When the Berlin Wall fell, optimism emerged that integrating China and Russia into the World Trade Organization and other elements of the western economic system would promote democratic reforms.
Instead, Russia and China became export powerhouses in resources and manufacturing but used that wealth to modernize their militaries, form an Axis with Iran and North Korea and menace global peace and security.
Now China challenges the United States’ status as the preeminent global economic and military superpower, and the benefits Americans enjoy from reserve currency status of the dollar are at risk.
The United States maintains dominant positions in many leading technologies like Artificial Intelligence, chip design and medicine, but has fallen behind China in electric vehicles, batteries and the green-industry supply chains.
The most advanced semiconductors that run U.S. AI software are designed by Nvidia, Qualcomm and other U.S. companies but are made in Taiwan and with critical equipment solely manufactured in Europe.
Securing the supply chain—and establishing a stronger role for U.S. fabrication—are critical to securing AI’s contribution to future prosperity and growth.
President-Elect Donald Trump should strengthen as opposed to abandon Mr. Biden’s industrial policies aimed at catching up American manufacturing where it lags. And recognize the United States has unavoidable economic security interests in both the Pacific and Europe.
The Europeans should do more to provide for their own defense, but their immediate capabilities are not fully up to the task and significant American backup is needed.
The United States can’t be a major player in Asia and Europe and continue a role in the Middle East without substantially increasing defense spending. How Mr. Trump and Republicans in Congress will be challenged to square all that with their tax cut promises.
Multinationals rightly worry that China is too politically erratic to be a reliable export platform, and India and ASEAN are becoming the locus of growth.
To enjoy the widest possible markets for expensive to develop advanced technologies, the United States must secure access to these markets.
The Trans-Pacific-Partnership could provide a window into ASEAN, but India likes to play off the West against Russia and relations with the world’s largest democracy will remain decidedly transactional.
President Biden’s Indo-Pacific Economic Framework for Prosperity seeks the benefits to U.S. exports and investment that could be accomplished through the TPP—for example, regulatory harmonization in areas like technology—but does not offer Asians lower tariffs; consequently its accomplishments are terribly limited.
Mr. Trump’s proposed tariffs on China would create opportunities for other Asian nations in our markets but across the board tariffs would only hasten them to turn to China.
Similarly, if the United States fails to adequately invest in naval and other military resources in the Pacific, fails to support Ukraine and continues a weak response to Iranian-sponsored Middle East terrorism, ASEAN nations can be expected to cut deals with China as best they can for simple reasons of national survival.
A combination of China’s economic strength and American strategic weakness and protectionism could undermine the reserve currency status of the dollar.
Americans have become smug that the dollar’s international commercial role cannot easily be replaced by the yuan or another major currency, but its reserve currency status is both anchored in the dollar as a reliable store of value and the position of the United States as a global superpower.
With the federal deficits at 7% of GDP and likely to rise with at least some additional defense spending and Mr. Trump’s tax cuts, inflation risks would erode confidence among international bond holders and a militarily weaker America wouldn’t inspire national central banks to stay with the dollar.
As importantly, the next reserve currency does not have to be a national currency.
Meta’s Libra—a digital currency based on the euro, dollar and pound—was abandoned owing to U.S. government concerns about money laundering. As with the SWIFT system, however, these reservations could be overcome if a trusted nation like Switzerland created such a digital currency convertible to a weighted average of the euro, dollar, pound, yen and yuan and enabled a similarly denominated bond market.
The kicker is that Mr. Trump’s interest in making the United States the cryptocurrency capital of the world further legitimizes those kinds of synthetic assets and makes such an outcome more feasible.
The loss of the dollar’s status could reduce American living standards by about 3% of GDP. Roughly, that’s equal to the efficiency benefits we get from trade—about 1% of GDP—plus the estimated cost for adequately funding our military.
It’s the old story—pay me now or pay me later. Put up with adjustments to competition with India and ASEAN through freer trade and invest in defense or suffer the consequences through a poorer American economy.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.