can import as many goods as the US, which for decades has been the ‘consumer of last resort.’ In any case, Trump will have only limited ability to reduce US imports. Rather, countries will work to build alternate markets and will try to adjust from export-oriented economic growth to strategies designed to boost domestic consumption. While these adjustments will take decades to fully accomplish, almost immediately the US’s ability to direct the global economy will be lost. It no longer will shape global trade agreements or rule the IMF and WTO. As confidence that the US can sustain global demand or maintain a stable dollar is lost investors will hedge their bets, placing their capital in more countries and denominated in various currencies, none of which will be the world reserve currency.

Geopolitically, countries will cease to plan on the basis of American military protection. Regional blocs will gain increasing control over the air and sea spaces that surround them, albeit usually with the leadership of a power that is unlikely to follow the US path of seeking to expand control in their area to the entire globe.

Someday, a more stable, rational, and internationally minded president will take office in the US. However, the world will know that if Americans elected a Trump once they could in the future elect another bizarre president. Confidence in the rationality and restraint of American voters now is lost forever, and that basis of American hegemony never will be recovered.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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