This page intentionally left blank America’s Global Advantage For over sixty years the United States has been the largest economy and most powerful country in the world However, there is growing speculation that this era of hegemony is under threat as it faces huge trade deficits, a weaker currency, and stretched military resources America’s Global Advantage argues that, despite these difficulties, the US will maintain its privileged position In this original and important contribution to a central subject in International Relations, Carla Norrlof challenges the prevailing wisdom that other states benefit more from US hegemony than the United States itself By analysing America’s structural advantages in trade, money, and security, and the ways in which these advantages reinforce one another, Norrlof shows how and why America benefits from being the dominant power in the world Contrary to predictions of American decline, she argues that American hegemony will endure for the foreseeable future carla norrlof is an Associate Professor in the Department of Political Science at the University of Toronto America’s Global Advantage US Hegemony and International Cooperation C a r l a Nor r l of CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521765435 © Carla Norrlof 2010 This publication is in copyright Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published in print format 2010 ISBN-13 978-0-511-67737-3 eBook (NetLibrary) ISBN-13 978-0-521-76543-5 Hardback ISBN-13 978-0-521-74938-1 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate To family and friends Contents List of figures List of tables Preface Acknowledgments Introduction The puzzle The argument Methodology and value added Plan of the book 2 The forms and consequences of hegemonic leadership The forms of hegemonic leadership The consequences of American hegemony The evolution of the United States’ hegemonic position Measuring disproportionality Conclusion page ix x xi xiii 11 12 15 17 22 29 Cooperation under hegemony The emergence of international institutions and the neorealist challenge Size matters The public goods assumption Revised size model Systemic stability and hegemonic decline Conclusion 30 31 35 38 40 49 54 International trade cooperation Trade theories What ‘good’ is free trade? 57 57 67 vii viii Contents The significance of trade deficits The reward of ongoing trade deficits Buying power as a source of bargaining power How the United States controls the global equilibrium through the trade regime Bargaining rounds and ministerial meetings Conclusion 72 88 94 96 103 113 5 Interactive effects between monetary and commercial power How monetary privilege facilitates commercial expansion How commercial strength reinforces monetary privilege Conclusion 115 116 141 165 The security card The security–dollar nexus The asymmetry in risk premiums Defense commitments and humanitarian interventions Unilateralism vs multilateralism, private vs public goods Conclusion 167 168 171 184 185 191 Credible threats and regional competition Geographically coherent regionalism in East Asia Euro Power Conclusion 192 198 206 244 Conclusion 247 References 253 Index 271 272 Bayard, Thomas O 102, 108, 109, 110 BEA 4, 77, 84, 85, 87, 118126, 130, 155, 156, 172, 179 Bear Stearns, emergency funding for 79 Becker, Gary S 14 Becker, Werner 208, 214 Beeson, Mark 203 Belke, Ansgar 224, 233 benevolence, and self-interest 14 and rational choice 14 benevolent hegemon as provider of public goods 12 motivation of 13–14 Bergsten, C Fred 168, 196, 217, 221, 222, 227 Bernanke, Ben, current account deficit 74 Bernard, Mitchell 200 Bertaut, Carol C., investment data 147, 148 Bhagwati, Jagdish 110, 111–12 spaghetti bowl effect 204 Biscop, Sven 238, 239 Blackhurst, Richard 96 Blair, Prime Minister Tony, and European defence cooperation 235 Bono, Giovanni 241, 243, 244 borrowing, and investment 77–8 asset/GDP ratios 80 consequences of amassing liabilities 87–8 government debt 82 and cost of borrowing 84–5 household debt 81 US investment 85 see also bail-outs Bosnian crisis, European dependence on US military support 234–5 Boyer, Mark A 36 Brander, James A 70 Brawley, Mark, benevolent hegemony 13 Brazil, investment losses in US 151 purchase of US Treasury bills 159 Bretton Woods 88 Bretton Woods II 142, 158–9 Index collapse of 142, 161, 162–3 Brewer, John 189 Brown, Stuart S 74, 76 Buchanan, James M 58, 64 Bulow, Jeremy 169 Burenstam-Linder, Staffan 63 Bush, President George W., and EU security cooperation 251 Byrd Amendment 100 Cable, James 182, 184 Cai, Kevin G 201, 205 