Argument

America, the Insecure

Hey, America: You're good enough, you're smart enough, and doggone it, people like you. Thoughts from across the pond on the U.S. obsession with exceptionalism.

LONDON — We hold these truths to be self-evident: The United States is the world's original and still-greatest political experiment, founded upon a creed of liberty for all in a land of unprecedented, unparalleled opportunity. This land's manifest destiny is to be a shining city on a hill, a light by which the rest of the world may see the glories of a new and better world. If the journey, approved by Providence, has been long and hard, it is all the more noble for being so. This is, was, and always shall be an exceptional nation, the envy and wonder of the world. America is, like, awesome.

That, at any rate, is the message coming from Tampa, Florida, this week. The Republican Party's convention is, like all such gatherings, a moment in which the promise of America is called to renewal and American greatness is reaffirmed as the country's guiding star. If the United States is not exceptional, then what is it and what is its purpose?

As former Secretary of State Condoleezza Rice put it in her speech on Wednesday, Aug. 29, "The essence of America, what really unites us, is not nationality or ethnicity or religion. It is an idea. And what an idea it is. That you can come from humble circumstances and you can do great things; that it does not matter where you came from -- it matters where you are going."

Viewed from this side of the pond, it is easy -- and perhaps often tempting -- to view this as just so much baloney and balderdash. This doctrinal declaration that America rocks has all the heft and seriousness of a slogan culled from Team America: World Police.

Calls for, as New Jersey governor and keynote speaker Chris Christie put it, a "second American century" cannot quite silence the suspicion that, for all America's great strengths, time and history are against the United States -- and, worse still, Americans know it. Just as the glories of the Roman republic were never so keenly hailed as when the republic was dying, so there is a fin de siècle whiff of decay about this week's paeans to American exceptionalism. The warnings are there. As Rudyard Kipling put it in his great poem "Recessional":

Far-called our navies melt away --
On dune and headland sinks the fire --
Lo, all our pomp of yesterday
Is one with Nineveh and Tyre!
Judge of the Nations, spare us yet,
Lest we forget -- lest we forget!

Britons can give you chapter and verse on these matters. One of the lessons is that absolute decline of the sort Britain endured for half a century is not as terrifying as it may seem. The comparative decline the United States may face this century is an altogether smaller problem.

Of course, no one, not even Democrats, can afford to deny American exceptionalism. President Barack Obama may have made the blunder of suggesting that other countries -- notably Britain and Greece -- might consider their histories exceptional too, but his own self-proclaimed "improbable" journey to the White House endorses his essential belief in American uniqueness. And he has doubled down on this message: Even Obama admits that nobody puts American exceptionalism in the corner. Pilloried for this by Republicans -- with, it must be said, a measure of dishonesty notable even by the shabby standards of election-year grime -- Obama was obviously right (even if the number of countries called to history is, for now, still quite small). Consider France, for instance. President Charles de Gaulle's "certain idea" of France was the belief, tenaciously held despite all the 20th century's myriad disappointments, that France was, is, and ever would be an exceptional nation. Echoes of this persist to this day: France will be different because France is exceptional.

But there are degrees of exceptionalism. The American polity is indeed different from, to take but one example, the Scandinavian model -- yet by any sensible measurement they must be considered close cousins when compared to political and economic systems that predominate in, say, the rising Asian powers. This is not only a matter of wealth (though it is partly that), but also a recognition that Europe's intellectual roots are also America's intellectual beginnings -- even if the New World's habits and preferences have sometimes subsequently diverged from the Old World's.

The differences are more of degree than kind. To take but a single example: Once state and other local taxes are accounted for, total government spending in the United States begins to approach European levels (even more so when the costs of American health-care and greater European redistribution to the poor are included in the calculation). Few politicians like to talk about this.

Moreover, whatever legitimate criticisms may be made of it, the European Union is itself an exceptional project rooted in an idea almost as audacious as that which drives the great American experiment: namely that, after centuries of turmoil and warfare, the peoples of Europe can build a better future if they unite in a common purpose. Constructing a pan-European sense of identity while still respecting the prerogatives of individual nation-states is a bold, sometimes compromised, and as yet unfinished ideal, but it lacks neither ambition nor seriousness. It too, in its way, is a great experiment.

