Empire states of mind

Is the age of US exceptionalism at an end?

As the world starts to emerge from the COVID-19 pandemic, the US’s position as global hegemon will be under mortal threat from a resurgent China that looks to have escaped the virus relatively unscathed.

The roots of the term American exceptionalism can be traced back to an 1840 book entitled Democracy in America by Alexis de Tocqueville. It wasn’t until a century later that the trope started to be widely used, by now in reference to the dominant position the US found itself in at the end of the Second World War.

By the early 1990s, with the Cold War ending and the Soviet Union on the verge of collapse, the US’s position as global hegemon appeared assured. So much so, that by early 2000 the US was effectively endorsing China’s entry to the World Trade Organization. The hope was this would encourage Beijing to accelerate economic liberalisation and eventually lead to political reform.

Things haven’t worked out as planned. While China has undergone a remarkable economic transformation – the country’s economy grew 4,000 per cent in US dollar terms between 1989 and 2019 – political reform has failed to materialise. Far from embracing democracy, in November 2012 China selected Xi Jinping, its most powerful leader since Mao Zedong.

Worse still from a US perspective, Xi has made it abundantly clear he believes China is in a long-term struggle for the crown of global hegemon. Moreover, China’s economic strength means America now has a far more formidable adversary than it ever had in the Soviet Union.

The demise of American exceptionalism may be hastened by COVID-19. After all, the US has been one of the worst-affected countries, thanks in part to its chaotic handling of the pandemic. Ironically, given its origins, the virus has wreaked far less damage on China.

While the US economy has held up better than many, it is still set to contract by around three per cent in 2020, whereas China’s grew by 2.3 per cent. That was well down on its normal level but, driven by a strong second half recovery, still meant that China was the only major economy to be in positive territory for the year. Moreover, the US’s economic performance could be enfeebled for years to come with Washington forced to rack up a record deficit.

A fragmented world

Sir Dominic Asquith of Macro Advisory Partners believes the pandemic will lead to an ever more fragmented world, by weakening the US and at the same time stoking fresh nationalist and populist urges.

The next decade is going to see a continuing diminution of US influence and authority

“The next decade is going to see a continuing diminution of US influence and authority. The reality facing any US administration is the global landscape is going to be realigned,” says Asquith, formerly Britain’s top diplomat in India, Libya, Egypt and Iraq.

Amid signs his trade war with China was backfiring by hurting the US economy, corporations and stock market, while doing nothing to curb the bilateral deficit, President Donald Trump in January 2020 signed a partial trade accord.

However, many commentators always believed the trade war was no more than a sideshow, camouflaging a battle for technological superiority. No sooner had the trade truce been agreed, than the US intensified its attack on Chinese technology companies.

Technological warfare

The US is trying to restrict the flow of technology to China, restructure global supply chains, and invest in emerging technologies at home. For its part, China is racing to develop semiconductors and other core technologies to reduce its reliance on US suppliers.

“It’s clearer than ever that having technological superiority, whether it’s from semiconductors, quantum computing, artificial intelligence or Big Data, translates into geopolitical strength,” says Deutsche Bank’s global head of technology investment strategy, Apjit Walia.

The world’s reliance on technology enabled connectivity was thrown into stark relief by the pandemic

The world’s reliance on technology enabled connectivity was thrown into stark relief by the pandemic as employees were forced to work, children to learn, and consumers to shop, online. With technology widely expected to go on playing an ever-bigger part in people’s daily lives and given the growing menace of state-sponsored cybercrime, Walia expects the technology cold war to intensify.

While some reckon the ultimate outcome will be two digital ecosystems that to a large extent are incompatible with one another, Walia believes neither side will be in a hurry to build what he calls a ‘tech wall’ – which he estimates could cost the technology sector as much as $3.5 trillion over the next five years. Instead, he predicts a ‘lukewarm’ war as calmer heads prevail.