Calvo, Guillermo 145 Cambodia, US anti-communist intervention in 184 Canada FDI 86 investment in US in 149 short-term 151 net external liability 130 US investment in 149–50 Cancun meeting, and Singapore issues 203 Capabilities Commitment Conference (CCC) 242 Capie, Forrest 233 capital inflow 141–2 and import absorption 141 capital markets relative size of 214–15 differences in components 216 in US 22 weakness of, and soft dollar peg 144–5 Carpenter, Ted Galan 187 Castro, President Fidel of Cuba, and Bay of Pigs 183 Cavallo, Michele 130 CBO 134 Cecchetti, Stephen G 223, 224 Cedras, General Raoul of Haiti, see militarized disputes and US capital flows Chamberlin, Edward 64 Chandler, Marc 91 Chatterjee, Charles 225 Chavez, Hugo, pricing of oil in euros 218 Chile, US anti-communist intervention in 184 Index China and ASEAN 199 challenger to US hegemony 192, 245, 250 competition with Japan for East Asian hegemony 205–6 and dollar fall 157 economic power 180 export outlet for East Asian trade 201–2 foreign exchange reserves 216 investment in US 149 short-term 151 military spending 20, 19 political liberalization in 206 relationship with Japan, and US military support 186 share of world GDP 20 US economic pressure on 154 US investment in 149–50 Chinn, Menzie 196, 207, 215, 217, 222, 227 Chirac, Prime Minister Jacques, and European defence cooperation 235 Cho, Sungjoon 111 Citigroup, emergency funding for 79 Cline, William R 75, 77, 106, 130, 135 coercive hegemon, and exploitation 14–15 Cohen, Benjamin 120, 146, 167, 168, 196, 215, 217, 221, 222, 225, 229 collateralized debt obligations (CDOs) 78 commercial strength, and monetary privilege 141 common external tariff (CET), in East Asia 203 Common Foreign and Security Policy (CFSP) 198, 234, 238, 243 communism, and US military interventions in Cambodia 183 against China 182 in Iraq 183 in Korea 182 against left-wing regimes 183 paramilitary interventions 182 273 in Vietnam and Laos 182 comparative advantage 59–60 and imports 61 conflicted virtue 145 consumer demand and international trade 67 and US trade deficit 89 Conybeare, John A.C 38, 68, 69 Cooper, Richard N 164 Cornish, Paul 242 Correlates of War (COW) 179 countervailing duties (CVD) 98 and GATT “Article 6” 99 Crystal, Jonathan 108 Curcuru, Stephanie E 132, 133 currency unions, economics of 231–2 current account deficit 72–3, 82 in Australia and Canada 130–1 drivers of 74 foreign investment in US 74–5, 77 US dependence on 75–6, 82 and investment-savings gap 73 custodial bias, in US investment data 148 Cyr, Arthur I 226 Dayton Agreement 175 De Gaulle, President Charles, and international lending 122 Deardoff, Alan V 105 debt advantage of repayment, and US military power 168–9 defense commitments, and US naval power 184–5 deficit countries, and return differential 126 Delors report 226 Dependencia Desker, B 199, 203 Despres, Michael P 118 Destler, I.M 72, 100, 153, 165 developing countries consequences of amassing liabilities 87–8 external debt 85, 86–7 Tokyo Round 105 and Uruguay Round 107 274 disproportionality 22–7 see also gains allocation; international economic activity; US hegemony Dixit, Avinash K 64 dollar as key currency 196 effect on US hegemony 193 euro as contender for 194, 196 incumbency advantage 196–7, 217–18 see also dollar cycles; key currency dollar assets, demand for 135–6 and long-term investment 117–18 official investors 118 positive income balance 122 return differential 122, 127–8 dollar cycles declines in 162–3 and key currency status 160 major appreciations 162, 163, 164 and increased foreign assets in US 164 and monetary privilege 159, 162 protection against depreciation 161 dollar depreciation 128 effect of size 131–2 expectations of 135, 136 dollar exchange rates against Asian currencies 142, 145–6 Plaza Agreement 152–3 dollar reserves, in central banks 141 Dominican Republic, US support for 183 Dooley, Michael 142, 146, 158, 228 Doremus, Paul N 67 Drahos, P 96, 106 drugs, war on 174 Dunning, John H 66 Dupont 36 Dvorak, Tomas 132, 133 East Asia access to US market 143–4 commercial links in 10 dependency on European and US markets 195, 200–1, 251 and dollar lending 145 economic integration and political union 193–5 intermediate goods 201 Index product and capital markets 193 undeveloped 144–5 and sovereignty 195 trade within 194–5 see also East Asian regionalism East Asian Economic Grouping (EAEG) 200 East Asian regionalism 193, 194, 206, 244–5 and ASEAN membership 198 ASEAN plus one (APO) 199 ASEAN plus three (APT) 199 ASEAN plus five (APF) 200 bargaining power 200, 204 comparison with