Is the US really losing its primacy?

It didn’t fall all once, but haemorrhaged slowly. It had split in two and was stricken by internal conflict. But still, when the news broke, it shocked contemporaries, friends and foes alike. At its far reaches in Bethlehem, St. Jerome even declared, “The City which had taken the whole world was itself taken”.

Rome had been sacked.

The event in 410 carried out by the Visigoths saw the Roman Empire cease to exist less than a century later. Many empires have fallen since: the Song Dynasty in China, the Mughal Empire in India and more recently, the British Empire. And each time, the pace of transition picked up.

Before, economic power came from those that housed the most people or held the most land. But industrialisation gave rising powers unparalleled financial dynamism never experienced in human history.

For instance, the British quickly replaced the Mughals in India. Afterwards the United States usurped the British with even more breath-taking speed.

Though the US is not an empire, it is a behemoth of an economic power. It has the same degree of influence and wealth of great empires before. And, it has already had an enormous impact on mankind.

Now change is at hand. China has made a miraculous ascent in the space of just a few decades. Not only does it have the people and the land, but it also has industrialised faster than any nation in the history of mankind. It’s the workshop of the world, manufacturing 80 per cent of the world’s air-conditioners, 70 per cent of its mobile phones and 60 per cent of its shoes.

Since the financial crisis, China has been a global engine of economic growth, while the US has been stuck in economic malaise. The margin that it has outpaced the US in terms of growth is impressive.

More impressively, China is already seen as the world’s largest economy in the eyes of the IMF and World Bank.

They both measure GDP in terms of purchasing power of parity (PPP) – a measure that adjusts for price differences. This simply means that they see China as bigger because your money stretches further in China than in the US.

Furthermore, China is set to also surpass the US by more traditional measures of GDP. The Centre for Economics and Business Research (Cebr)  predicts this will happen in 2029.

This is all very impressive. But why do we use GDP as a measure of economic size and health.

What’s GDP?

“Someone tell me what is it?” Mr Griswald barked.

He stared sternly at each pupil until he singled out Eamon Hickey and pointed at him.

“You! What’s the answer” he yelled.

Eamon paused for a moment. He smiled slyly and replied, “Sir, is the collective excrement of the country”.

The classroom erupted with laughter. “Eew that’s gross!” someone yelled.

But seriously, this is pretty much what I think of GDP as a measure of economic prowess. 

GDP is the dollar value of all goods and services produced in a year. You could calculate this by either adding up what everyone earns in a year (the income method), or what everyone spends in a year (the expenditure method).

As a measure is works well for economies made up of mostly farms and factories that produce goods that can be easily counted. However, it is less suited to measuring modern service-led economies like the US, which are geared towards the quality of the service delivered.

Think about it! Imagine Ryanair actually got rid of the seats it planes and made all its passengers stand up (they actually though about this). They would fit in twice as many passengers, double their output and hence add to Ireland’s GDP. But, they would also deliver and even crappier service.

Honestly, if we really want to see if the US is losing its primacy to China, then we have to look at other factors that GDP doesn’t measure well.

Finance

For some reason, global financial dominance is often overlooked in this debate. This is where the United States excels. It’s true that China made some inroads during the financial crisis, but it’s nowhere near the scale of the US.

More than 80 per cent of all financial transactions worldwide are conducted in US dollars, as are 87 per cent of foreign currency market transactions. The New York Stock Exchange accounts for 27 per cent of global value – there is no other exchange that can rival its size. Overall, the US economy is the bedrock for the global financial system.

However, the US government also has a lot of debt – almost 20 trillion US dollars – largely issued in US Treasuries. And China is it’s largest foreign holder with an enormous 1.146 trillion US dollars.

The willingness of China to lend massive amounts of money to the US government has raised concerns that China has potential leverage over the US. However, even if China wished to “call in” its loans, it could only dictate terms with the US, if the US had no other options. Of course as world’s largest and most dynamic economy, the US has plenty of options.

China on the other hand does have a significant amount of debt, which has ballooned since the global financial crisis. This is what has fed its current economic boom, and it’s now starting to slow.

Military

The US remains by far the world’s largest military spender with a total expenditure of 596 billion US dollars. This is nearly three times the level of China, which ranks behind it. Moreover, American military exports account for nearly 33 per cent of worldwide arms exports – it’s by far the top arms exporter on the planet.

Apart from that, the US holds around 800 military bases in some 50 countries, spending about 156 billion US dollars annually on them. Its navy has ten large nuclear-powered carriers, the largest carriers in the world. From the Atlantic Ocean to the South China Sea, US battleships can be seen prepared for any unfortunate incident against the interests of its allies.

In reality, the US has widened its gap on military advancement over Russia and China, since the Cold War. 

Innovation

Resourcefulness and innovation are important for maintaining superpower status. From Stanford to MIT, California’s Silicon Valley to Manhattan’s Silicon Alley, Kansas City to Austin, the United States is famous for how it nurtures innovation so well.

Of the nine largest tech companies in the world, eight are based in the US. Today, US research universities and scientific institutions are considered some of the best: 75 of the top 200 universities in the world are based in the America.

However, China is trying to catch up. China quietly surpassed the US in spending on the later stage of R&D that turns discoveries into commercial products. And at its current rate of spending, China will invest up to twice as much as the US or 658 billion US dollars by 2018.

China’s patent applications have also surged: it rose by 45 per cent last year according to the World Intellectual Property Organisation, which puts it on track to surpass Japan and the US as the largest users of the international patent system.

However, it’s about quality not quantity. China does innovate considerably, but its still stuck in “Made in China” mode. The US also has one other advantage that makes its innovative edge enduring – free speech.

It helps provide robust a exchange of opinions and fresh thinking, and with them, new business ideas. Here, success is born from risk-taking and innovation is handsomely rewarded, while failure when viewed properly is seen as a tool to learn. After all, Thomas Edison famously found 10,000 ways not to make a light bulb before he succeeded.

Other measures

Of course there are so many other comparisons we can make: healthcare, the supply of natural resources, the environment, energy consumption, the quality of life index, internet coverage and even the Economist’s Big Mac Index.

I think the US will continue to enjoy it’s position as a global superpower for quite some time into the future. More importantly though, I think we really need to think more holistically about how we measure economic power. The structure and nature of economies constantly changes and so should our metrics to measure them.