Today's date:
Fall 1987

Pax Americana's Twin Deficits

Masahiro Sakamoto Sakamoto is Chief of the Intemational Trade Institute or Japan's Foreign Trade Council. In this article, he compares the global commitments of the United States under Pax Americana with those of Great Britain during the era of Pax Britannica.

After World War II ended, it was imperative that the United States rapidly recover stability and prosperity in the West because the Soviet Union immediately challenged its hegemony as a world leader. This ideological contest required a better Western performance.

In order to promote stability and recovery, the selfsufficient US economy supplied the world with capital through the Bretton Woods institutions of the IMF and the World Bank, eventually stimulating a strong recovery in Europe and Japan by the 1950s and '60s. Consequently, the gap between the hegemon and its allied competitors narrowed in a very short time, but the hegemon, the United States, continued to maintain a disproportionate burden of maintaining peace and the stability of the system.

This cost-benefit disadvantage of empire originated in the early challenge of the Soviet Union The US effort to build hegemony while simultaneously facing powerful economic competition from its allies accounts for the shorter heyday of Pax Americana when compared to Pax Britannica.

Malfunctioning Hegemony
Because of this disadvantage, Pax Americana has been malfunctioning since the early 1970s.

Although the US share of -he combined GNP of the five most advanced nations in 1983 was 40.4%, it covered 56.7% of combined defense expenditures. In that same year the German share of advanced nation GNP was 8.7% a defense share of 8.3 %. The Japanese GNP share was 14% with a defense share at 3.3%, The French GNP share was 7.1% with a defense share of 8.3%. And
the UK GNP share was 6.4% with a defense share of 7.7%.

US share of overseas direct aid in 1983 also il lustrates this imbalance. For the US it was 29.1% compared to 13.7% for Japan, 11.6% for West Germany, 13.9% for France and 5.8% for Great Britain.

The deficit of the American current account in 1984 was nearly 3% of GNP The trade deficit was also close to 3% of GNP By comparison, although the British had a trade deficit of 5 % of GNP in 1913 when their international leadership began to wane, their current account ran a surplus of 8.5 % of GNP.

Although Britain had a large trade deficit with both the US and Germany, it was masked by a larger British surplus in current account from the colonies, especially India.

In spite of their huge current account surplus, the British industries lost their competitiveness against the US and Germany, especially in the advanced industries at the time - electricity, autos, chemicals and steel. In 1913, the US share of world industrial production was 36%, Germany's share was 16% and Britain's was 14%.

Although France and Germany carried a larger military burden than Britain in 1913 (5% and 3.7% of GNP respectively compared to Britain's 2.8%), in the economic field Britain maintained low tariff rates in spite of protectionist moves by Germany and the US. Britain's commitment to international investment (64% share of overseas investment as compared to France's 13%. Germany's 22% and 1% share by the US) and to maintaining the dominant currency was greater. Interestingly, at the turn of the century. the US had the smallest military and economic commitment to the international system even though it had nearly three times the British industrial production.

The Military Burden Build
The US began to take on an additional military burden with the outbreak of the Korean War. US military expenditures increased from 5% of GNP in 1949 to 13.3% in 1952 and 1953. This large increase was covered by raising taxes and cutting non-defense expenditures. At the same time, private consumption as a share of GNP dropped from 68% in 1949 to 62% in 1952, thus increasing savings with little damage to capital formation and causing only a small rise in prices.

However, as the Korean War wound down, a large military burden in the range of 8-10% of GNP became permanently incorporated in the American economy, initiating the disadvantageous cost-benefit relationship which has cut short the US span of hegemony. It is from this moment in the early 1950s that the US balance of payments began to shrink and shifted into deficit.

This military burden plus the economic burden resulting from the success of postwar recovery by America's allies worked as a drain on the confidence of the dollar. By the late 1950s, only 15 years after Bretton Woods, the US began to experience an "unstable dollar."

Even under the Kennedy Administration economicperformance improved considerably and the trade account improved, the basic balance remained in deficit and the decline in gold reserves continued. Even though American competitiveness remained strong, America's advantage over its competitors in productivity, technological advances and management diminished.

The Damage of Vietnam
The escalation of the Vietnam War, which began in 1965, profoundly damaged the relative competitiveness of the American economy. Even though military escalation started under an economy in a cyclically mature state, the Johnson Administration did not raise taxes or cut non-defense expenditures as was done during the Korean War. This policy set off a strong inflationary trend.