European regionalism 203 competition for dominance 205–6 and European dominance 203 free trade area (AFTA) 198, 204 hub and spoke trade 201, 203–4 need for US market 200–1 Eaton, Jonathan 168 Economist, The and Iraq war 177 Edwards, Geoffrey 242 Eichengreen, Barry J 144, 196, 216, 217, 224, 225 Ekelund, Robert B 65, 66, 71 El Salvador, and Roberto D’Aubuisson 184 Elliott, Kimberly Ann 102, 108, 109, 110 English, William B 168, 169 equity markets, and financial crisis 139 escape clause, in US trade law 98 Ethier, Wilfred J 64 EU-NATO Declaration on ESDP 243 euro appreciation against dollar 142 cooperation 226 diversification into 228 emergence of 10, 228–9, 233, 245 and economic shocks 229–30 and security 229 prospects as world currency 217, 251 dollar incumbency advantage 217–18 Index medium of exchange 218 store of value 221–2 unit of account 218–21 role in bond market 215–16 Euro Area military spending in 19, 20 share of world GDP 21, 20 Europe, dependence on US military support 186 European “snake” 226 European Central Bank (ECB) costs of military capability 241 lender-of-last-resort functions and supervision authority 224–5 risk-taking 225 sovereignty 225 management of liquidity 224 operations of 222 price stability anti-inflation policy 232 first and second pillars 226–7 and voting policy 223 European Community enlargement of 103 tariff negotiations in Tokyo Round 104 and Uruguay Round 105 extension of trade to new areas 106–8 European Defence community 198 European military cooperation 233–5, 245 Blair/Chirac meeting 235 EU battle groups 238 Headline Goals and European Rapid Reaction Force 235 security committees 235–6 strategic problems 238–9 variations in national attitudes 236–7 competition between countries 237 use of force in Iraq 237 see also European Union military capability European Monetary System (EMS), and Exchange Rate Mechanism (ERM) 226, 230 European Security and Defense Policy (ESDP) 194 275 European Security Strategy (ESS) 238 European Union (EU) fiscal policy 230–2, 241 military capability 236, 238, 240, 243 costs and division of labour 241–2 development of satellite surveillance systems 240 inferior to US technology 240 reliance on NATO 241, 246 troop levels and support f unctions 239–40 principal threats to security 239 security cooperation 251 reliance on US 243, 251 structural power of 243–4 and US hegemony 194, 245, 250 European Union Military Committee (EUMC) 235–6 European Union Military Staff (EUMS) 235–6 Eurosystem 222 Eurosystem of Central Banks (ECSB) 222 euro-zone, enlargement of absorption of asymmetric shocks 232 collective action problems 222–4 and key currency status 222, 228 euro-zone, trade in 197 excessive deficit procedure 231 external debt, in industrialized countries 86 external economies, and monopolistic competition 64–5 extraction power 46, 48, 54–5 factor endowments and trade, political implications of 62 see also Heckscher-Ohlin theory Factor Price Equalization theorem 61, 62 factor-proportions theory of trade, see Heckscher-Ohlin theory Fannie Mae 79 farm subsidies, in Doha Round 14 Farrell, Diana 92 fear of floating 145 276 Federal Deposit and Insurance Corporation (FDIC), bail-out for Bank of America 79 Federal Reserve of St Louis, leverage factors 80 Federal Reserve, supervision authority 225 Ferguson 51 financial account surplus 75 financial center bias, in US investment data 148 financial crisis assistance to US homeowners 139 disproportionate gains by US firms 140 and euro-zone reaction to 140 and structural advantage of hegemony 249–50 US financial cleansing program 139 and US position 83 US stimulus packages 139 Financial Times, The 80, 111 Finger, Michael J 99 firm size external scale economies 65 intangible advantage 66 internal scale economies 64–5 limits to 64 Folkerts-Landau, David 142, 146, 158, 228 foreign currency risk, and hedging 161 foreign direct investment (FDI) and debt 85 in developing countries 86–7 in United Kingdom 85 in United States 85 and capital flows 133, 136 and current account deficits 135 and hegemonic power 140 risks from 138 dependence on 135 residual adjustments 132 returns on 134 government assistance 134 structural advantage 134 share of 156 and Uruguay Round negotiations 108 Index Fouchet Plan 198 France, US investment in 149–50 valuation adjustments 150 Frankel, Jeffrey 196, 207, 215, 217, 222, 227 Fratianni, Michele 232 Freddie Mac 79 free trade and comparative advantage 60 and customs unions, need for rules of origin 204 and hegemonic stability theory 38 and hegemon’s gain 68 imperfect public good 69–70 pure public