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Predictions about the death of American hegemony may have been greatly exaggerated

Let's face it, there's a general anxiety about the future of America.  There's Tom Friedman's column today, which my doctors have now forbade me from critiquing in order to keep my blood pressure down.  Books suggesting the United States is kowtowing to China are forthcoming.  The Economist recently observed on the highlights of a sobering survey of Harvard Business School graduates, which contained the following:

Fully 71% of the businesspeople polled expected America’s competitiveness to decline over the next three years. (National competitiveness is a slippery concept: countries do not compete in the same way that firms do. But the businessfolk in question answered some clearer questions, too.) Some 45% said that American firms will find it harder to compete in the global economy. A startling 64% said that American firms will find it harder to pay high wages and benefits.

Intriguingly, the Harvard alumni were gloomy about where America is headed, rather than how it is now. Some 57% felt that today the business environment in America is somewhat or much better than the global average; only 15% said it was worse. But when asked to compare its prospects with those of other industrialised economies, only 9% felt that America was pulling ahead; some 21% said it was falling behind. A striking 66% expected America to lose ground to Brazil, India and China; only 8% thought it would pull away from them.

This would seem to jibe with popular laments about why Apple can't make its products domestically.  There are a lot of reasons, but a significant one is the lack of necessary skills for higher-end manufacturing.  This is in no small part because American students shy away from the training necessary to do these kind of jobs even if they originally think they want to be engineers.   Why?  Because American college students don't like doing homework

So, America is doomed, right? 

To be honest, this sounds like a lot of pious baloney.  As Michael Beckley points out in a new article in International Security, "The United States is not in decline; in fact, it is now wealthier, more innovative, and more militarily powerful compared to China than it was in 1991."  The whole article is worth a read, and a good cautionary tale on the dangers of overestimating the ease of national catch-up:

The widespread misperception that China is catching up to the United States stems from a number of analytical flaws, the most common of which is the tendency to draw conclusions about the U.S.-China power balance from data that compare China only to its former self. For example, many studies note that the growth rates of China’s per capita income, value added in hightechnology industries, and military spending exceed those of the United States and then conclude that China is catching up. This focus on growth rates, however, obscures China’s decline relative to the United States in all of these categories. China’s growth rates are high because its starting point was low. China is rising, but it is not catching up.

What about the future?  One could point to the last few months of modestly encouraging economic data, but that's ephemeral.  Rather, there are three macrotrends that are worth observing now before (I suspect) they come up in the State of the Union: 

1)  The United States is successfully deleveraging.  As the McKinsey Global Institute notes, the United States is actually doing a relatively good job of slimming down total debt -- i.e., consumer, investor and public debt combined.  Sure, public debt has exploded, but as MGI points out, that really is the proper way of doing things after a financial bubble:

The deleveraging processes in Sweden and Finland in the 1990s offer relevant lessons today. Both endured credit bubbles and collapses, followed by recession, debt reduction, and eventually a return to robust economic growth. Their experiences and other historical examples show two distinct phases of deleveraging. In the first phase, lasting several years, households, corporations, and financial institutions reduce debt significantly. While this happens, economic growth is negative or minimal and government debt rises. In the second phase of deleveraging, GDP growth rebounds and then government debt is gradually reduced over many years....

As of January 2012, the United States is most closely following the Nordic path towards deleveraging. Debt in the financial sector has fallen back to levels last seen in 2000, before the credit bubble, and the ratio of corporate debt relative to GDP has also fallen. US households have made more progress in debt reduction than other countries, and may have roughly two more years before returning to sustainable levels of debt. 

Indeed, the deleveraging is impressive enough for even Paul Krugman to start sounding optimistic

the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front.

