Part Three: The Rise and Relative Decline of the United States (US) as the Second Global Hegemonic Power. The post-1945 era ushered in the US as the global hegemonic power. It was the US, as the hegemonic power, that created the current global liberal economic regime. This era is divided into three different time frames: 1945 to 1971 during the bipolar or Cold War era, 1971 to 1991 relative decline of the US during the bipolar or Cold War era, and post 1991 the unipolar moment and the relative decline of the US as the global hegemonic power.
The period from 1945 to 1971 is sometimes referred to as the Pax Americana. The United States was the most powerful state in the world at the end of WWII. The US homeland was untouched by the war, its military and economic power was overwhelmingly dominant, and states in the west (non-communist) turned to it out of necessity. US power had been growing rapidly since the turn of the 20th century. Leading economic sectors/technology at that time included steel, railroads, industrial chemicals, and the development of an excellent national infrastructure that facilitated the growth of the most powerful economy in the world. During WWII the US economy grew largely due to leading economic sectors/technology such as automobile production and the petroleum industry. By the end of WWII it had the most powerful military (airpower, sea power, and land power) in the world. It had military bases literally all around the world that would give it market access in the post WWII era. Western Europe and Japan desperately needed US economic assistance. In other words, the US already had a global economy in the making due to its access to global markets and the desperate needs of Europe and Japan. It had learned the lessons of the Great Depression and realized the advantages of freer trade or an open, liberal global economic regime. President Franklin Roosevelt began moving the US and the rest of the states in the west to a liberal trade regime with the passage of the Reciprocal Trade and Tariff Act in 1934. This act was based on reciprocity and began to reduce tariffs globally. This process was interrupted by WWII but after the war the US, as the global hegemonic power, at least in the west, created a liberal economic regime in the west and began to provide global public goods such as an international currency and the guarantor of business contracts.
The US created the General Agreement on Trade and Tariffs (GATT) which was based on reciprocity and most favored nation status in 1947. GATT was the international institution which began to reduce tariffs globally, at least in the west. Tariffs began to be significantly reduced. The US created the Bretton Woods global monetary regime in 1944 which the dollar was set to the value of a particular amount of gold and it promised to exchange the dollar for gold on demand. Thus, international goods could be priced in dollars because they had a known value. The dollar became the international standard for values and the only currency accepted in the west for international trade. Local currencies were defined in terms of so many dollars. US banks began to serve as the guarantor of international business contracts. The US, like the British before it, was a hegemonic power that created a global, liberal economic regime, at least in the west during the Cold War.
The outcome of this new liberal, global economic regime was a dramatic increase in global trade, global production, and global wealth. By the mid-60s Europe and Japan had been completely rebuilt. This is exactly what the liberal school of international political economy said would happen. In addition to the liberal economic order, a political/security regime was established based upon US leadership and military dominance through the North Atlantic Treaty Organization and several other regional security arrangements. US hegemony coupled with its regional economic and military alliances and growing global wealth kept nationalism in check.
Because of the diffusion of technology (Robert Gilpin) and imperial overstretch (Paul Kennedy), several major powers in Western Europe and Japan were beginning to “catch up” with the United States in terms of relative economic power by the mid to late 1960s. Europe and Japan had been rebuilt since WWII and their industrial growth began to compete with the United States. The United States which had created the global monetary system based upon a fixed value for the dollar (gold standard) could no longer maintain that value of its currency (the dollar was overvalued and currencies in Japan and Wester Europe were undervalued). In 1971, President Nixon announced a dramatic change in the global monetary regime by ending the so-called gold standard. Rather than the Bretton Woods fixed exchange rate system based on gold, the new system would be based upon the market. Currency values would change based upon global supply and demand. In other words, exchange rates were flexible and based on the market. The dollar was still the primary international currency but no longer was it a fixed value in terms of so much gold. In addition, capital (investment funds) was freer to move from one state to the next and there was growing cooperation among the central banks of states to manage the global monetary system. This change in the global monetary regime was caused by the relative decline of the US to Western Europe and Japan. While the US was still dominant, it was forced to change the rules and principles upon which the monetary regime was based. This is the current global monetary system under which states function today.
By the 1980s tariffs had been reduced throughout the west under GATT. But with some US industries facing greater competition from Western Europe and Japan, they began to turn to the government for protection via non-tariff barriers (NTBs) to trade such as quotas and voluntary export restraints. A quota is just what it suggests. It’s a mercantilist policy that limits the amount of a good or product that can be imported into the state. A voluntary export restraint is where the leader of a state asks the leader of another state to simply export less to his/her state. All of the major states including the US used NTBs by the 1980s. While this did not legally violate the liberal trading regime, it did violate the underlying principles of freer trade. This era came to an end with the end of the Cold War in 1991. Presidents Bush and Clinton created the World Trade Organization which provided a mechanism to reduce NTBs to trade and to address economic sectors such as finance, agriculture, and intellectual property not covered by GATT.