Nevertheless, assailed by the prospect of becoming, according to the Republican critique of Obama's administration, more like Europe on the one hand and spooked by the (unavoidable) rise of China on the other, this Republican convention seems steeped in distress. How did it come to this? What caused this crisis in American exceptionalism? What happened to American swagger? Whence this fretfulness? Most of all, perhaps, where is this generation's new frontier to be found?

Neither political party has a plausible or stirring answer to that question. When George W. Bush suggested in 2004 a manned mission to Mars, the proposal was mocked to death. Rightly so, perhaps, because it was a ploy smacking of desperation and, what's more, one designed to distract attention from troubling events and setbacks elsewhere.

Recall that, in the Republican millennial primary, Bush had run against John McCain's "national greatness conservatism." Bush promised a humble foreign policy and, in general, a modest domestic presidency too. And back then, William Kristol, David Brooks, and other (genuine) neoconservatives considered this a depressingly small vision.

One day in September changed that. Suddenly, America discovered a bigger, grander purpose. The eagle would rise from and soar above the still smoldering ruins of the World Trade Center. A fresh battle was joined, and all countries were to choose their side -- with us or against us, but no messy middle ground.

Real life proved more complicated. National greatness conservatism had its cause but lacked the means or even, sometimes, the desire to see its mission through. It had a short half-life too; even before Bush won reelection, it was on the wane, pinned down in the Hindu Kush and bogged down in the sands of Mesopotamia.

Even so, Bush's second inauguration speech was a manifesto for global liberation so sweeping and fanciful that his own State Department quietly backed away from its promises, retreating to a quieter, more nuanced appraisal of the compromises even hegemons must sometimes accept. But as the wars in Iraq and Afghanistan dragged on, a chorus of voices began quietly asking a pair of terrible questions: Is this it? Was it worth it? American foreign policy gave off the stench of failure.

Today, the more a party talks about American exceptionalism, the more one suspects it fears for the future. It reeks of fear -- not strength -- and like most such boastfulness seems designed to camouflage insecurity. But, after a decade of grinding, attritional warfare in which there've been precious few clear-cut victories and with the aftershocks of a calamitous financial crisis still felt, how could it be otherwise? (Never mind that the economic whirlwind was, at least in part, the consequence of American hubris.)

If Americans fear they're no longer as exceptional as they should be, that's at least in part a consequence of poor George W. Bush's failed presidency. Empires wither when they're overextended abroad and underresourced at home. Rome was lost in Rome just as much as it was doomed in the provinces.

Yet despite Washington's fondness for "picking winners" overseas (an approach, incidentally, that is at odds with the Republicans' view of domestic industrial policy), what's apparent is that the splintering of old orthodoxies in the Islamic world is both a response to American rhetoric and utterly independent of it. If this seems paradoxical, then so be it. The United States neither caused nor can control the so-called Arab Spring -- yet one can't quite suppose that American hymns to universal values had no effect whatsoever. The rippling consequences of both the end of the Cold War and the 9/11 attacks are still being felt, often in surprising ways.

Despite all this, the United States does remain an extraordinary, even an exceptional country. It does not lack resources or will, and its relative decline vis-à-vis other powers is, in one sense, evidence of the American century's success. That is, American notions about the path to liberty and prosperity may not be as universal as some boosters think, but they remain powerful, even inspirational ideas. And Americans are right to celebrate them. The American idea really is worth preserving and celebrating. But that doesn't mean it must be cheapened or swaddled in bombast. Leadership, however, is never as selfless as its leaders like to suppose it must be. Certainly those being led rarely see it in the same terms as those doing the leading. But if other parts of the world are becoming more American (that is, classified by organizations such as Freedom House as "free" or on the path toward being free), this is something to cherish, not fear.

Despite protestations to the contrary from the likes of McCain this week, these are not unusually dangerous times -- rising prosperity in other continents is evidence that the American-led world order did its job. Wasn't part of the enterprise to promote and support the success of American-style capitalism abroad? The American model is unique in its specifics; its general thrust or principles really are more universally useful. Relative decline is not always a bad thing, not least because, for example, the closer China is lashed to global markets, the closer the country is tied to American interests. Chinese prosperity is more of a promise than a threat. In any case, even were this not the case, the American eclipse is still some decades distant.