good 67–8, 113 and scale economies 65 and Adam Smith 59 US policy 72 free-riding 31, 35, 37, 54 characterization of international collaboration 38 and free trade 68 and low-yield investment 152 need for benevolent hegemon 13 revised HST model 41, 44 by US 129–30 Frisch, Helmut 227 Frohlich, Norman, leadership 13 Funabashi, Yoichi 152, 154 Gabszewicz, Jean J 65, 71 gains allocation assumption of rivalry 44–5 disproportionate gains 45–9 neoliberal v neorealist account of international institutions 32 neorealist position 32–3, 34 see also hegemonic stability theory; public goods Galati, Gabriele 214, 216 Galileo satellite surveillance system 240 gapping 118 Garber, Peter 142, 146, 158, 228 Garrett, Geoffrey 66 Gates, Robert, and Iraq 178 Geithner, Timothy, Chinese economic reform 154 General Agreement on Tariffs and Trade (GATT) 58, 71, 97–8 Index and anti-dumping 99 and countervailing duties 99 exceptions to free trade 98 inclusion of investment, intellectual property and services 107–8 Tokyo Round 99, 103–4, 105, 114 Uruguay Round 105, 106–8 US control of global equilibrium 97–8 Gephardt amendment 108 Germany investment in US 149 short-term 151 US investment in 149–50 see also Louvre accord Gersovitz, Mark 168 Giegerich, Bastian 235, 238, 241 Gill, Stephen 52 Gilpin, Robert, S-shaped curve 35, 37 decline of US hegemony 50 exploitation and benevolence 15 global currency reserves, in dollars 158 Goldberg, Linda S 210, 212, 213 Goldstein, Judith 98 Gordon, Philip H 234, 235 Goulart, Joao, and CIA coup 183 Gourinchas, Pierre-Olivier 118, 131, 132, 228 Gowa, Joanne S 37, 69 Graber, D.A 181, 182 Gramm-Rudman Act 154 Grassman, Sven 212 Gray, H Peter 135, 156 Greenaway, David, spaghetti bowl effect 204 Grenada, US anti-communist intervention in 184 Grieco, Joseph, gains distribution 32, 34, 54 Gros, Daniel 224 Grossman, Gene M 68 Gruber, Lloyd, on exclusion 39 Grunberg, Isabelle 14 Guatemala, US anti-communist intervention in 184 Guzman, President of Guatemala 183 Haass, Richard N 183, 185 Hagan, Kenneth J 181 277 Haine, Jean-Yves 236, 238, 241 Hamilton, Lee H 178 Hanskrecht, Andreas 232 Hanson, Paul, Chinese economic reform 154 Harrison, Jason 161 Hartmann, Philipp 196, 206, 216, 217, 227 Hausmann, Ricardo 144 Hawkins, John 161 He, Baogang 200, 203 Healy, David 170 Heckscher, Eli 61 Heckscher-Ohlin theory 61, 62 hegemonic indicators 18, 19 capital market size 18, 22 GDP 18 military spending 20, trade performance 22 importance of imports 22 hegemonic power causes of decline 53–4 coercive and exploitative strands 37 decline and burden of cooperation 41 and foreign investment 50 growth of 35 predictions of US decline 50–2 opposing view of 52 sources of 18 see also hegemonic stability theory hegemonic stability theory (HST) 11, 31, 35, 54 free trade 38 revised model 40–1, 54 benefit sharing 46–9 exclusion 45 Gompertz curve 42–3 increasing returns 41–2 rival gains 44–5 size of states 43–4, 56 Snidal’s model 31 Heisenberg, Dorothee 223, 224 Helpman, Elhanan 68 Henley, John S 66 Henning, C Randall 153, 165 Hicks, John R 64 Higgins, Matthew 134 Hindley, Brian 100 Hiscox, Michael J 62 278 Hoekman, Bernard M 99, 104 Hoffmann, Stanley 198, 234, 241 Holst, David Roland 201 Hood, Miriam 169 household debt, and easy money 138, 139 in financial crisis 83 Howard, David H 163, 164 humanitarian intervention, by US 185 Hume, David, trade surpluses 60 Hund, Markus 200, 205, 206 Huntington, Samuel 52 Hussein, President Saddam pricing of oil in euros 218 removal of 177 Ibarra, President Jose Maria Velasco of Ecuador 183 Icelandic banks, in financial crisis 80 Iida, Keisuke 110 Ikenberry, G John 187 hegemonic decline and public goods 32 imported goods, and limit pricing 70–1 import-restricting policies, and deficits 4–5 increasing returns, and public goods provision 41–2 intangible advantage, of advanced countries 66 intellectual property, inclusion in GATT 107–8 see also TRIPS International Bank for Reconstruction and Development (IBRD) 21, International Monetary Fund (IMF) 126, 76, 85 capital market size 22 definition of external debt 86 policy demands on deficit countries reform and debt 87–8 International Trade Commission (ITC), and anti-dumping 99 international economic activity gains from 6–7 disproportionate allocation of international institutions conception as public goods 31, 37, 38–9, 40 Index and hegemonic decline 31–2, 33 interactions within 34, 35–7 neoliberal approach to 33–4 threat of exclusion 39–40, 45 US control of 96–7 lack of intervention for common good 187 non-cooperative preferences 41 see also gains allocation