Who is more dominant: the US on military expenditure or China on manufacturing output?

Richard Baldwin, 瑞士洛桑国际管理发展学院 (IMD) - 商学院 , 6 September 2024, Factful Friday.

Introduction.

You may find the question in the title a bit puzzling. Why would a wannabe trade theorist be interested in that? Hear me out.

I’ve been teaching geopolitics at my new home base—IMD Business School. In trying to clarify the complexity for executives, I had to answer: Why now? What changed? Why are geopolitical considerations an issue now when they weren’t so much ten years ago?

In the process, I came across Ian Bremmer’s framework for thinking about recent geopolitics. Bremmer has developed a line of thinking that he calls the G-Zero world. You can watch him explain it in one minute here , but this is the spoiler:

• Zero groups oversee the global order, not the G7, not the G20.

Global leadership is fragmented.

• The US continues to dominate the military and security order, but the US and its allies no longer dominate the economic order.
• China and other Emerging Economies have undermined the G7 economic dominance but have not replaced it with anything.

• China is now the world’s sole manufacturing superpower (as I pointed out in my recent VoxEU.org column ), but it has not stepped up to replace the US-led alliance in the economic sphere.

This matters since manufacturing has taken on an outsized importance in the world of geopolitics. Nations around the world are untying the purse strings and pouring billions into efforts to build up their local industry—at least partly in reaction to China’s rapid rise to dominance. At least some of the players view this as a zero-sum game, so tearing down others is one of the allowable tactics.

It is worth saying that the US still dominates the world financial order via the hegemonic role of the US dollar in reserves, payments, forex, and the central role of US equity and bond markets. This allows it to weaponize economic interdependence in a way that no other nation can match. See charts in the Annex.

Bit of history.

For years after the fall of the post-WWII global order (the Cold War), the US was willing to assume the costs and benefits of leading the world economic order. With allies, it led the transformation of the GATT into the WTO, guided the entry of China and Russia into the WTO, participated in the flourishing of mega-regional trade blocks in North America, the Pacific, and Latin America. It led development efforts in the World Bank and supported the IMF in its crisis-fighting role. When the global financial crisis struck, the US and allies stepped up to avoid a new Great Depression, and establish a new, global financial regulation regime.

The US was never dominant enough economically to go it alone (unlike Britain in the pre-WWI global order), but it was willing to lead like-minded nations. The US was willing to moderate its narrow, short-run nationalist goals to sustain a multilateral economic order that benefited America in broad, long-run terms. Enlightened self-interest was the name of the game.

Over the last dozen years or so, the US has stepped back from its leadership role. The US motto changed from “Rules Based System” to “My Way or the Highway”. Multilateralism was out; nationalism was in. US enlightened self-interest flipped over to enlightenment selfishness.

That’s what sparked the question in the title.

Leaders of the military/security sphere and the manufacturing sphere.

Since I have a lot to do, I’m not going to go through the usual wind up and promotion of my books (did you know I wrote a couple of books on globalization?). I’m going to get straight to the point and bike to work (? transport avec un peu de sport ?, as they say around here).

The title question is answered below. The answer is, the US by a midge. US military spending is greater than the next 10 largest spenders. China’s manufacturing output is larger than the next 9 largest producers.

The US in the military sphere is more dominant than China in the manufacturing sphere, using these simple world share metrics. The military spending data, by the way, are from the World Bank’s wonderful World Development Indicators database.

Since I already whipped up a few more slides on the question of economic dominance, I’ll share them with you in the annex. They show that no one nation has been dominant economically (at least since the early nineteenth century, as I showed in this Factful Friday, Who Was Most Dominant in World Trade: UK in 1800, US in 1948 or China Today? (BTW, it was the UK what was dominant back then.)

Summary and Concluding remarks.