2) Manufacturing is on the mend.  Another positive trend, contra the Harvard Business School and the GOP presidential candidates, is in manufacturing.  Some analysts have already predicted a revival in that sector, and now the data appears to be backing up that prediction.   The Financial Times' Ed Crooks notes:

Plenty of economists and business leaders believe that US manufacturing is entering an upturn that is not just a bounce-back after the recession, but a sign of a longer-term structural improvement. Manufacturing employment has grown faster in the US since the recession than in any other leading developed economy, according to official figures. Productivity growth, subdued wages, the steady decline in the dollar since 2002 and rapid pay inflation in emerging economies have combined to make the US a more attractive location.

“Over the past decade, the US has had some huge gains in productivity, and we have seen unit labour costs actually falling,” says Chad Moutray, chief economist at the National Association of Manufacturers. “A lot of our members tell us that it sometimes is cheaper to produce in the US, especially because labour costs are lower.”

Now, whether this boom in manufacturing will lead to a corresponding boom in manufacturing employment is much more debatable.  Still, as The Atlantic's Adam Davidson concludes:  "the still-unfolding story of manufacturing’s transformation is, in many respects, that of our economic age. It’s a story with much good news for the nation as a whole. But it’s also one that is decidedly less inclusive than the story of the 20th century."

3) A predicted decline in energy insecurity.  British Petroleum has issued their Energy Outlook for 2030.  The Guardian's Richard Wachman provides a useful summary:

Growth in shale oil and gas supplies will make the US virtually self-sufficient in energy by 2030, according to a BP report published on Wednesday.

In a development with enormous geopolitical implications, the country's dependence on oil imports from potentially volatile countries in the Middle East and elsewhere would disappear, BP said, although Britain and western Europe would still need Gulf supplies.

BP's latest energy outlook forecasts a growth in unconventional energy sources, "including US shale oil and gas, Canadian oil sands and Brazilian deepwater, plus a gradual decline in demand, that would see [North America] become almost totally energy self-sufficient" in two decades.

BP's chief executive, Bob Dudley, said: "Our report challenges some long-held beliefs. Significant changes in US supply-and-demand prospects, for example, highlight the likelihood that import dependence in what is today's largest energy importer will decline substantially."

The report said the volume of oil imports in the US would fall below 1990s levels, largely due to rising domestic shale oil production and ethanol replacing crude. The US would also become a net exporter of natural gas.

Note that this will take a while, and doesn't mean that the U.S. will be energy independent.  Still, it's quite a trend.  Or, rather, trends.   

Since the Second World War, the pattern in the global political economy has been for the United States to adjust to systemic shocks better than any potential challenger country.  A lot of very smart people have predicted that this time was different -- the United States wouldn't be able to do it again.  These trends suggest that maybe, just maybe, that might be wrong. 

Am I missing anything? 

Daniel W. Drezner

Why is Russia freaking out more than China?

Let's consider and contrast American foreign policy towards Russia and China over the past few years.

With Russia, the Obama administration announced a much-ballyhooed "reset" with the goal of improving bilateral relations.  In an effort to advance that goal, the administration reworked missile defense system plans in eastern Europe, creating political headaches for governments in the region to make Moscow happy.  The administration took great pains to endorse a Russian proposal on Iran's nuclear program.  The administration signed a fresh new arms control treaty and then expended a decent amount of political capital to get NewSTART ratified.  Washington conducted some serious behind-the-scenes diplomacy to get Russia into into the WTO.  Most recently, the administration appointed a chief architect of the "reset" policy as ambassador to Russia.   

With China, the Obama administration (after some idle G-2 talk) has been far more aggressive.  The administration has "pivoted" it's foreign policy resources toward the Pacific Rim, with the not-so-subtle signal that China is the focus of this pivot.  Washington has poked its nose into the South China Sea dispute, and recently announced a decision to station troops in Australia.  It pushed forward a framework trade agreement that pointedly does not include China, while simultaneously calling on that country to let its currency appreciate.  The State Department has reached out to one of China's longstanding allies in an effort to coax the nascent democratization in that country into something more long-lasting.  This is simply part of a larger theme in which Washington is seemingly bear-hugging any significant country that is concerned about Beijing.  The U.S. ambassador to China, when not becoming an online sensation among ordinary Chinese, is busy criticizing Beijing's human rights record

So, to sum up:  the Obama administration has made it something of a priority to improve relations with Russia, while at the same time investing serious amounts of diplomatic capital into various frameworks and initiatives that hedge against a rising China. 

