Sunset over America: it’s time for the next superpower

On Thursday morning I was doing some work with the radio on, which was playing In Our Time, the Radio 4 programme which discusses ideas and events from through history. It’s a simple formula: get a topic, get three experts on the topic and a moderator, talk for 45 minutes.

That day, the topic was the JM Turner painting known as “The Fighting Temeraire”, from 1838, shown above. (You can listen to it here.) The full title of the painting is this:

“The Fighting Temeraire tugged to her last berth to be broken up”

As one of the experts explained, the Temeraire was one of the fleet that won the Battle of Trafalgar — a key victory in British imperial history, won in 1805. At the time, the British fleet was bigger than its five biggest rivals put together. Britons were proud of their ships, made of wood with “hearts of oak”.

But change was afoot: the age of steam was coming. A giant wooden fighting ship could be pulled by a tiny little tug — the black shape in the foreground.

Steamships could challenge the power of sail; they didn’t rely on wind, which meant many military tactics and strategies learnt over centuries about maneouvring and attacking would become redundant. As one of the experts on the programme pointed out, this caused some anxiety: what if other countries exploited steam better than Britain did, and so could vanquish the British navy? The Turner painting encapsulates that anxiety: the positioning of the sun (an impossible one in real life) points to that worry of the sun setting on an empire built by big wooden fighting ships which now faced extinction.

And so we come to Donald Trump. Everyone’s trying to figure out what his policies will be. I doubt he really knows what is feasible. But here’s the fact: just as with the Temeraire, the sun is setting on the American empire. Here’s why.

Screw the externalities

“The people being regarded as the essential part of the state, and food as the people’s heaven, is it not right that those in authority should value and be careful of both?” — Sun Tzu, “The Art Of War”

Once installed, Trump’s actions will I think largely be driven by the Republican politicians who control the House of Representatives and the Senate. As much as anything, those are career politicians with a coherent set of policies. But they’re amazingly regressive policies. The tax cut plans would favour the well-off and make the federal deficit balloon by as much as $5 trillion (yes, trillion) over a decade. (This is a matter of record.) Obamacare, aka the Affordable Care Act, will be rolled back — pulling away affordable healthcare for millions of people — because the Republicans hate it, even though its problems stem more from the distortions that the US’s profit-driven health system creates. (There has to be an explanation for why the US is a huge outlier in cost of healthcare and infant mortality. Notably, the latter — 51st internationally, equal with Croatia — is caused by “poor birth outcomes among lower socioeconomic status individuals”. I think that’s “people who can’t afford healthcare”.)

Meanwhile, look at the people being nominated for important jobs — such as a climate change denialist being touted for the head of the Environmental Protection Agency. Both the repeal of the ACA (and perhaps the Republican-backed privatisation of Medicare) and the appointment of a denialist at the EPA follow a thread of thinking that forms an undercurrent in American thinking, especially on the Republican side, which is, basically, “screw externalities, and screw you too.” (“Externalities” is the economic term for effects on other people of things you do). Republicans don’t see health care as a public good, even though taxing everyone based on income to treat everyone based on need benefits everyone, because it means you have a healthy working population. Climate change, meanwhile, is the biggest imaginable externality. And the US is ignoring it.

Then there’s the trade stuff; maybe Trump will try to rip up trade agreements, or maybe legislators will back some sort of tariff measures. That will be an interesting demonstration of secondary effects. We’ll look at those presently.

The death of the new frontier

“Even the finest sword plunged into salt water will eventually rust.” — Sun Tzu, “The Art of War”

The US used to be the envy of the world for its technology; who else could land people and a rover on the moon and bring them back safely? The 1960s were good, weren’t they? All that New Frontier stuff from Kennedy. Whoop!

But now the US is literally crumbling. An infrastructure renewal plan passed by Congress in December 2015, a five-year $305bn package, is only a drop in the bucket:

According to the 2013 report card by the American Society of Civil Engineers, the U.S. has serious infrastructure needs of more than $3.4trn through 2020, including $1.7trn for roads, bridges and transit; $736bn for electricity and power grids; $391bn for schools; $134bn for airports; and $131bn for waterways and related projects.