international trade regime benefits of US hegemony 16–17 classical theory 58–61 free trade as public good 67–8, 113 creation of GATT 97–8 neoclassical theory 61–3 new theories 63–7, 113 free trade as imperfect public good 69–70 section 301 negotiations 109 “special 301” 108 “super 301” 108 US control of global equilibrium 96–7, 101–3 US optimal tariff strategy 70, 71 US statutes 98 welfare-enhancing 57–8 see also protectionism investment inclusion in GATT 107–8 opportunity cost, in US markets 146–7 security of and anti-Americanism 180 and military power 167, 172, 191 in US data on 147–8 by official investors 155–6 motivation for, and oilexporting countries’ reserves 152–3 private 152 portfolio investments 156 short-term 151–2 and US long-term lending 148–9 see also Baker-Miyazawa deal; dollar cycles; Louvre accord; Plaza Agreement 279 Index Iraq Coalitional Provisional Authority 177 US justification for military intervention 188 Ireland, short-term investment in US 151 Irwin, Douglas 59 Issing, Otmar 196, 206, 216, 217, 227 Izetbegovic, President, war in Bosnia and Herzegovina, see militarized disputes and US capital flows Jackson, John H 99 Japan 103 capital market size 22 competition with China for regional dominance 195, 205–6 and hub-spoke perspective on trade 201 investment in US 149, 151 short-term 151–2 and regional cooperation 199 share of world GDP 21, 20 and Uruguay Round 105 US investment in 149–50 see also Baker-Miyazawa deal; Louvre accord; Plaza Agreement J-curve effect, and response to dollar decline 164 jingle mail 78 Johnson, Chalmers 52 Johnson, Harry G 68 jointness of supply, of public goods 38, 39 Jones, Seth G 234 Jupp, Kenneth 87 Kabel, Dickel L 65, 66 Kaikati, Jack 226, 232, 233 Kamps, Annette 209, 211, 212, 213 Kelche, General Jean-Pierre, European military capability 237 Kenen, Peter B 116, 197, 207, 217 Kennedy, Paul, political ambition and hegemonic decline 51 Keohane, Robert O 11, 101 demand for international institutions 31, 32, 33 hegemonic decline and stability 49, 51 motivation of hegemon 13–14 key currency 18 and borrowing 160 capital market size 18, 22 collapse of fixed exchange rate regime 164 and euro 216 and foreign investment 28, 74 importance to US 116, 136 indicators of gravitational pull 214 international financial transactions 28–9 medium of exchange, use of euro 207–8 and military power 168–9 move from fixed to flexible exchange rates 228 need for 207 as peg 213–14 roles of 116–17 size advantage of dollar 211 store of value, use of euro 214 unit of account, use of euro 208–11 price and demand uncertainty 211–13 vehicle currency, use of dollar 213 see also euro Kindleberger, Charles P 68, 118 on benevolent hegemon 11, 12–14 and exploitation 15 and HST 31, 37 Klein, Michael 153 Klitgaard, Thomas 134 knowledge industry, source of power 18, 19 Koizumi, Prime Minister of Japan, ASEAN plus five 200 Kostecki, Michael M 99, 104 Kouparitsas, Michael 134 Krasner, Stephen D 105 Krueger, Anne 106 Krugman, Paul R 61, 63, 64, 65, 73, 117, 167, 213, 220 Lake, David A 15, 35 280 Lal, Deepak 51 Lambelet, Jean Christian 42 Lane, Philip R 130, 131, 132, 228 Larsen, Henrik 244 Lay, Hong Tan 198, 200 leadership, provider of public good 13–14 Lee, Jong-Wha 199 legitimacy costs of war to US 190–1 Leontief, Wassily, and Leontief paradox 63 Levey, David H 74, 76 Lewis, Karen 76 limit pricing 64–5, 69, 165 US strategy 70–1 Lipson, Charles 101 Lisbon Treaty 233 location of firms 66–7 Long-Term Capital Management Crisis 175, 180 Looney, Robert 219, 220 Louvre accord 151, 156, 157, 186 Luterbacher, Urs 42 Maastricht Treaty 105 Maccario, Aurelio 232 Mann, Catherine L 74, 76 Mann, Michael 52, 164 Marcus Aurelius 60 market imperfections, and new trade theory 64 market-based economies, and growth 15 role of institutions 16 Marris, Stephen 163 Marshall, Alfred, competition and returns to scale 64 Mataloni, Raymond J 91, 93 McKinley, President, and Cuba 181 McKinnon, Ronald 74, 83, 117, 118, 138, 142, 144, 145, 146, 196, 212, 213, 217, 226, 227 Mead, Walter Russell 53 Meade, Ellen E 224 Mearsheimer, John J 34 medium of exchange, key currency 116–17 Mérand, Frédéric 244 mercantilism 60 Index Merrill Lynch, acquisition by Bank of America 79 Messerlin, Patrick 100 Mexico, holdings of US Treasury bills 159 Milesi-Ferretti, Gian Maria 130, 131, 132, 228 militarized disputes, and US capital flows 178–80 in Afghanistan 176 in Bosnia 174–5 in Grenada 173, 174 in Haiti 174, 175 in Iran 173, 174, 175 in Iraq 174, 175, 177 Kosovo war in Yugoslavia 176 in Libya 173–4, 175 in Panama 174 and Soviet Union 173 and Sudan 