America’s Self-Inflicted Wounds

Political dysfunction is doing serious damage to U.S. economic power.

Petar Kujundzic / Reuters

Will the United States remain the most powerful country in the world? Many think not. Those who feel this way also tend to think that China’s ascent will lead to America’s decline. Harvard professor Joseph Nye, who is not a declinist, begins his new book Is the American Century Over? noting that “in recent years, polls showed that in 15 of 22 countries surveyed, most respondents said that China either will replace or has already replaced the United Sates as the world’s leading power.” Its giant landmass and billion-strong population, combined with rapid economic, social, and military progress over the last few decades, make China an obvious candidate to overtake the United States as the primary shaper of world affairs. But the attention in the United States to China and other foreign threats obscures an important fact: America’s diminishment as a world power may be driven as much by the fraying of its domestic politics and chronic institutional gridlock as by the rise of rivals abroad.

Several recent developments reveal how political and institutional fragmentation in the United States has produced self-inflicted wounds for the U.S. abroad. In all of these instances, America’s ability to exercise economic power in the world has been deliberately curtailed through decisions made unilaterally in Washington by American political leaders.

The first development involves the International Monetary Fund (IMF). As the global economy becomes more interdependent, the need grows for a supranational institution capable of detecting looming financial crises and containing the spread of these crashes when they occur. Countries that get in economic trouble also need a lender of last resort to help them regain stability and undertake often-unpopular economic reforms. The IMF’s record on these matters is far from stellar; it has, for instance, failed to anticipate crises and gone too far in imposing harsh conditions on its beleaguered borrowing countries. Critics around the world denounce the IMF as an opaque organization that perpetuates America’s economic preeminence; in the United States, it is mostly ignored or seen as another UN-like bureaucracy that feeds on American taxpayers. These critiques often exaggerate the institution’s indisputable flaws and overlook or dismiss the instances in which it has provided an indispensable public service. The challenge for U.S. officials is to ignore populist calls to shut the IMF down and instead find ways to make it work better.

In fact, that’s precisely what the United States tried to do in 2010 with a series of reforms aimed at updating the World War II-era institution for the 21st century. Among other changes, the Obama administration proposed raising China’s voting shares in the IMF’s board from 3.8 percent to 6 percent of the total. The adjustment doesn’t even reflect the fact that the Asian superpower will soon have the largest economy in the world and that China’s share will remain well below America’s 16.7 percent of votes, which gives the U.S. several advantages, including the ability to veto IMF decisions it dislikes. The administration’s reforms also included increasing the nearly negligible weight that emerging economies like Brazil and India now have in the IMF—despite accounting for half of the world economy—by altering the composition of the institution’s board of directors. That board still reflects the world order of 1944 and affords Europe representation that is disproportionate to its current influence (seven of 24 board members are European). The board unanimously approved all the proposals.

After spearheading these reforms, however, the Obama administration has been unable to get Congress to approve them. The IMF cannot implement the measures without such approval, which has now been delayed for five years. One of the chief obstacles is Jeb Hensarling, a Republican representative from Texas and the head of the Committee on Financial Services, which must sign off on the reforms. Neither he nor his allies in the Tea Party are fond of the IMF. As a recent New York Times editorial noted, “Republicans in Congress have refused to ratify changes to the I.M.F., which would have also increased its capital. They signaled that they would only vote for I.M.F. reforms if they got something in return from the administration, like changes in the 2010 health care reform law.” And yet a better functioning, more representative and legitimate IMF is good for the rest of the world and a strong pillar of an international economic order in which the U.S. economy has thrived for over half a century.

This failure to enact change at the IMF resulted in a second development: After years of waiting for reform, China launched its own rival institution—the Asian Infrastructure Investment Bank (AIIB)—and proceeded to invite other countries to join as shareholders. The Obama administration launched an aggressive diplomatic campaign to dissuade governments from joining the initiative, but it backfired. Even stalwart U.S. allies like Australia and the United Kingdom ignored Washington’s pressure and are now part of the new bank’s 57 founding nations. The AIIB is likely to become the primary funding source for large infrastructure projects throughout Asia. U.S. leaders, who will not be joining the AIIB, must now watch the institution from the sidelines, without any power to influence its decisions.

Another organization that enhances U.S. economic influence is the Export-Import Bank (Ex-Im Bank), which finances exports by providing loans to clients overseas who want to buy products made in the United States. But here again, a group of Republicans in Congress is threatening to close down the institution for practicing corporate welfare (if you make a loan to buyers of Boeing planes, Boeing’s sales and profits go up). Never mind that all of the world’s major exporting countries have similar institutions. Or that in the last two years alone, the Chinese government has lent $670 billion, compared with the $590 billion that the Ex-Im Bank has lent since it was created by President Franklin Roosevelt in 1934.

Sometimes the developments are buried deep inside the institutional apparatus of the international financial system. Since 1959, the Washington, D.C.-based Inter-American Development Bank (IDB) has been the main source of financing for Latin America’s development—from highways to schools to child-vaccination programs. Recently, the IDB decided to expand its hitherto limited capacity to lend to or invest in the region’s private sector and asked for a $2 billion increase in capital to meet that goal. The proposal was that the IDB would contribute $700 million toward the target and the remaining $1.3 billion would be covered over seven years by the bank’s shareholding nations in proportion to the shares they already owned. According to a high-ranking U.S. official, every nation agreed to the plan except the United States, where support in Congress was low. To maintain its influence in the region, the U.S.—the main shareholder in the IDB—would have had to invest a paltry $39 million a year for seven years. Ideological blindness in Congress and incompetence on the part of bureaucrats in the Treasury Department combined to erode another important means of projecting U.S. economic power in Latin America—a region that, according to official statements, is a priority for the White House.

The Republicans don’t have a monopoly on undermining U.S. economic power abroad. Democrats recently opposed a bill that would have given President Obama trade-promotion authority (TPA), a legal mechanism enabling his administration—like other recent administrations—to negotiate an international trade deal with a congressional up-or-down vote on a final agreement rather than through political haggling over every provision in the deal. Obama had requested the TPA to secure U.S. participation in the Trans-Pacific Partnership, which has generated hostility on the American left. This is the case even though, as Fareed Zakaria has lucidly argued, “Democratic opposition to fast-track trade authority for President Obama is blind to the fundamental reality of this era: You can’t turn off the machine. You can’t stop China from growing. You can’t prevent Africa from deepening its integration into the global system. These deeply entrenched forces will continue to gain steam. The potential trade deal with Asia, the Trans-Pacific Partnership, could, however, shape these trends in a direction that is compatible with American ideals and interests. That’s why congressional—mainly Democratic—opposition is so misguided.” Little matter. The opposition continues and may even be gaining strength.

Larry Summers, a former U.S. treasury secretary recently wrote, “As long as one of our major parties is opposed to essentially all trade agreements, and the other is resistant to funding international organizations, the U.S. will not be in a position to shape the global economic system.” I agree with Summers. The most potent forces constraining America’s economic power in the world are coming from Capitol Hill, not Beijing.