US infrastructure spending has (as the article points out) hit a 30-year-low. Simply: the US has ignored its public costs for years. More generally, the US is showing the limits of Ayn Rand-style devil-take-the-hindmost capitalism. Pensions are outsourced (as a relative pointed out) to the stock market, which is risky. Health care (as noted above) is relegated to a situation where you can only be as ill as you can afford; otherwise you’re bankrupt or more ill. (I wonder: do people who are against universal healthcare refuse to provide financial help to ill friends? If they do, isn’t that hypocritical?) Government spending on everything socially useful is chipped away in favour of tax cuts, because people know best what to do with their money — don’t they? They’ll definitely ration it out on buying a pension and health insurance rather than beer, won’t they?

Even your social interaction online is just a means to monetisation for some company. Your usefulness only extends as far as you can create money for someone else. You’re not a part of “society”. And yet the discontent that led to Trump being elected was about the frustration over the breakdown of community cohesion; the feeling, as James Allworth has explained, that the spoils of globalisation aren’t being shared out equally, even though they’re substantial. And if there’s one thing that pisses people off, it’s feeling that they’re not getting an equal share of the spoils.

And the US has been doing that with knobs on. Tax cuts for the rich. Bailouts for the banks which screwed up mortgages, but not for those millions struggling to pay the banks’ mis-sold mortgages. CEOs who get gigantic bonuses. CEOs who get gigantic payoffs when they leave companies which knowingly ripped off customers. Naked capitalism has reached its limits, discovered that it has run aground.

Here’s the fact of it: the US’s position as the world’s premier superpower is over. It’s the Fighting Temeraire being led to the breaker’s yard. Its powers are waning, and the seeds of change are here. (Take it from someone who lives in a superseded empire.) It will take years for that to become complete. It hadn’t happened when George W Bush invaded Iraq and Afghanistan, but the trillion-dollar cost of those wars, and the failure to win convincingly, loaded it down with ballast it couldn’t shake.

So who’s next? We’ll come to that.

Those manufacturing jobs that people think will Make America Great Again aren’t going to come back. Tim Cook, among others, has explained it patiently in the past: there aren’t enough factories in the US to build iPhones; there isn’t the skilled workforce; there isn’t the infrastructure. (That again!) Short-term interests move the jobs abroad, and the factories close, and once that’s done they don’t come back again.

That’s why the US’s manufacturing output is static, in real terms:

Sure, Trump wants to do a lot of infrastructure rebuilding. How’s that going to be paid for? Either through money or debt. But there isn’t any money.

Larry Summers, the former US Treasury secretary, writes in the Financial Times that

I have long been a strong advocate of debt-financed public investment in the context of low interest rates and a decaying US infrastructure, so I was glad to see Mr Trump emphasise it. Unfortunately, the plan presented by his advisers, Peter Navarro and Wilbur Ross, suggests an approach based on tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting of public resources.

Many of the highest return infrastructure investments — such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system — do not generate a commercial return and so are excluded from his plan. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage of the program.

(Summers’s piece is well worth the read; note the FT requires subscription.)

Trump could raise some money by offering a 10% tax holiday to US companies which are storing money abroad: there’s said to be $2.5 trillion held abroad to avoid tax. If that all comes home, that’s $250bn suddenly available to the government budget. But look at those figures above: it needs about $3.4 trillion spent on it in the next four years. That $250bn sounds like a lot, but won’t go far.

Well, the US could raise the money with debt, by issuing US Treasury bonds. Except… and here we come to the new superpower.

Trade wars, and how to lose them

“To secure ourselves against defeat lies in our own hands, but the
opportunity of defeating the enemy is provided by the enemy himself.” — Sun Tzu, “The Art Of War”

How is the US able to keep issuing debt to fund its gigantic budget deficit? In large part, because China keeps buying US Treasuries.