We have seen the number of superpowers decline from 10 to 12 in 1648 to 5 in 1815 (with Britain as the global hegemon), to 2 in 1945 (the Cold War with the US was the hegemon in the west), to one in 1991. With the end of the Soviet Union, there was only one remaining global power, the so-called unipolar moment had arrived. The US economy by the 1990s was growing largely due to new lead economic sectors such as computers, digitization, microelectronics, smart machines, integrated circuits, and artificial intelligence. The US took the lead in expanding the global liberal economic regime it had created in the west to the entire world including those formerly communist countries under the Soviet Union and the so-called developing world including China, East Asia, South Africa, Brazil, Mexico, India, and other countries of Latin America, Africa, south and East Asia. GATT was replaced by the World Trade Organization in 1994 and the global monetary regime created in 1971 continued to function. Regional groups such as the European Union and the North American Free Trade Agreement (NAFTA) further integrated the economies of their member states. Overall global wealth expanded dramatically and the major powers continued to cooperate with each other and follow the global liberal economic regime.
The US is, by most measures, the most powerful country in the world today, yet no matter how one measures power, the relative power differential between it and other major powers has declined considerably. This has occurred through the diffusion of technology (Robert Gilpin) and military overstretch (Paul Kennedy) similar to what happened to Great Britain in the late 1800s. Countries of Western Europe and Japan began to narrow the gap between themselves and the US by the mid-1960s. Today, there is an additional rising power and that is China. China is by most measures the second most powerful economy in the world and competes quite well with the US and the Western European countries. China began its dramatic rise in 1979 when it ended its isolationism, began to interact politically and economically with the rest of the world, and developed a powerful state-led economy. It is now challenging the US in the development of the next new set of lead economic sectors such as artificial intelligence, 5G networks and beyond, virtual and augmented reality, biotechnology and genetic engineering, and green energies. China’s New Silk Road and Digital Silk Road Initiatives are expanding its economic influence globally in the form of major investments not only in tradition infrastructure such as roads and port facilities but also in telecommunications networks, cloud computing, and artificial intelligence. In addition, China has dramatically expanded it military capabilities with more ships, anti-ship missile capabilities, and the creation of strategic artificial islands in the South China Sea. This also includes the development of intercontinental ballistic missiles, nuclear submarines, aircraft carriers, fifth generation jet fighters, and long range strategic bombers.
While the current global liberal economic regime led by the US is still in place despite relative gains by China and the European states, there is evidence that mercantilism is reappearing. President Donald Trump, an isolationist and economic nationalist or mercantilist by choice, repeatedly violated the basic liberal economic norms and practices that the US once championed. He rejected the Trans Pacific Partnership which has enabled greater Chinese economic and military penetration in the fastest growing region of the world. Through his tariffs and other barriers to trade against China and some of our closest allies, he sent signals that the global liberal economic regime led by the US since 1945 may not survive his presidency. Those states that were the targets of these tariffs responded in kind. President Trump viewed the world economically and politically through a zero-sum lens. His anti-immigration policies both reflected and played to a growing right wing nationalism in the US. Right wing nationalism is once again raising its divisiveness in Hungary, Austria, Switzerland, Denmark, Belgium, Estonia, Finland, Sweden, Italy, Spain, France, the Netherlands, Germany, the Czech Republic, and Turkey. Rising nationalism is another indicator of the relative decline of the United States as a hegemonic power and opens the door to greater economic nationalism/mercantilism. President Biden has yet to reverse the tariff policies of his predecessor and his strategic vision of the role of the US has yet to be fully articulated. The future of the global hegemonic system will depend upon the ability of the US to develop new lead economic sectors and the foreign policy path yet chosen by President Biden.
What does this mean? Think about the period of the relative decline of Great Britain and the subsequent return to mercantilist policies by the major powers (see Part Two of this series). If that is the future, then there will be less predictability in the behavior of states, less global wealth being created, a more competitive and conflict oriented global economic and political environment, and greater conflict among the major powers of the world. All of this, of course, remains to be seen but if history tells us anything it is certainly possible. More about this in Part Four.
For more information see the writings of Joseph Nye, Robert Keohane, Stephen Krasner, Joseph Schumpeter, Robert Gilpin, Paul Kennedy, and Herman Schwartz.
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