Aviva Investors’ head of emerging market equities, Alistair Way, says a broader range of Chinese technology companies could be targeted by the US. As a result, investors are already starting to distinguish between those that are heavily dependent on international suppliers and customers that could find themselves in the firing line, and others, such as Alibaba and Tencent, that are more focused on their domestic market.

Like Walia, Way believes a technology war would be far from straightforward for either side to win given many policies are likely to have unforeseen and often adverse consequences. For example, US efforts to damage Huawei have aided Taiwanese semiconductor group MediaTek at the expense of Qualcomm, a US rival.

War over values

It is increasingly apparent the US and China are simultaneously locked in a war over values, central to which is a struggle for control of international rule-making bodies erected after the Second World War.

“The US desperately needs to start repairing alliances around the world if it is to have a chance of winning this battle,” says Charles Parton, senior associate fellow at the Royal United Services Institute, a defence and security think tank.

China looks to apply economic leverage to encourage others to adopt its rules and standards.

Regardless of its course of action, Asquith believes the US will struggle to maintain its influence as China looks to apply economic leverage to encourage others to adopt its rules and standards.

Stephen King, senior economic advisor at HSBC, says just as China is expanding its influence via programmes such as the Belt and Road Initiative, the US probably knows it cannot maintain its clout in lots of different parts of the world indefinitely.

“The US has got to the point of what you might call great-power overreach… and has to find space for China to operate,” says King, a former specialist advisor to the House of Commons Treasury Committee, and author of the 2017 book Grave New World: The End of Globalization, the Return of History.

A divided world

If the US’s position as the world’s undisputed hegemon is ending, predicting what comes next is less straightforward. A survey of global investors by UBS in January 2020 found 57 per cent expected China to replace the US as the world’s biggest superpower by 2030.1

Some scholars have warned the two nations could be heading for military conflict

However, others believe it is more likely the world divides into two blocks that over time become ever more distinct, with China and the US vying to seduce other nations into their sphere of influence. For instance, Parton and King believe that in the wake of the pandemic, China may accelerate efforts to pick off cash-strapped nations with its Belt and Road Initiative, as it did last year with Italy and Greece.

This could present a dilemma to many countries, especially in Europe and Asia, which will be reluctant to pick sides. While many will be happy to continue relying on the US for security, they will be loath to give up economic ties with China.

Given the mistrust between the US and China, some scholars have warned the two nations could be heading for military conflict. However, Parton and Asquith say while China’s relations with neighbouring countries, in particular Taiwan, are an ever-present source of concern, all-out conflict between two nuclear powers is unlikely.

Market implications

The end of American exceptionalism is likely to have sizeable ramifications for financial markets. For a start, demand for dollar assets depends heavily on the vast trade and financial system built up by the US following World War Two. If that begins to be dismantled, US companies and the US government may find it harder to borrow from foreigners than they have been accustomed to.

Whether this eventually leads to the US dollar losing its status as the world’s reserve currency is another matter. “While that is plausible, it looks to be a long way off. If you really believe the dollar’s in trouble, then it’s chaos you should expect, not the sudden arrival of a new shiny currency,” King says.

COVID has reduced to tatters the illusion of American exceptionalism

In an August 2020 op-ed for Rolling Stone magazine, Wade Davis, a Canadian-US anthropologist who works at the University of British Columbia, wrote: “COVID has reduced to tatters the illusion of American exceptionalism.”2 He was referring to the damage done to the US’s reputation and international standing by its chaotic handling of the crisis.

However, the pandemic looks to have weakened the country in an equally important way, by causing a massive increase in inequality. While millions of Americans were losing their jobs and turning to the government for help, the richest saw their wealth soar.

Such unprecedented levels of inequality have led to deep schisms in American politics. By making the country increasingly hard to govern, they are undermining its ability to lead on the world stage.

In his 1840 book, de Tocqueville marvelled at the ability of American people to govern themselves responsibly and prudently, and above all to preserve their own liberty. The chaos surrounding last year’s US presidential election adds to the feeling the era of American exceptionalism is in its final death throes, irrespective of the president in office. There is a lot riding on what comes next.

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