Viewed in terms of this kind of time scale, the United States has little to fear and much of which to be proud. Even the indignities and the self-inflicted shame of a decade during which the United States disgraced itself in the name of the War on Terror has not yet entirely eliminated all this -- even if, at times, Washington has appeared to forget that the rest of the world is watching and that foreign peoples will measure American actions by the yardstick of American rhetoric. Indeed, it is America's greatest friends who have reason to feel betrayed by its shortcomings at Guantánamo, at Abu Ghraib, and in the CIA's "black sites." Preaching the faith is one thing; living it is another. And the United States has too often asked that its good intentions compensate for its practical and ethical failings. Exceptionalism, if it is to mean anything, also means setting the bar high for one's self.

Britain long ago accepted relative decline as something inevitable. Bankrupted and exhausted by two world wars, Britannia reappraised its position. Yet today this small island of just 60 million people remains the world's sixth-largest economy and is still, in so many ways, an exceptional and extraordinary place. The opening ceremony for the London Olympics was a poppy, populist celebration of all this -- it spun a surprisingly coherent narrative of an exceptional nation that, from Shakespeare to the Industrial Revolution to popular culture, has transformed the world. It was an oddly stirring story that put decline in its proper context.

Someday, some time still long in the future, the United States will tell a comparable story of its own. This too will be no disgrace. Sometimes it's enough to be good without having to strain to be exceptional.

Ronald Martinez/Getty Images

Argument

The China Bubble

U.S. companies are banking their future success on tapping into the enormous Chinese market. They're in for a nasty surprise.

At the height of the dot-com bubble in 1999, the magic word for hyping a stock was "Internet." Pets.com, one of many speculative dot-com companies, earned a gilded stock price of $11 per share in early 2000. Buoyed by an initial investment by Amazon.com, it ultimately raked in $300 million in early financing. Like many Internet companies in that era, however, it never earned a profit; when the bubble popped in late 2000, just months after Pets.com went public, the company announced its liquidation, driving shares down to 19 cents, a 98 percent loss. Today, the magic word for hyping stock could be "China."

A China strategy remains the holy grail for global companies. While China's growth has slowed from over 10 percent just two years ago to 7.6 percent in the second quarter of this year, executives still make their China strategy prominent in pitches to analysts and investors. Thirty-seven percent of companies surveyed from a range of industries consider China "critical to global strategy," according to an Economist Intelligence Unit report from November that surveyed executives from 328 companies. Forty-six percent expect China to be their biggest market within 10 years.

The conventional wisdom is that multinationals that successfully build market share in the fast-growing Chinese market will deliver profits that reward investors handsomely. Indeed, the success stories can be astonishing: Yum! Brands, which operates over 3,800 KFC restaurants in China and claims a 40 percent share of the fast-food market, received roughly 40 percent of its 2011 revenue and $900 million of its $1.8 billion operating profit from China. Boeing, which cites China as its biggest customer outside the United States, has a 52 percent share of China's commercial aircraft market; its business there is worth $4.8 billion, 7 percent of revenue. Nike, with revenues of over $2 billion in China and 16 percent market share in the country, reported in 2011 a Greater China operating margin (percentage profit before interest and taxes) of 38 percent, the envy of the corporate world.

But China is a much more difficult market than most company's stock prices reflect. In a May study by the European Union Chamber of Commerce in China, a business advocacy group, half the 557 member companies surveyed said that market access and unspecified regulatory barriers limited business opportunities and hurt annual revenues by 10 to 50 percent. The American Chamber of Commerce in China found similar results in its 2012 survey.

