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The end of US hegemony

Article no: EN20170210-Article-1.1-2017

The end of US hegemony

The Trump government signals unequivocally the end of international US hegemony. An international hegemon is able to define rules that find relatively broad acceptance internationally and plays a role in safeguarding international economic stability. The Trump government which is formed by oligarchs, top managers and former high ranking military officials announced measures that go against the present economic rules while not proposing new ones. De facto, this is an abdication from the role of an international hegemon, Joachim Becker writes.

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Economically, the hegemonic position of the USA has been eroded already for many years. The US economy has incurred substantial trade and current account deficits. Its growth has relied on massive capital imports. Never before, could such traits be observed in the case of an international hegemon. Due to the structural current account deficits, protective policies would not be unsuited to the US case. For significant sections of the working class, protective policies can be potentially beneficial. Therefore, the protective discourse of Trump has been attractive to many working class voters in the USA.

? Financial deregulation as a priority

The economic and social effects of protective measure hinge to a large extent on their design and on complementary policies. In the case of Trump, these policies will certainly not have a pro-labour bias. Though there is vague talk about the need of industrial revival, there is not even a rough proposal for industrial policies. In contrast, Trump and his top officials are much more concrete on building pipelines, infrastructure and on liberalising the financial sector again.

The latter actually seems to be one of the top priorities of the Trump government in which the interests of banking are more than well represented. It wants to lift some key restrictions on financial speculation that the Obama government had introduced as a consequence of the global financial crisis. For the banks, the proposed deregulation will bring extra profits in the short run, while it will render the US and international financial system more vulnerable to crisis again. A Goldman Sachs economic advisor to Trump admitted that the strengthening of the competitive position of the US banks is a key rationale behind the deregulation. In the financial sector, the US government actually radicalises globalisation policies.

? Bilateral instead of regional trade agreements

In other respects, the policies of the Trump government seem less protectionist than they seem to be on a first, superficial reading. Trump has criticised specifically regional free trade agreements, but not free trade agreements as such. Instead of regional agreements, he shows a preference for bilateral agreements. In negotiations on bilateral agreements, the negotiating power of the US would be higher than in regional or global negotiations. His emphasis on competition suggests that the aim of the changes in trade policies might be not be just balanced external accounts, but achieving a positive trade balance. This would give US trade policies a neo-mercantilist bend.

? Trade salvos at China and Germany ?

The Trump government has singled out China and Germany for a particularly harsh criticism. The exchange rate policies of these two countries were in the focus of US criticism. Both states have followed neo-mercantilist strategies for many years. The Chinese government has recently started to promote a bit more inward looking strategy in order to reduce the over-reliance on exports. Such restructuring, however, necessarily takes time. In line with the changed economic strategy, the Chinese government recently rather prevented a depreciation of the Chinese currencies while it had been banked on an undervalued currency in order to promoted exports in the past.

According to the Ifo-Institut, the German export surplus surpassed the Chinese one in absolute terms last year. The German surplus on the current account has continued to grow since the global crisis. Last year, it reached astronomic 9% of the GDP. Low wage growth and rather low (public) investment have been the other side of the neo-mercantilist coin. The EU emphasis on austerity and reducing domestic demand that was energetically by the German government has led to increasing current account surplus and has given a neo-mercantilist bend to the EU as a whole. The policies of the European Central Bank have led to a depreciation of the euro which has favoured EU exports. For Germany, the euro exchange rate is clearly undervalued. For the Southern euro zone state, it is, however, not undervalued. US criticism of German ?beggar-thy-neighbour? policies is not misplaced.

? ? and Mexico

The first trade policy salvo of the Trump government is, however, not directed at Germany or China, but at Mexico. For Trump, the Southern neighbour seems to be an easier target. The tone towards Mexico is aggressive, humiliating and (neo-)colonialist. Trump repeatedly said that he wants to construct a wall on the US-Mexican border and the Mexicans are to pay for it, e.g. through higher tariffs on Mexican exports to the US. This is not the tone of a hegemon, but rather of the lawless ?Wild West?. It gives an idea on what to expect on other fronts and in other regions.

? Worrying parallels

There are worrying parallels to the interwar years. After the First World War, the dominant powers sought to resurrect a liberal-globalist economic order that had failed. The UK was willing, but unable to continue functioning as an international hegemon. At that time, the US might have been able, but were unwilling to be the new international hegemon. The big crisis of 1929 and the collapse of the international order ensued.

After the 2007/2008 global crisis, the dominant powers likewise have sought to re-establish a failed globalist-financial capitalism. The USA has been less and less able to function as a hegemon and, now with the Trump government, they are unwilling to be one as well.

De facto, a multi-polar order is emerging. It might be more equilibrated. For functioning, it would require cooperative strategies of the main players. However, the Trump government has announced a non-cooperative, aggressive course.

Posted: 10 Feb 2017

Recommended citation: Becker, Joachim (2017) 'The end of US hegemony', World Economy & Development In Brief, Issue 1-2/Jan-Jun, Luxembourg (