symptomatic of the national condition of the
United States that the worst humiliation ever
suffered by it as a nation, and by a US president
personally, passed almost without comment last
week. I refer to the November 20 announcement at a
summit meeting in Phnom Penh that 15 Asian
nations, comprising half the world's population,
would form a Regional Comprehensive Economic
Partnership excluding the United States.
President Barack Obama attended the summit
to sell a US-based Trans-Pacific Partnership
excluding China. He didn't. The American
led-partnership became a party to which no-one
Instead, the Association of
Southeast Asian Nations, plus China, India, Japan,
South Korea, Australia and New Zealand, will form
a club and leave out the United States. As 3
billion Asians become prosperous, interest fades
in the prospective contribution of 300
million Americans -
especially when those Americans decline to take
risks on new technologies. America's great
economic strength, namely its capacity to
innovate, exists mainly in memory four years after
the 2008 economic crisis.
A minor issue in
the election campaign, the Trans-Pacific
Partnership initiative was the object of enormous
hype on the policy circuit. Salon.com enthused on
This agreement is a core part of the
"Asia pivot" that has occupied the activities of
think tanks and policymakers in Washington but
remained hidden by the tinsel and confetti of
the election. But more than any other policy,
the trends the TPP represents could restructure
American foreign relations, and potentially the
As it happened, this
grand, game-changing vision mattered only to the
sad, strange people who concoct policy in the
bowels of the Obama administration. America's
relative importance is fading.
these matters in context: the exports of Asian
countries have risen more than 20% from their peak
before the 2008 economic crisis, while Europe's
exports have fallen by more than 20%. American
exports have risen marginally (by about 4%) from
their pre-2008 peak.
Exhibit 1: Asian,
European and US exports
exports to Asia, meanwhile, have jumped 50% since
their pre-crisis peak, while exports to the United
States have risen by about 15%. At US$90 billion,
Chinese exports to Asia are three times the
country's exports to the United States.
After months and dire (and entirely wrong)
predictions that China's economy faces a hard
landing, it is evident that China will have no
hard landing, nor indeed any landing at all.
Domestic consumption as well as exports to Asia
are both running nearly 20% ahead of last year's
levels, compensating for weakness in certain
export markets and the construction sector.
Exports to the moribund American economy are
Exhibit 2: China's exports to
Asia vs USA
In 2002, China imported five times as much
from Asia as it did from the United States. Now it
imports 10 times as much from Asia as from the US.
Exhibit 3: Chinese imports from the US
Following the trade patterns, Asian
currencies began trading more closely with China's
renminbi than with the American dollar. Arvind
Subramanian and Martin Kessler wrote in an October
2012 study for the Peterson Institute:
A country's rise to economic
dominance tends to be accompanied by its
currency becoming a reference point, with other
currencies tracking it implicitly or explicitly.
For a sample comprising emerging market
economies, we show that in the last two years,
the renminbi (RMB/yuan) has increasingly become
a reference currency which we define as one
which exhibits a high degree of co-movement
(CMC) with other currencies.
Asia, there is already a RMB bloc, because the
RMB has become the dominant reference currency,
eclipsing the dollar, which is a historic
development. In this region, 7 currencies out of
10 co-move more closely with the RMB than with
the dollar, with the average value of the CMC
relative to the RMB being 40% greater than that
for the dollar. We find that co-movements with a
reference currency, especially for the RMB, are
associated with trade integration.
draw some lessons for the prospects for the RMB
bloc to move beyond Asia based on a comparison
of the RMB's situation today and that of the
Japanese yen in the early 1990s. If trade were
the sole driver, a more global RMB bloc could
emerge by the mid-2030s but complementary
reforms of the financial and external sector
could considerably expedite the
All of this is well known and
exhaustively discussed. The question is what, if
anything, the United States will do about it.
Where does the United States have a
competitive advantage? Apart from commercial
aircraft, power-generating equipment, and
agriculture, it has few areas of real industrial
pre-eminence. Cheap natural gas helps
low-value-added industries such as fertilizer, but
the US is lagging in the industrial space.
Four years ago, when Francesco Sisci and I
proposed a Sino-American monetary agreement as an
anchor for trade integration, the US still
dominated the nuclear power plant industry. With
the sale of the Westinghouse nuclear power
business to Toshiba, and Toshiba's joint ventures
with China to build power plants locally, that
advantage has evaporated.
The problem is
that Americans have stopped investing in the sort
of high-tech, high-value-added industries that
produce the manufactures that Asia requires.
Manufacturers' capital goods orders are 38% below
the 1999 peak after taking inflation into account.
And venture capital allocations for high-tech
manufacturing have dried up.
Venture capital allocations for export-related
industries collapse (March 2003=100)
Source: National Venture Capital
Exhibit 5: US capital
goods orders nearly 40% below 1999 peak in real
Source: Bureau of Economic
Without innovation and
investment, all the trade agreements that the
Washington policy circuit can devise won't help.
Neither, it should be added, will an adjustment in
It is hard to fathom just
what President Obama had in mind when he arrived
in Asia bearing a Trans-Pacific Partnership
designed to keep China out. What does the United
States have to offer Asians?
It is borrowing $600 billion a year from the
rest of the world to finance a $1.2 trillion
government debt, most prominently from Japan
(China has been a net seller of Treasury
securities during the past year).
It is a taker of capital rather than a
provider of capital.
It is a major import market but rapidly
diminishing in relative importance as intra-Asian
trade expands far more rapidly than trade with the
And America's strength as an innovator and
incubator of entrepreneurs has diminished
drastically since the 2008 crisis, no thanks to
the Obama administration, which imposed a steep
task on start-up businesses in the form of its
Washington might want
to pivot towards Asia. At Phnom Penh, though,
Asian leaders in effect invited Obama to pivot the
full 360 degrees and go home.