The Future of American Power

How America Can Survive the Rise of the Rest

Fareed Zakaria

From Foreign Affairs, May/June 2008

Summary:  Despite some eerie parallels between the position of the United States today and that of the British Empire a century ago, there are key differences. Britain's decline was driven by bad economics. The United States, in contrast, has the strength and dynamism to continue shaping the world -- but only if it can overcome its political dysfunction and reorient U.S. policy for a world defined by the rise of other powers.

FAREED ZAKARIA is Editor of Newsweek International. This essay is adapted from his book The Post-American World (W. W. Norton and Company, Inc., © 2008 by Fareed Zakaria).

LEARNING FROM THE WORLD

In 2005, New York City got a wake-up call. Twenty-four of the world's 25 largest initial public offerings that year were held in countries other than the United States. This was stunning. The United States' capital markets have long been the biggest in the world. They financed the turnaround in manufacturing in the 1980s and the technology revolution of the 1990s, and they are today financing the ongoing advances in bioscience. It is the fluidity of these markets that has kept American business nimble. If the United States is losing this distinctive advantage, it is very bad news.

Much of the discussion around the problem has focused on the United States' regulation, particularly post-Enron laws such as Sarbanes-Oxley, and the constant threat of litigation that hovers over businesses in the United States. These obstacles are there, but they do not really get at what has shifted business abroad. The United States is conducting business as usual. But others are joining in the game. What is really happening here, as in other areas, is simple: the rise of the rest. The United States' sum total of stocks, bonds, deposits, loans, and other financial instruments -- its financial stock, in other words -- still exceeds that of any other region, but other regions are seeing their financial stock grow much more quickly. This is especially true of the rising countries of Asia, but even the eurozone is outpacing the United States. Europe's total banking and trading revenues, $98 billion in 2005, have nearly pulled equal to the United States' revenues. And when it comes to new derivatives based on underlying financial instruments such as stocks or interest-rate payments, which are increasingly important for hedge funds, banks, and insurers, London is the dominant player already. This is all part of a broader trend. Countries and companies now have options that they never had before.

In this and other regards, the United States is not doing worse than usual. It functions as it always has -- perhaps subconsciously assuming that it is still leagues ahead of the pack. U.S. legislators rarely think about the rest of the world when writing laws, regulations, and policies. U.S. officials rarely refer to global standards. After all, for so long the United States was the global standard, and when it chose to do something different, it was important enough that the rest of the world would cater to its exceptionality. The United States is the only country in the world other than Liberia and Myanmar that is not on the metric system. Other than Somalia, it is alone in not ratifying the Convention on the Rights of the Child. In business, the United States did not need to benchmark. It was the one teaching the world how to be capitalist. But now everyone is playing the United States' game, and playing to win.

For most of the last 30 years, the United States had the lowest corporate tax rates of the major industrialized countries. Today, it has the second highest. U.S. rates have not gone up; others have come down. Germany, for example, long a staunch believer in its high-taxation system, has cut its rates in response to moves by countries to its east, such as Austria and Slovakia. This kind of competition among industrialized countries is now widespread. It is not a race to the bottom -- Scandinavian countries have high taxes, good services, and strong growth -- but a quest for growth. U.S. regulations used to be more flexible and market-friendly than all others. That is no longer true. London's financial system was overhauled in 2001, with a single entity replacing a confusing mishmash of regulators, which is one reason that London's financial sector now beats out New York's on some measures. The entire British government works aggressively to make London a global hub. Regulators from Warsaw to Shanghai to Mumbai are moving every day to make their systems more attractive to investors and manufacturers. Washington, by contrast, spends its time and energy thinking of ways to tax New York, so that it can send its revenues to the rest of the country.

Being on top for so long has its downsides. The U.S. market has been so large that Americans have assumed that the rest of the world would take the trouble to understand it and them. They have not had to reciprocate by learning foreign languages, cultures, or markets. Now, that could leave the United States at a competitive disadvantage. Take the spread of English worldwide as a metaphor. Americans have delighted in this process because it makes it so much easier for them to travel and do business abroad. But it also gives the locals an understanding of and access to two markets and cultures. They can speak English but also Mandarin or Hindi or Portuguese. They can penetrate the U.S. market but also the internal Chinese, Indian, or Brazilian one. Americans, by contrast, have never developed the ability to move into other people's worlds.

The United States is used to being the leading economy and society. It has not noticed that most of the rest of the industrialized world -- and a good part of the nonindustrialized world as well -- has better cell-phone service than the United States. Computer connectivity is faster and cheaper across the rest of the industrialized world, from Canada to France to Japan, and the United States now stands 16th in the world in broadband penetration per capita. Americans are constantly told by their politicians that the only thing they have to learn from other countries' health-care systems is to be thankful for their own. Americans rarely look around and notice other options and alternatives, let alone adopt them.

Learning from the rest is no longer a matter of morality or politics. Increasingly, it is about competitiveness. Consider the automobile industry. For more than a century after 1894, most of the cars manufactured in North America were made in Michigan. Since 2004, Michigan has been replaced by Ontario, Canada. The reason is simple: health care. In the United States, car manufacturers have to pay $6,500 in medical and insurance costs for every worker. If they move a plant to Canada, which has a government-run health-care system, the cost to them is around $800 per worker. This is not necessarily an advertisement for the Canadian health-care system, but it does make clear that the costs of the U.S. health-care system have risen to a point where there is a significant competitive disadvantage to hiring American workers. Jobs are going not to low-wage countries but to places where well-trained and educated workers can be found: it is smart benefits, not low wages, that employers are looking for.

For decades, American workers, whether in car companies, steel plants, or banks, had one enormous advantage over all other workers: privileged access to American capital. They could use that access to buy technology and training that no one else had -- and thus produce products that no one else could, and at competitive prices. That special access is also gone. The world is swimming in capital, and suddenly American workers have to ask themselves, What can we do better than others? It is a dilemma not just for workers but for companies as well. When American companies went abroad, they used to bring with them capital and know-how. But when they go abroad now, they discover that the natives already have money and already know how.

There really is not a Third World anymore. So what do American companies bring to Brazil or India? What is the United States' competitive advantage? This is a question few American businesspeople thought they would ever have to answer. The answer lies in something the economist Martin Wolf noted. Economists used to discuss two basic concepts, capital and labor. But these are now commodities, widely available to everyone. What distinguishes economies today are ideas and energy. A country can prosper if it is a source of ideas or energy for the world.