The US is in thrall to China. The US’s trade imbalance with China shows a $367bn trade deficit in 2015, and $257bn for the first nine months of 2016. China produces 21% of the US’s imports. The other big sources are Canada (13%), Mexico (13%), Japan (6%) and Germany (5.5%); that’s five nations making 60% of US imports.

Although the US is the largest single trade export destination for China, it’s only 18% of China’s export total; Hong Kong is 14.6% (likely for other world destinations) and then Japan (6%), Korea (4%), Germany (3%) and 204 more.

Viewed in the other direction, the US is the second largest exporter (9%) to China after Korea (10.4%), but only narrowly ahead of “other Asia” (8%), China itself (8.6%, don’t ask me how), and Japan (8.5%).

What I’m getting at with all this is: Trump can threaten “up to 45%” tariffs on Chinese goods. China, for the most part, can say “is that the best you got?”

Where Trump has one threat — trade tariffs — China’s government has multiple ones:
• impose retaliatory import tariffs on US goods and/or services

• Tie US imports (especially of finished goods) up in red tape requiring “approval” and “licensing”. Focussing on finished goods hurts US companies more easily than for raw materials needed by exporters’ factories.
• lower the value of the yuan to make Chinese imports cheaper, so that other countries apart from the US could import more, making up for any trade lost to US tariffs
• Slow down or stop buying US Treasury bonds. This latter one is a subtle one, but China is essentially propping up the US’s deficit because that helps it as long as the US is its biggest export market. (Read more if you like.)

If Trump really wants to have a trade war, and China really wants to retaliate bigly, it could dump US debt for Euro debt — a radical move, but one that would gain a lot of attention. Essentially, China would be saying “Euro debt is a better bet than dollar debt. We’ve got more confidence in the Euro, less in the dollar.” The dollar would plummet and US Treasury bond prices would fall too, increasing the yield and making it more expensive for the US to issue debt. European GDP would look healthier, especially compared to an America struggling to find suppliers to fill the gap left by Chinese goods — where exchange rates would have moved against the dollar.

China doesn’t even have to do any of those four things very overtly; it can do any of them subtly, pushing harder or softer, and creating just the desired amount of retaliatory economic havoc in the US, while playing nicely with its other trade partners.

The new superpower

“One hundred victories in one hundred battles is not the most skillful; subduing the other’s military without battle is the most skillful.” — Sun Tzu, “The Art Of War”

As the US trends backwards, and its new rulers amplify the damage that its libertarian tendencies have done by favouring the rich over the poor with tax breaks and medical costs, China is perfectly placed to become the world’s superpower — deciding what happens where.

It’s already the world’s biggest smartphone market, and its population uses the internet in ways that are often more inventive than in the US. It focusses on education, it manufactures stuff the world wants, and it has the largest GDP.

By the way, don’t take this analysis as any sort of approval of China. It is authoritarian. Its government spies on its citizens, suppresses ethnic minorities, annexes countries, massages its economic statistics, restricts peoples’ freedoms. (One could point out that the US government does most of the same things, as do others. But to a lesser extent, and always with the possibility of administrative change and under the rule of law, in theory.)

But this is realpolitik. If one has to accept Trump, one equally has to accept the reality of China’s gigantic power.

China’s on the rise because its government is staffed by engineers, and they take an engineers’ view of what they have to do. Need to shift a mountain so you can run a train or build some power stations? Sure, go ahead. When you’re planning what power stations you need 20 years ahead and don’t need to go through public planning consultations, you tend to get things done. The displacement of huge numbers of people goes ahead, because the will of the individual is secondary to that of the nation.

It’s that latter point which is so shocking to Americans, and yet so reflexive to Chinese, to whom the important thing in making China great is the sacrifice of individual citizens’ ambitions to the broader good. Try selling that concept to Americans.

Note also that China’s communism is nothing like the Russian or North Korean versions; it has evolved quickly to allow a capitalist thread — there are Chinese billionaires — while always keeping space for the government to reel in anyone on some pretext and in effect strip them of their riches. Billionaires watch out for the warning signs. And the Chinese government effectively owns the banks, and decides what they will do and how fast the economy will expand. It’s engineer thinking.