Ian Bremmer argues that the world has been more turbulent since no one is in charge, and the system is transitioning to an unknown, unprecedented situation. Since Pax Britannica started in the early nineteenth century, the world order has been stabilized by powers that dominated both the security and economic spheres: Pax Britannica, the inter regnum (1914-1945), the Cold War's bipolar order, recent US hegemony, and now confusion. The US still dominates the military sphere, but no one nation or coherent group of nations controls the economic sphere.

And that’s it for today’s Factful Friday!

References

Baldwin, R. (2019). The globotics upheaval: Globalization, robotics, and the future of work. Oxford University Press.

Baldwin, R. E. (2016). The great convergence: Information technology and the new globalization. Belknap Press of Harvard University Press.

Baldwin, Richard (2024). China is the world’s sole manufacturing superpower: A line sketch of the rise, VoxEU.org column, 17 Jan 2024. https://cepr.org/voxeu/columns/china-worlds-sole-manufacturing-superpower-line-sketch-rise

Bremmer, Ian (2012). “What is a G-Zero World?”, YouTube video,? https://www.youtube.com/watch?v=Djo2qNumzKU

Bremmer, Ian (2023). “The next global superpower isn't who you think”, Ted Talk, https://www.ted.com/talks/ian_bremmer_the_next_global_superpower_isn_t_who_you_think

Ruggie, J. G. (1982). International regimes, transactions, and change: Embedded liberalism in the postwar economic order. International Organization, 36(2), 379-415. https://doi.org/10.1017/S0020818300018993

Bonus charts.

Manufacturing is not the only measure of importance in the global economy. The charts below show a couple of other natural measures: world share of GDP and imports.

The right chart presents the data for GDP shares. GDP is a measure of the size of the economy and thus a blunt measure of a nation’s or a group’s importance. What we see is that back before globalization’s second unbundling started with the ICT revolution (thus enabling a massive transfer of manufacturing knowhow from G7 firms to Emerging Economy factories), the G7 accounted for two-thirds of world output and income. That is definitely dominant. Note that the US alone was not dominant. Its share was only a quarter—same as it is today. But the US was the leader of the G7 and so the heft of the group mattered. For example, if the G7 really wanted to transform the GATT into the WTO, it would happen (and did).

After the Great Convergence that I explain in my 2016 book, the G7 share declined. China’s share soared. China, with its 17% in 2020, was close the US with its 26%. The key, however, is that the G7’s is now down to 44%, so even if the US were willing to lead the G7 on economic matters, the leverage it would wield is greatly diminished.

In short, no “G” dominants today. That’s why Bremmer calls it a G-Zero world.

The right chart takes a more functional view of economic dominance. One of the biggest levers that nations have—and one that China is using to great effect—is the some of its purchases from the rest of the world, prosaically known as imports.

Here we see that even back in 1990, the G7 had only half the world’s imports. Now the figure is down to 35%. The US’s individual share was always modest at 10-20%. China’s 10% share is almost as large as the US’s 13%. But again, these are not the number of hegemons. Back in its glory days, Britain single-handedly accounted for almost half of world imports. Moreover, it was the only nation with very low tariff barriers.

Last chart shows a range of indicators of the US currency’s dominance. Here we can unambiguously speak of dominance. Quite simply, there is no other currency that is even close. This, in turn, gives the US its unparalleled ability to enforce its will on an extra-territorial basis. When the US threatens to shut off nation’s banking system, those nations bend a knee and comply with the US’s desiderata.

References.?????

Baldwin, R. (2019). The globotics upheaval: Globalization, robotics, and the future of work. Oxford University Press.

Baldwin, R., & P. Martin (1999). Two waves of globalization: Superficial similarities, fundamental differences. In H. Siebert (Ed.), Globalization and labor (pp 3–58). Mohr Siebeck Verlag.

Bénétrix, A. S., O'Rourke, K. H., & Williamson, J. G. (2012). The spread of manufacturing to the periphery 1870-2007: Eight stylized facts (Working Paper No. 18221). National Bureau of Economic Research. https://www.nber.org/papers/w18221

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