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A dollar in the water on blue background (Thinkstock)
A dollar in the water on blue background (Thinkstock)

America’s global economic leadership teeters at a tipping point Add to ...

The imperial power of our times has been the United States of America. But there is good reason to believe that America’s economic, political and military power have plateaued, and may have even reached a tipping point into decline.

For generations, historians, political scientists and economists have debated the rise and fall of empires and leading nations, and what it means. Since the end of the Second World War, the debate on global leadership has focused on the ebb and flow of American influence and leadership, and the prospective countervailing influence of other powers – the USSR from the 1950s to the 1970s, Japan in the 1980s, then the European Union, and more recently, China.

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The U.S. share of global gross domestic product has been shrinking for three decades. In the early 1980s, the U.S. accounted for 26 per cent of the world’s GDP; it is expected to drop to 19 per cent this year. This is not surprising, particularly given the rise of emerging markets over the past decade.

The U.S. still has the underlying potential to grow at 3 per cent annually or more this decade – faster than most other industrial economies. However, we all know that the 2008 financial crisis was precipitated by an excessive risk appetite and inappropriate decisions and practices within the American financial system, combined with inadequate regulation. The long recovery period – now in year five, and still not back to normal – has diminished America’s global economic influence and standing. Canada, living in America’s shadow, is acutely aware that American growth has been impaired since 2008, since we have felt the consequences.

The never-ending fiscal turmoil in Washington, and the inability to act on a long-term plan to deal with a structural fiscal imbalance, are further eroding U.S. economic and fiscal credibility in other Western capitals and in financial markets. Since Washington appears unable to get its own act together on economic and fiscal policies, other nations are less prepared to accept its guidance on economic and financial affairs.

If America’s power and influence have peaked, who’s next? China is the obvious leading competitor or even a potential successor. China’s GDP will likely surpass that of the United States within the next decade or so.

Yet while China has tried occasionally to flex its geopolitical, military and economic muscles (such as with a space program or a blue water navy), it has been unable to use its rising economic power in a consistent manner, and struggles to balance internal demands on its resources. Moreover, China’s internal political leadership model – in which the Communist Party has historically been the sole source of power – appears to be challenged by conflicting internal forces and interests. If China cannot figure out how to evolve its internal leadership toward a more open process, how could it ever provide credible global economic leadership?

Of course, the U.S. could always take action to re-assert its global economic leadership. It reached out to the G20 during the 2008 financial crisis, a sign that the U.S. knew it could not solve the crisis alone.

The most obvious immediate area where the U.S. could show economic leadership would be the free-trade negotiations now under way, specifically the Trans-Pacific Partnership (TPP) and free-trade negotiations with the EU. Successful completion of the TPP under American leadership would both advance the cause of free trade and set a high standard for other prospective TPP entrants, specifically China.

The most likely scenario is for the U.S. to remain the most influential nation economically, but its power and influence to plateau and to slowly ebb. As that occurs, the global system might become increasingly fractured, unable to form a consensus even in times of crisis. Or the collective of nations might realize that since no one nation can dominate, consensus needs to be formed through alliances and practical co-operation. This evolution should be interesting.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.

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