Sure, China’s population pays a price for its headlong growth, which outstrips even the engineers’ ability to regulate it: faked products which can be dangerous (baby milk, most egregiously), polluted air and soil, the necessity to travel huge distances for manual work, and an overall loss of individual agency: people can’t choose a radically different administration. I’m completely aware of that. I’m not saying China’s system is “better”; it’s different, and that’s what we have to deal with, because it shows no signs of changing in a hurry. (Of course, the communist system there is only 60 years old, but notice how rapidly it’s evolving — in stark contrast to those in the USSR, which collapsed under its economic contradictions, and North Korea, which is imploding too, but more quietly. Cuba, of course, is also evolving its model to accommodate more capitalism; its weakness is that it doesn’t have China’s scale.)

Can’t Make America Great Again

“A kingdom that has once been destroyed can never come again into being; nor can the dead ever be brought back to life.” — Sun Tzu, “The Art Of War”

If you want to know why the US can’t take back the “Great” mantle, ask where the steel, the solar panels, the consumer electronics that the US consumes come from. China has the factories and the skilled workers. It’s a colossal infrastructure which has taken decades to build up, and which has received preferential investment from the west because it was cheaper, in the short term at least. As a result, western factories closed and workers were marginalised. Now the balance of power is with China. Strategy beats tactics.

If you needed any better illustration of the US’s retrograde intentions, look at the promises to keep the coal mines open. An industry from the past. You’d do better building factories to make silicon for solar panels — except China did that decades ago. Everywhere you turn, the US is looking to the past instead of the future in the parts of the country which voted for Trump. The bits on the edge can’t drag the rest into the future.

Do you think that the US could retaliate against China by withdrawing services, if it can’t do so with goods? The answer is — nope. China would still have the same levers of retaliation as before, and also it has lots of the services that the US does — but home-grown. It copies the stuff it wants (to American outrage), and learns how to make the rest. Donald Trump’s “Make America Great Again” hats were made in the US, but copies soon began appearing from China. [corrected original, which relied on an untrue viral claim.] This is steam supplanting sail, and though the US is able to compete for now, the truth is that the sun is setting on its role as the foremost superpower. You might hope that the US v China will be like the matchup of Reagan’s America versus the Evil Empire of the USSR. I don’t think so. Or at least, I don’t think the US will play the role of America in that play if it’s repeated. (But I don’t think it will be.)

But wait, cry the technologists, in a last-ditch appeal: won’t the rise of machine learning mean that human jobs will be supplanted, so they can come back to the US and be done by robots? Again, no: it’s going to be cheaper to refit an existing factory using your skilled workers than to build a new one with those damn unskilled labourers. (I’d love to know how China’s administration is preparing for that eventuality, as you know it must be.)

How is China going to exploit its new power? Probably by claiming more territory in the south China sea, buying up raw materials in foreign countries, solidifying its lines of supply. Its absence from Middle East disputes has been notable: it doesn’t seem interested in foreign oil reserves (because it has hydro, solar, and nuclear for its baseline energy). [Addendum: except it gets plenty of oil from Venezuela, as payment for buying Venezuelan debt. See how it works?] But as it flexes its muscles, that could change. Indeed, Trump might not have to worry too much about North Korea; Kim Jong-Il is more China’s problem, because he threatens regional stability there.

But it’s all to play for. Enjoy the ride to the breakers’ yard, America.

Further reading: George Magnus on what we can deduce about the impact of Trump’s stated policies (including the infrastructure deficit); 22 maps that explore the state of modern America; “the problem with China isn’t China isn’t China — it’s usually us” by Simon Wardley; and, if you’re looking for more news about China’s economy, seen through a wary lens, you could sign up to the sinocism.com newsletter, written by Bill Bishop. (It’s free.)

I usually write on technology at The Overspill (daily roundup of tech news — think Daring Fireball in your inbox or on the site). Click the green heart and share this because, well, why not?