Why Is America Such A Big Deal?

August 27, 2018
Editor(s): Stefano Gunawan
Writer(s): Sam Iacono, Leena Phan, Megan Ortega

The birth of a superpower

To understand America’s position today in the world, we must first understand how America came to power. Simply put, America’s road to becoming a superpower began in the 1800s, through the use of imperialism. Throughout the late 1800s, America extended its influence and power throughout the world with the use of its military force and colonialism. With the rapid acquisition of multiple territories across the globe, the U.S. increasingly found that they were obligated to intervene in foreign affairs as a major power. Furthermore, the U.S. was the only major power to avoid economic ruin during the World Wars, and it was the only country equipped with atomic military weapons which meant they had the authority to set the terms. With the foundations laid down, the U.S. harnessed its opportunity to further strengthen their economy and achieve primacy throughout the world.

1909 to 1913- The use of the Dollar Diplomacy

In 1909, then U.S. President William Howard Taft followed a foreign policy which was coined ‘dollar diplomacy’. Dollar diplomacy was known as a policy which was “aimed at furthering the interest of the United States abroad by encouraging the investment of U.S. capital in foreign countries”. The goal of the dollar diplomacy was to create stability abroad and reap the economic gains from foreign investment. With deep involvement in the economies of foreign countries, the U.S. was obligated to uphold economic and political stability in those regions. What’s more, other major countries found themselves deprived of the opportunity to achieve the same influence because U.S. capital was already securely placed. This capitalising on the ‘first-movers advantage’ was a key stepping stone for the U.S. 

1944- Bretton Woods agreement

The Bretton Woods agreement was a major turning point and contributing factor to the U.S.’s current global power. Its aim was a sanguine one, which was to establish a post-war international monetary system that would prevent a repeat great depression and world war. It resulted in the formation of the World Bank and International Monetary Fund. Through creating these institutions, U.S. committed themselves to be involved in the world financial system. A new monetary management system was established, namely the Bretton Woods system, which pegged the exchange rate for all currencies to the U.S. dollar, while the U.S. dollar was then pegged to gold. At that time, the United States held the largest gold reserves and this agreement allowed countries to back their currencies with U.S. dollars rather than gold.

The American Dream

Following a huge expansionary period, the United States quickly became the superpower, boasting the world’s largest and most influential economy and markets. This was possible through their established economic position and abundance of natural resources. The US is also advantageously positioned between two booming coastlines on the Pacific and Atlantic oceans, which provide excellent opportunities for trade.

Chart from: http://www.visualcapitalist.com/most-traded-currencies-2016/ * Note: the total of percentage shares of all currencies is 200%, instead of 100%, since each transaction involves two different currencies.

Today, the majority of world trade is exchanged in US dollars with an average turnover of USD $4458 billion. A massive 39% of the world’s global debt is also issued in US dollars. The US dollar is the currency used for most international transactions, such as in commodity contracts, like oil. As a result of the vast use of the dollar, the US has developed an international economic reach that far exceeds its own domestic GDP. The US economy has been looking positive in terms of growth for quite some time. Unemployment is near an 18 year low and exports are surging.

However, there is much uncertainty regarding the future, largely due to the recent trade war between US and China, and Trump’s implementation of trade tariffs. Both China and the U.S. have imposed 25% tariffs on a total of $50 billion worth of each other’s goods. The escalating trade war underscores the notion that the biggest economies in the world can carry a large amount of financial risk. An escalation of these tariffs could lead to a massive 9 percent decrease in global trade over the next two years. This would have the same magnitude as the Global Financial Crisis in 2008. If such circumstances were to eventuate, economies around the world would be hugely affected, particularly the emerging markets and developing economies.

An uncertain future

Looking forward, we see the rise of other potential superpowers such as China. With their economy projected to overtake America’s and an uncertain political and economic environment, will the U.S. be able to retain their superpower status? Public opinion around the world believes the global balance of power is shifting from the United States to China, according to a survey conducted in 39 nations by the Pew Research Center’s Global Attitudes Project. China possesses many of the trappings of a global power: the world’s largest population, a large continental land mass, the world’s second-largest economy. Beijing’s economic power is on the rise, and many think it will eventually supplant the United States as the world’s dominant superpower.

From: Bloomberg

From the year 2000 till the early 2010s, China’s economy went from barely one-tenth of the US to just under half of US economy. China’s economy is still growing at a rate of 6.5% per annum which is three times that of the US’s. If China stays on course, the size of its economy shall surpass that of the US by the late 2020s; while U.S. growth is slowing due to a maturing economy and ageing demographics. During the fourth quarter of 2016, The Chinese RMB claimed a spot as one of the world’s reserve currencies. By late 2017, the world’s central banks held $108 billion worth and are only expected to grow in the near future. Interestingly, a CNBC report has suggested that China is aiming for the yuan to replace the dollar as the global currency.

What implications will these changes have on America? Will we see the modern era’s great superpower fall behind? The rise of other major economies and powers could, of course, strengthen or weaken U.S. influence. But the ultimate outcome is contingent on how America chooses to adapt to the world’s changing political and economic landscape. If the U.S. wants to remain the global superpower, and presumably it does, then it will have to engage in the world proactively and assert itself in the world economy, as it has done for 200 years.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Stefano Gunawan

Stefano Gunawan is a 3rd year student pursuing an Honours degree in Economics. In the future he hopes to acquire a role in public policy and planning.

Sam Iacono
Leena Phan
Megan Ortega