China rising, but the US is still the great global power

Washington’s flaws as a soft power do not erode its economic and military might

There is a popular narrative these days that President Trump is undermining America’s standing in the world and ceding the mantle of global leadership to China. By insisting that America should act like any other country and put its own interests first, these declinists say, Trump is demoting America to the status of any other country and straining its postwar alliances to the breaking point. Global polls show that Trump is far less trusted than President Barack Obama was and Trump’s America is viewed far less favourably than Obama’s was.

A provocateur like Trump will trigger strong opinions, but opinions are flighty. A president’s character is indeed likely to affect America’s soft power — its cultural and diplomatic influence — while he is in office. It is less clear, however, that any erosion of soft power under Trump represents a permanent threat to America’s hard power, including its measurable economic and financial strength.

Even before Trump, the declinists cited data showing China gaining a greater share of the global economy at America’s expense, a trend that is easy to exaggerate. America’s current 24 per cent share looks much diminished compared with 30 per cent in 2000 but about the same as the 26 per cent share in 1980. It’s simple to cherry-pick a start date that makes American decline look bad, but the reality is that China is gaining global economic share at the expense mainly of Europe and Japan.

America is a tested economic superpower, having survived 21 recessions and a Great Depression since 1900. China remains untested, having suffered not one outright recession since its modern renaissance began around 1980. It has yet to be seen just how well China will weather such a test, which is inevitable for any large economy.

China’s rise has already slowed sharply. When the Chinese economy grew at a double-digit pace last decade and its currency appreciated strongly, many forecasters thought it would match the size of the American economy by now. Instead, following a significant slowdown, China is on pace to catch up with the United States by 2030 — and then only if it experiences no major disruptions or further slowdown. Both things are highly possible.

At a time when finance increasingly dominates the global economy, America’s influence as a financial superpower is as great as ever. Central banks around the world are always looking for a safe place to park their money, and they usually buy United States assets, typically Treasury bills, which show up as dollars in their foreign exchange reserves. Since 1980, the dollar’s share of foreign exchange reserves has held roughly steady at around 66 per cent. This is in part the world’s way of saying it not only trusts the United States to pay its debts but also trusts it more than Europe, Japan and especially China.

Serious money does not equate America with Trump, and those obsessed with American decline ignore the state of its rivals. The euro was introduced 19 years ago, ambitious to become a reserve currency, but its youth and the recurring fears of a eurozone breakup have limited the world’s willingness to trust it. Aging Japan’s long stagnation acts as a permanent cap on the yen’s popularity. And outsiders remain even more wary of the renminbi, owing both to China’s debt troubles and the standing threat that Communist rulers pose to free flows of capital.

On the other hand, confidence in the dollar reflects longstanding faith in American financial and political institutions and effectively ignores both the recent advent of Trump, who as a candidate threatened to reduce United States debt payments, and the dysfunction in his White House.

When businesses in two countries — say, India and Argentina — want to conduct a deal, they almost always arrange payment not in rupees or pesos but in dollars. Everyone wants to hold the world’s most trusted and liquid currency. Nearly 90 per cent of bank-financed international transactions are conducted in dollars, a share that is close to all-time highs.

Critically, there is no sign that the dollar’s status on any of these measures — as a reserve, an anchor or the favoured currency for cross-border transactions and loans — has declined since Trump took office.

In a dollar world, most countries are happiest when the dominant currency is cheap and plentiful. A strong dollar raises the cost of borrowing, which slows global economic growth and has often triggered debt crises in the emerging world. A weak dollar has the opposite effect, which is why the weakening of the dollar this year offers more evidence of its dominance: Partly as a result, the world is enjoying an unusually broad recovery encompassing every major economy.

The global embrace of the dollar matters not only as a sign of trust. Having the world’s favourite reserve currency is a practical advantage, lowering borrowing costs and boosting GDP growth in America, while symbolising great power status. Not surprisingly, then, China in particular has been eager to challenge the dollar’s supremacy.

Instead, the renminbi has gained no ground as a reserve currency and probably won’t as long as China’s financial markets remain largely closed, underdeveloped and subject to government meddling. One reason foreigners like to hold the dollar is that they know they will never get stuck with it, thanks to the vast, open and highly liquid American stock and bond markets.

Many observers nonetheless assume that with China rising as an economic power, financial clout will follow. Perhaps, but the United States surpassed Britain as the world’s largest economy in the late 19th century, and the dollar did not fully displace British sterling as the leading reserve currency until after the World Wars, which left British finances shattered. That doesn’t mean it will take World War III to end the dollar’s reign, but it will take time and a shock bigger than one unpredictable president.

History also suggests that economic size alone will not be enough to propel China to financial superpower status. From 1450 through the late 1700s, the leading reserve currency was held by smaller countries — first Portugal, followed by Spain, the Netherlands and France. These nations were all major trading and military powers with credible financial systems, but not one was the world’s largest economy. Throughout those centuries, the leading economy was primarily China. It never gained the advantages of having the leading reserve currency because, then as now, its financial system lacked credibility.

No one doubts that China poses a growing military and economic challenge to the United States. But Trump’s critics may be overstating both the scope and inevitability of American decline and the role one president can play in advancing it.

To identify which nation the world really trusts in the long term, follow the money. And money still flows downhill to the dollar — arguably the vote of confidence in America that matters most.

US is a tested economic superpower, having survived 21 recessions and a Great Depression since 1900. China remains untested, having suffered not one outright recession since 1980