Fiscal expenditures, both military and nonmilitary, expanded vigorously in the later half of the 1960s. The ratio of government expenditure to GNP increased by 5% between 1965 and 1970. American competitiveness was further weakened by rises in wages and prices. Also, during this period both public and private sector consumption increased while the balance-of-payments deteriorated substantially and the trade account with Japan and Canada went into deficit for the first time.

The Vietnam War was also the direct trigger for the breakdown of the gold-dollar standard. The large burden of military expenditures in Asia accelerated the long term capital outflow and further exposed the dollar to speculation. At the same time the improvement in European and Japanese competitiveness reduced the need for dollars. The consequent run on gold inevitably meant the end of the gold-dollar link, which finally occurred in 1971 under President Nixon.

The weakness of American economic dominance was revealed by the collapse of the Bretton Woods monetary system only 25 years after the establishment of Pax Americana. This contrasts sharply with the experience of Pax Britannica where the gold standard lasted for about 100 years.

Also, we should note that for 40 years after the end of the Napoleonic Wars, Britain fought only one major war - the Crimean War in 18 5 6 with the participation of its competitors. By contrast, the United States was involved in large scale war efforts without the direct participation of competitors twice since the end of World War II - in Korea and Vietnam.

Nixon's Short-lived Sharing
President Nixon's strategy to cope with economic and military overextension had three pillars. The first was to reduce the security costs of Pax Americana by negotiating arms control with the USSR and rapprochement with China. Second, there was to be a more equal sharing of trade and monetary responsibilities. And third, in order to strengthen the American economy, in effort was made to control wages and prices.

The strategy of detente with the USSR reduced the military cost of the US from 7.4% of GNP in 1970 to 4.6% in 1979. However, when the equilibrium in nuclear forces became apparent in the late 1970s, anxiety grew to the point where NAM decided in 1978 to increase the military spending of member countries 3% in real terms and ultimately, under Reagan, rapid US military increases took place in attempt to regain an edge in the East-West balance.

While the cost-sharing of Pax Americana did advance during the 1970s, It was limited. The monetary system shifted to floating rates, tariff rates were harmonized and import quotas were reduced in Europe and Japan even as they increased foreign aid. But, the two oil shocks severely constrained Japan's and Europe's ability to share economic and military burdens just as deteriorating manufacturing competitiveness in the US made international burdens harder to bear.

In 1970, the US was No. 1 in military might, industrial supremacy and foreign exchange reserves. By 1980; its military expenditures were matched by the USSR which also exceeded the US in petroleum and steel production. Japan surpassed the US in automobile production and Germany in the holding of foreign reserves.

Under the Reagan Administration, personal consumption has risen dramatically, capital formation has not markedly changed and the overseas account in trade and capital flows has turned to heavy deficits.

The Twin Deficits
The failure to adequately share the burden of Pax Americana has resulted in large US deficits in the fiscal balance and balance-of-payments. These twin deficits clearly indicate an overcommitment in international responsibilities.

The rapid and large increase in military expenditures since 1980 is one of the most important causes of the fiscal deficit. Once the decision was made to alter the military equilibrium achieved by detente, only a growing US commitment could make a difference because efforts by the other allies could only marginally affect the East-West balance.

In the economic field, the US has pulled the world economy out of a severe recession twice since the early 1970s. US expansionary policies rescued the world economy from severe stagnation after both the first and second oil shocks and produced sizable effective demand for the outside world. The result his been a large and growing balance of payments deficit.

However, we should not forget that the US today has the largest economy in the world. Pax Americana is malfunctioning not because US economic capacity is too small - as was the case with Great Britain - but because the burden is too heavy.

In sum, US overcommitment in preserving global peace and stability has resulted from the military challenge of the USSR, which itself has few international economic commitments, and the economic challenge of its allies who rely on the US militarily. This combination has constituted a strong challenge to Pax Americana existence and has placed far greater comparative burdens on the US in the later half of the 20th Century than on Great Britain in the 19th century

This article is adapted from an unpublished paper prepared for the Japan Foreign Trade Council by Masahiro Sakamoto, titled The Hegemonic Structure and Cost Sharing in Pax Americana, 1986.

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