173 see also September 11 attacks military dominance, economic benefits of 51, 167 and dollar-reserve status 3, size advantage and key currency 167, 191 see also political stability; risk premiums military security division of labour between EU and US 10, 244 and East Asia 195, 203 in Europe 197 support for US hegemony 193 Mill, James Stuart 59, 61 Mill, John Stuart 59 Milner, Helen 101 hegemonic indicators 18 outward orientation of US firms 72 Milosevic, President Slobodan of Serbia, see militarized disputes and US capital flows Mizrach, Bruce 153 Mobutu, President, CIA support for 183 Mohamad, Mahathir, Prime Minister of Malaysia, and East Asian zone 200 monetary union, and politics 232–3 Index monopolistic competition, and consumer preference 65 Monroe doctrine 170 Lodge resolution 170 Platt amendment 181 Roosevelt Corollary to 169–70 Montenegro, Julio Cesar Mendez 183 mortgages 78 rescue plan for 79 Mossaddegh, Mohammad, and coup d’état 183 multilateral trade negotiations, US policy on 103 in Tokyo Round 103–4, 114 MFN principle 105 revisions to AD and CVD codes 105 in Uruguay Round 105 dispute settlement system 108–10 extension of trade to new areas 106–8 multi-national corporations, and international economy 52 Mundell, Robert 168, 232 Murphy, Kevin M 14 Murphy, Robert G 153 national debt 84 NATO and European defence 243 Berlin plus agreement 242–3 European Strategic Defence Identity (ESDI) 242 reinforcement by EU 236 net foreign assets (NFA) 75, 83 and cumulative current account benefits 130–1 net international investment position (NIIP) 75, 83 Netherlands investment in US 149 short-term 151 US investment in 149–50 Ng, Francis 202, 203 Nicaragua, US anti-communist intervention in 184 Nice Declaration 236 Nice Treaty 281 and Irish neutrality 239 enabling clause 233 Niels, Gunnar 100 Nimeiry, President Gaafar of Sudan, see militarized disputes and US capital flows Nixon, President Richard, and dollar standard 160, 162–3 non-exclusion and free trade 68 of public goods 38, 39 non-rivalry, and free trade 67 Prisoner’s Dilemma 68 non-tariff barriers, reform of rules 104–5 Noreng, Øystein 220 Noriega, President General Manuel of Panama, see militarized disputes and US capital flows North East Asia, and regional cooperation 199 link with South East Asia 199 Nye, Joseph S 52 O’Mahony, Angela 35 O’Sullivan, Róisín 223, 224 Obama, President Barack, financial rescue plan 79 Obasanjo, President Olusegun, cost of borrowing 85 Obregon, President, of Mexico 182 Obstfeld, Maurice 61, 63, 73, 156 Office of Management and Budget (OMB) 190, 192 Ohlin, Bertil 61 oil pricing criticism of US foreign policy 219 dollar v euro 218 economic incentives to price in euros 219–21 for importers 220 Olson, Mancur 11, 17, 31, 35, 37, 222 Ong, Eng Chuan 198, 201, 205 open sectoralism 106 Oppenheimer, Joe A 13 opportunity cost, and trade theory 59 optimal currency areas 231 optimal tariff pricing 165 orderly marketing arrangements 104 282 “original sin” 144 over-leveraging, risk to financial system 138 Pahre, Robert excludability 45 hegemonic decline and public goods 31, 33, 36–7 Pakko, Michael R 164 Palmeter, David 99 Panagariya, Arvind, spaghetti bowl effect 204 Panama Canal, safeguarding of 170, 174 Papadopoulos, President of Greece 183 Papandreou, President of Greece, coup d’état against 183 Park, Innwon 199 Partnership for Peace agreement 243 Pax Americana, and stability 50, 56 Peace Support Operations (PSO) 243 People’s Bank of China, renminbi peg 154 Perkins, Dexter 170, 181 Petraeus, General, and Iraq 178 Plaza Agreement 152–3, 156, 157, 186 policy independence, and consequences of debt 88 Political and Security Committee (PSC) 235–6 political freedom, and US hegemony 16 political power, link with economic power, and US hegemonic decline 51–2 political stability and economic growth 186 and US military intervention 167–8, 191 Portes, Richard 196 Powell 32 power of initiative 46, 54 in decline phase 47–8, 54–5 in second decline phase 48–9, 55–6 Preeg, Ernst H 164 price stability and euro take-over 229 and international currency 221–2 Index Maastricht convergence criteria 230 and US trade deficits 227–8 see also European Central Bank; fiscal policy product differentiation and scale economies 65–7 and size of firm 64 production, share of, and power 18 property rights protection by Britain, Switzerland and Canada 172 as common good 187 and investment in US 172–3 use of military power 180–1 in China Sea 181 against communism 182–4 in South America 181–2 protectionism and bargaining power 95 collective action problem 68 and entry barriers 