Now compare and contrast how Moscow and Beijing are thinking about Washington this week.  In Beijing

China and the United States should cooperate more closely to defuse international crises and ensure friction does not overwhelm shared interests, China's likely next president, Xi Jinping, said on Monday, setting an upbeat tone for his impending visit to Washington.

"No matter what changes affect the international situation, our commitment to developing the Sino-U.S. cooperative partnership should never waver in the face of passing developments," Vice President Xi told a meeting in Beijing.

"In dealing with major and sensitive issues that concern each side's core interests, we must certainly abide by a spirit of mutual respect and handle them prudently, and by no means can we let relations again suffer major interference and ructions."

Xi's mood-setting speech did not unveil new policies or give the precise date for his U.S. visit. But he stressed Beijing's desire for steady relations for his visit and his accession to running the world's second biggest economy after America's.

And now Moscow:

Russia's foreign minister, Sergey V. Lavrov, warned Wednesday that outside encouragement of antigovernment uprisings in the Middle East and North Africa could lead to “a very big war that will cause suffering not only to countries in the region, but also to states far beyond its boundaries.”

Mr. Lavrov’s annual news conference was largely devoted to a critique of Western policies in Iran and Syria, which he said could lead to a spiral of violence.

His remarks came on the heels of a report on state-controlled television that accused the American ambassador to Russia, Michael McFaul, who has been in Moscow for less than a week, of working to provoke a revolution here. Prime Minister Vladimir V. Putin, at an impromptu meeting with prominent editors, also unleashed an attack on the liberal radio station Ekho Moskvy, which he said was serving American interests.

Now, it's possible to find other news stories that suggest China might not be handling all aspects of the bilateral relationship with equal aplomb, and its possible that these Russian statements contain more bluster than bite.  Still, stepping back, the larger narrative does seem to be that Russia has adopted an angrier and more belligerent posture toward American foreign policy in recent months, while China has responded with more aplomb. 

Why?  I don't know if there's an easy and accurate explanation.  Some neoconservatives might proffer that authoritarians only respond positively to strength, and therefore Russia feels more emboldened than China.  I seriously doubt that this is about bandwagoning.  Similarly, it could be argued that Russia is more domestically insecure than China, what with the recent protests and all.  Again, I seriously doubt this, as it's not like China hasn't experienced some domestic hiccups as well this year.

There are two more compelling explanations, but I honestly don't know if they work either.  The first is that Russia and China have different diplomatic styles.  Russian diplomats are far more comfortable with being blunt in their assessments of American intentions and actions, whereas Chinese diplomats are more comfortable laying low and not making as much of a public fuss.  Furthermore, China has moved down the learning curve, recognizing that its 2009-10 policy of "pissing off as many countries as possible" didn't turn out so well.  It's possible that the substance of both countries' approaches toward the United States are not that different -- they just go about it in ways that play very differently in the media. 

The second, more realpolitik explanation is that China and Russia are looking into the future, and Beijing is far more sanguine than Moscow.  Russia is suffering from institutional dysfunction and demographic decay.  It's only great power assets are bountiful natural resources, a huge land mass, and nuclear weapons.  China will encounter difficulties in the future, but does not have nearly the same kind of structural stresses as Russia.  Beijing is therefore simply less anxious than Moscow about U.S. policy, because it has more hard and soft power resources. 

To be honest, I'm not thrilled with either of these explanations. So, dear readers, I put it to you: why is Russia acting more bellicose toward an accommodating policy from the United States, whereas China is reacting calmly toward a more aggressive United States? 

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