Above photo:Trade is moving away from US dollars. AFP.
America’s obsession with global strategy resulted in neglect at home and the first casualty will be the dollar.
In 1997, Zbigniew Brzezinski wrote: “Eurasia is the axial supercontinent … It is imperative that no Eurasian challenger emerges, capable of dominating Eurasia and thus also of challenging America.”
American geo-strategists remain obsessed with this idea, as do opponents and proponents of the rise of China.
But what if there is no single Eurasian challenger? What if trade and investment among the several centers of power located between the Atlantic coast of Europe and the western Pacific simply grow until they are significantly larger than the total economic activity of the United States?
In fact, they already have done that.
There are variations in the data provided by the IMF, World Bank and other sources, but in 2019 the US accounted for about 25% of global GDP on a nominal (US dollar) basis, but only 15% based on purchasing power parity (PPP).
Eurasia accounted for just over 55% of global GDP on a nominal basis and nearly 60% on a PPP basis. On a nominal basis, the largest components of the Eurasian economy were the EU 21%, China 16%, Japan 6%, the Association of Southeast Asian Nations (ASEAN) 4% and India 3%. Japan, South Korea, Taiwan and ASEAN combined accounted for 12%.
On a PPP basis, the corresponding figures were the EU 13%, China 20%, Japan 4%, ASEAN 6% and India 8%. The combined East and Southeast Asian economies accounted for 13%.
This suggests that India, China and ASEAN are the greatest market opportunities, with the greatest potential for growth in nominal terms if the dollar declines.
China, India and ASEAN also account for about 45% of the global population versus less than 5% for the US. All Eurasia accounts for more than 60%.
The Turkish and Russian economies are also notably larger on a PPP basis than they are on a nominal basis. In 2019, Russia’s economy was about two fifths the size of Germany’s on a nominal basis, but the same size on a PPP basis.
Turkey’s economy was less than a fifth the size of Germany’s on a nominal basis, but more than half as large on a PPP basis.
Of course, the United States is also part of a larger market – the USMCA (US-Mexico-Canada Agreement), previously known as NAFTA (North American Free Trade Agreement). But this doesn’t change the fundamental imbalance with Eurasia.
The three nations of North America account for about 28% of global GDP on a nominal basis, 20% on a PPP basis, and 6.5% of the global population.
The other large Latin American economy, Brazil, does about 2.5 times as much trade with Eurasia as it does with the USMCA.
Eurasia connects internally
In early June, the first freight train bound for Tiburg in the Netherlands departed Hefei, the capital of China’s Anhui Province, which lies to the west of Nanjing. There are now 20 rail cargo routes connecting Hefei and Europe.
More than 200 trains have departed Hefei on these routes so far this year, according to China’s Xinhua News Agency.
Since the route to Duisburg, Germany, was established in 2011, freight trains have connected some 60 cities in China with 50 cities in 15 countries in Europe, reaching as far as London and Madrid.
In May, more than 1,000 freight trains traveled between China and Europe – up more than 40% year-on-year. The volume of cargo was up almost 50%. Eurasia is being connected internally, without American participation.
Freight trains have replaced air, sea and road transportation disrupted by Covid-19, but this has only accelerated a long-term trend.
Reducing dollar exposure
The only reason to conduct trade or investment within Eurasia in US dollars is convenience, and America’s sanctions-minded leaders have been making it less convenient year after year.
For one reason or another, the US has imposed economic sanctions on more than 15 Eurasian states and territories, including individual citizens and corporate entities. Its targets include China, North Korea, Myanmar, Iran, Pakistan, Syria, Turkmenistan, Kyrgyzstan, Russia, Ukraine, Belarus, Turkey and Germany.
The response has been gradual, but predictable.
Earlier this year, the members of the Shanghai Cooperation Organization – China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, India and Pakistan – decided to shift mutual trade and investment away from the US dollar to their national currencies.
China and Russia are farthest along in this process. In the past five years, the share of trade between the two denominated in dollars has dropped from about 90% to less than 50%.
According to data from the Russian central bank, the breakdown in the first quarter of 2020 was dollar, 46%; euro, 30%; and ruble and yuan, 24%.
The euro has caught up with the dollar in Russia-EU trade and appears likely to overtake it in the near future. India and Russia are increasingly trading in their own currencies, as are India and Iran and Turkey and Iran.
Since September 2019, Rosneft, Russia’s largest oil exporter, has priced new contracts in euros.
Expired growth engine
Until recently, America was a growth opportunity for the rest of the world. Now, having turned protectionist and actively interfering in the economies of allies, enemies and neutrals alike, it is a threat to other nations’ growth.
Eurasia and the rest of the world don’t have to take it and they won’t.
Eurasia is its own growth opportunity. EU trade with the rest of Eurasia – almost half of it with China – is more than twice its trade with the US. India’s trade with the rest of Eurasia – less than one-quarter of which is with China – is five times greater than its trade with the US.
Japan’s trade with China alone is 1.4 times its trade with the US. South Korea’s exports to China are more than 80% greater than its exports to the US. The list goes on.
The US has been running trade deficits since the 1970s. And, with the exception of a tiny surplus in 1991, it has booked current account deficits since the early 1980s. With millions of jobs and much of its industrial leadership lost to outsourcing, Americans have finally decided that enough is enough.
Trump and Biden – Republicans and Democrats – agree on this point.
No matter who wins the election in November, the US is not returning as the engine of global economic growth. Instead, it is adopting the mercantilist import-substitution policies that built the “miracle” economies of East Asia.
Meanwhile, Japan and Germany can claim the mantle of free trade. In the heat of the moment, the irony of this is not fully appreciated.
This is not a short-term aberration. It could take a generation for the US to rectify its economic and social imbalances, rebuild its industrial base, and reform its educational system.
Recent studies from sources such as the Pew Research Center and the University of Washington have ranked the US from 24th to 38th in the world in terms of health care and education, math, and science. This is a deep hole to climb out of.
Eurasia is not monolithic and does not constitute an anti-American bloc, but it is much larger economically, has more and better-educated people, and is catching up with the dwindling number of technologies in which America still holds the lead.
As the US turns to the task of putting its own house in order, the Eurasian Century has already begun.
Scott Foster is an analyst with LightStream Research, Tokyo.