The Eagle Still Soars

If it's Tuesday then it's time to bemoan the waning of American hegemony yet again. This topic has been a growth industry among the commentariat in recent weeks—and for good reason. Using standard metrics of power, the United States is in a relative decline. Militarily, this is the last year of a deeply unpopular administration that has exhausted U.S. armed forces in the Middle East. Economically, the United States seems headed for a recession—or worse. The collapse of the subprime mortgage market in the United States has constipated other financial markets and contributed to the fall in the dollar. Last month the Federal Reserve sprang into action to avert a panic—but not before U.S. financial institutions were forced to rely on bailouts from sovereign wealth funds to retain their solvency.

In a recent cover story in the New York Times Magazine titled "Waving Goodbye to Hegemony," the author, Parag Khanna, asserted that rising powers like Venezuela and India would be playing the United States, the European Union and China off each other to advance their aims. As if on cue, Venezuela's Hugo Chávez announced last week that his country was contemplating a cutoff of oil sales to the United States. America's decline is matched with growing buzz over the rise of the BRICs—Brazil, Russia, India and China. Are we already living in a multipolar world?

Not so fast. There is a difference between forming expectations about future trends and believing that the future is now. If anything, recent events reaffirm the primacy of American power.

American consumer and capital markets are still the primary engine of global economic growth. In the recent rash of health and safety scares revolving around products made in China, Beijing blustered in a way that suggested it held the upper hand. Six months later, however, China announced plans to overhaul health and safety inspections of Chinese exports, including improving its information database on all exports. Chinese diplomats demonstrated greater contrition in private negotiations with Western officials. Publicly officials began opening up more factories to inspection by Western journalists. In December of last year China signed two bilateral agreements with the U.S. Department of Health and Human Services widening access to Chinese factories. One Chinese academic concluded that the agreements represented "a very big response to U.S. demands." Contrary to popular perception, China's productive power remains less salient on the world stage than the market power of the United States.

The effect of uncertainty in America's mortgage market had ripple effects across the globe. These market jitters revealed two facts. First, for all the talk about waning American power, markets stabilized only when Federal Reserve chairman Ben Bernanke announced an emergency interest rate cut. Second, an underlying cause behind the worldwide financial hiccup is that producers across the globe rely on the American consumer to purchase their wares. This even applies to sovereign wealth funds. To be sure, the United States needs the money to finance its large current account deficit. However, most other asset markets are neither big enough nor open enough to cater to large-scale sovereign wealth investments. Indeed, the very countries ginning up sovereign wealth funds at the moment are the most protectionist when it comes to foreign direct investment.

The ability of rising states to play the United States off Europe and China is also open to question. Consider Venezuela again. This past Sunday Chávez backed down from his threat, saying, "We don't have plans to stop sending oil to the United States." Clearly Chávez wishes he could carry out the threat—but the only refineries that can process Venezuelan oil into a useful commodity are based in the United States. Chávez has been in power for close to a decade, and the United States remains Venezuela's largest export market.