Many firms in industries the Communist Party deems sensitive -- such as oil, telecoms, and information technology -- hit a ceiling once their company expands above a certain size. Because reaching economies of scale fuels long-term success, constricting market share damps U.S. company prospects in China. Although there are individual exceptions, U.S. companies' share of the Chinese market has been shrinking. Industrial output by foreign-invested firms in China as a share of the national total peaked around 36 percent in 2003 and has declined ever since to about 27 percent in 2010, the most recent year for which data is available. The theft of sensitive technology, which leads to reduced market share, is also a concern. The technology firm American Superconductor claimed 70 percent of its business disappeared in 2011 after a Chinese partner convinced one of its employees to steal some of its technology. The November Economist Intelligence Unit report found that half the executives surveyed in big companies were concerned or very concerned they would be forced to give up their intellectual property in exchange for market access.

But the most unappreciated problem with investing in China is the unexpected risks that arise. "The government can close us down suddenly, or it can help native Chinese firms to steal our technology and gradually replace us in the market," says one U.S. CEO of his firm's China operation who asked to remain anonymous. Foreign assets also face the threat of liquidation. Although they're safe from Latin American-style government takeovers, China can de facto nationalize assets by exercising such strict control over taxes, regulations, and costs that it effectively controls and drains foreign firms' profits. Nearly 40 foreign electricity producers rushed into China in the 1990s, lured by long-term contracts with guaranteed returns. Today, nearly all these firms have since exited, often selling their plants to the Chinese after being unable to make money as rising coal prices outstripped electricity-rate increases set by the state and as Chinese firms benefited from access to state credit and subsidized coal. And though unlikely, China could descend into political instability or an armed conflict with Japan, the Philippines, Taiwan, or Vietnam -- a scenario in which foreign businesses would find it very difficult to operate. Such risks don't receive enough attention from analysts and investment managers. In its biannual country risk survey, Euromoney magazine optimistically gives China a risk rating of 61.5 points (100 being least risky), compared to 75.7 for the United States and a 53.7 for India.

As with so many stock market fads, investors and analysts haven't adequately incorporated the risks into stock prices. There's a gap between the optimism presented on Wall Street and the difficulties of doing business in the Middle Kingdom, in part because CEOs are reluctant to speak publicly about these risks due to fear of Chinese retaliation against their businesses, which would make matters even worse. Think about the shock that greeted General Electric CEO Jeffrey Immelt in 2010 when he wondered aloud whether China wanted any foreign firm to "be successful." Two years later, Immelt said in a speech at Stanford University that "China is big, but it is hard," prompting a Wall Street Journal article explaining how Australia is set to generate more revenue for GE than China in 2012.

Indeed, China has been known to punish companies that publicly complain about doing business there. In Europe, EU Trade Commissioner Karel De Gucht even floated the idea of speaking out against abuses on companies' behalf -- and taking the heat -- sparing companies from retaliation triggered by the filing of official complaints. "It is undeniable that many European companies are unwilling to come forward and make justified trade defense complaints due to fear of consequences for their business," he said in May. The result of all this silence is that information about the downsides of working in China doesn't get priced into the market.

Hundreds of companies have been suckered into pursuing China strategies based on faulty expectations. Currently, the expectations of the market are high. When Caterpillar announced in April a slowdown in the growth of its China business -- China makes up only 3 percent of its global sales -- its stock fell 5 percent. That was in spite of the company earning a quarterly profit of $1.6 billion. When Apple reported in late July that sales in China had fallen 28 percent from the previous quarter (though they had risen 48 percent from the year before), Apple's stock fell 5 percent.

The question isn't whether companies can continue to operate in China, but whether they can earn margins on their investments that justify the risk. The American Chamber of Commerce survey found that 61 percent of companies surveyed report operating margins that are comparable to, or less than, their worldwide margins. From a shareholder's point of view, that's hardly a glittering statistic. Only one of three companies, in other words, is more profitable in China than elsewhere in the world -- in spite of the added risks. If companies adequately factored risks into their investment decisions, few would find China investments passing their profitability thresholds for long-term investments. And many CFOs would disqualify investments that have only a 39 percent chance of exceeding average profits, in a country much riskier than their home market.

Analysts and executives, however, will no doubt continue to portray the growth potential of China as too big to miss, highlighting the potential profit and discounting the growing challenges and risks. But as analysts tally the current value of verifiable long-term cash flows, the stock prices of firms built on the China story will weaken. Investors, once they appreciate the meager potential, will drop the stocks. And prices will follow. CEOs, beware.

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