It is 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 came.
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 October 23,
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 economy itself.
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.
To put 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
China's 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 stagnant.
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 and Asia
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.
In East 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.
We 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 process.
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.
Exhibit 4: Venture capital allocations for export-related industries collapse
Source: National Venture Capital Association
Exhibit 5: US capital goods orders nearly 40% below 1999 peak in real terms
Source: Bureau of Economic Analysis
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 exchange rates.
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).