101 by firms 71 retaliation against hegemon 69, 71 and US open market policy 102–3 see also anti-dumping; international trade regime public goods characteristics of 38 and free trade 38 Gompertz curve 42–3 and international institutions 31, 37, 38–9 and US security provision 191 Public Private Investment Program 139 Puckett, A Lynne 108 Qaddafi, President Muammar of Libya, see militarized disputes and US capital flows Quadrilateral Group 96 Quinlan, Joseph 91 Rambouillet talks, failure of 176 Ransom, Harry Howe 183 Ravenhill, John 100, 106, 200 Reagan, President Ronald 165 Regan, Donald T 165 Rehman, Scheherazade S 230 Reinhart, Carmen 145 Index return differential 126 capital and exchange rate gains 127, 128–9 significance of 132–3 Rey, Hélène 118, 131, 132, 196, 228 Reynolds, William L 108 Ricardo, David, and comparative advantage 59–60 Ricardo-Viner specific factors model 62 risk premiums, and military power 171 see also investment, security of; property rights protection Robinson, Joan 64 Rogoff, Kenneth 156, 169 Rogowski, Ronald 62 Rolnik, Arthur J 223, 224, 225 Roubini, Nouriel 135 Rueff, Jacques, US deficit 141 Russett, Bruce 11, 18, 45, 52 Russia, short-term investment in US 151 Rybczynski, T.M., Rybczynski theorem 61–2 Rynning, Sten 244 Salant, Walter 118 Samuelson, Paul 59 Saudi Arabia, and OPEC oil pricing 219 savings, and investment, link with mortgages and consumer credit 136–8 scale economies, and trade external 65 internal 64–5 Schiller Plan 226 Schnabl, Gunther 142, 144, 145, 146 Schoenbaum, Thomas 109 Schraeder Peter J 182, 183 Schultz, Theodore William 64 security and hegemonic decline 51 of investment environment 74 and protection of US firms 66 US spending on 6, 184–5 see also military security 283 September 11 attacks, and financial flows 176, 179 Setser, Brad 135 Shakespeare, William, Merchant of Venice Shepherd, Alistair J.K 236, 238, 239, 240, 241, 242 Singapore, investment in US 149 SIPRI 20, size and exclusion 41, 45 and free riding 35 and gains allocation 34 models 35–7 and new trade theories 194 and position in international system 17 production of public goods 29, 43–4 revised model shares of world GDP 18, 20 see also key currency; hegemonic stability theory Smith, Adam, classical trade theory 58 Smithsonian agreement 162 Smoot-Hawley tariff 69, 112 Snidal, Duncan benefit share 45 conception of hegemony 29 decline and stability 49–50 exploitation 15 hegemonic stability theory 31, 32, 33, 35, 36, 37, 48 on public goods 38–9 Snow, John, Chinese economic reform 154 strong dollar 165 Snyder, Jack, hegemonic indicators 18 Soderberg, Nancy 185 South East Asian Nuclear Weapon Free Zone (SEANWFZ) 205 South Korean central bank, and dollar fall 157 sovereignty customs unions 204 and monetary union 233 regional trade arrangements in East Asia 195, 202–3 284 Soviet Union, military spending 20, 19 Spanish-American War 181 Special drawing Rights (SDRs) 250 Spolaore, Enrico 35 Sraffa, Piero, size of firms 64 S-shaped curve assumption of increasing returns 41–4 public goods benefits 40 stability 56 and hegemonic decline 49–50 see also hegemonic stability theory Stability and Growth Pact (SGP) 231 Stegemann, Klaus 107, 108 Steinberg, Richard H 103, 105, 107 Stern, Robert M 105 Stiglitz, Joseph E 64, 106 Stolper-Samuelson theorem 61, 62 Stopford, John M 66 Strange, Susan 11, 18, 66 strategic debt 78 structural adjustment programs 87–8 Stubbs, Richard 199 sub-prime market, and defaults on mortgages 139 Swoboda, Alexander 211 Tanca, Antonio 187 technological diffusion, and hegemonic decline 50 technology differences and comparative advantage 60 and division of labor 58 Term Asset-Backed Securities Loan Facility (TALF) 139 Tertrais, Bruno 168 Tille, Cédric 210, 212, 131, 134, 213 Todd, Emmanuel 52 Tokyo Round, see GATT Tollison, Robert D 65, 66, 71 Tomz, Michael 169 Tongzon, Jose L 201 Torrens, Robert 59 Torres, President Juan of Bolivia 183 trade adjustment assistance 98 deficits US policy 4, Index weakness of non-US countries laws 102 sanctions 108 sources of see also current account deficit; international trade regime transaction costs, and key currency 208, 211 Treacher, Adrian 234, 235, 237 Triffin dilemma 160 TRIPS Agreement 108 troubled asset relief package (TARP) 139 Tryon, Ralph W., investment data 147, 148 Tudjman, President of Croatia, see militarized disputes and US capital flows Tyson, Laura D’Andrea 100, 109 UK investment in US 149, 151 short-term 151 net external liability 86 US investment in 149–50 Ulriksen, Ståle 236, 239–40 UN authorization, and US military interventions 187 UNCTAD 85, 87 unemployment, and adjustment to economic shocks 230 unilateralism and US hegemony 186–7 US military intervention 187, 188–9 United States Trade Representative (USTR) and trade law 102 Uruguay, US anti-communist intervention in 184 Uruguay Round, see GATT US Caribbean interests, and enforcement of debt payments 170–1 and lending 171 decline, predictions of deterrent threats 160 effect of economic collapse in 165–6 import share 90, 113 lending 169–71 Index long-term investment in 149–50 valuation gains 150 valuation losses 150–1 military deterrent, dependent relationship of allies 167, 185–6 military spending 19, 20 as military target, Bush era policies 190 net external liability 84, 86 net liability position risks of 75–6 size of 76–7 productivity, and import share 89 share of world capital 119 benefit of seignorage 119–20 US borrowing 120 treaty obligations 168 US commercial expansion large firms 91 openness strategy 91–2 sales through foreign affiliates 90–1 separation of production and sales 90 and employment 92–3 trade in services 94 US current account deficit attitude of others towards its maintenance 146 benefits of 88–9 composition of foreign assets 156 fears of world recession 155 GDP share of capital inflows 155 increase in official capital inflows 155–6 pressure on China 154 prospects for adjustment in fi nancial crisis 154–9 see also Baker-Miyazawa deal; Louvre accord; Plaza Agreement US as financial intermediary 117–18 disproportionate benefits of 120–2 property rights protection 118 world venture capitalist 118 US hegemony allied dependence on American markets 193 285 alternative power structures 10, 192 advantage of relative weakening 17, 249 benefits from trade deficits 2, benefits to other states 3–4, 11, 17, 27–8, 29 challenges to and allies’ view of US as political liability 192 commercial power 248 disproportionate benefits of 5–6, 8, 247 domestic policy mistakes 249–50 and economic interests 16–17, 28–9 key currency status 2, 9, 248 limits to 250–2 military power 6, 248–9 persistent deficits 250 and security 16–17, 29 see also East Asian regionalism; European Union valuation adjustments and capital flows 127–8 and NFA 133–4 and return differential 127 US advantage 128 capital and exchange rate gains 128–9, 132–3 effect of size 131–2 net asset position 129–30 NFA and cumulative current account 130, 131 Van Bergeijk, Peter A.G 65, 66 Van Eeckhaute, Jean Charles 102 van Wincoop, Eric 213 voluntary export restraints (VERs) 100–1 voluntary import expansions 100 Wachovia, take-over by Citigroup 79 Wallace, William 235, 238, 241 Walter, Norbert 208, 214 Wanghia, Treaty of 181 war, financial costs to US 189 comparison with UK during decline of Empire 189 during World War I 189 War of the Pacific 181 286 Warnock, Francis E 132, 133 weapons systems, costs of 167 Weiss, John 201 Weller, Christian 164 Werner Plan 226 Wessel, Ramses A 238, 243 Western European Union (WEU) 234, 235 Whalley, John 104 Whitman, Richard G 236, 238 Winn, Neil 237, 240, 241 Winsor, Charles P 42 Wolf, Martin 113 Wolfe, Robert 110 Wooldridge, Philip 214, 216 World Bank policy demands on deficit countries reform and debt 88 world export shares 23, world GDP, US share of 21, 20 world import shares 24, dollar lead over euro 213, 221 and foreign investment in US 141–2, 158–9 World System theories World Trade Organization (WTO) 58, 71 and American interests 28 Index Anti-dumping Agreement 99 China’s import market 201 Dispute Settlement Body 71, 102, 109 import shares 24, ministerial meetings confrontation between US and developing countries 110–11 distribution of power 110 Doha Round talks 111–12 effect of financial crisis on 112–13 world export shares 23 see also GATT world trade share, US 22 and commercial performance 18 Wyplosz, Charles 217 Yeats, Alexander 202, 203 Yoffie, David B 101 Yoon, Yong J 58, 64 Zeckhauser 35, 37 zero-for-zero tariffs 106 Zhou Xiaochuan, and world currency 245 Zhu, Rongji, Prime Minister of China 205 ... extremely useful comments on a paper on the IPE of investment, and invited me to talk on the rivalry between the dollar and the euro at McGill Csaba Nikolenyi offered useful pointers and a generous... Eva-Carin, Claes, Sofia, and Håkan, as well as Karl and other members of my extended family for love and support, and to Isabelle and Marwa for feedback on these chapters and impeccable friendship... investors pick up and leave In order to be persuaded to stay, official investors – both governments and international institutions such as the World Bank and the IMF – demand reform and attach different