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paper series

Losing Control:
The Transatlantic Partnership, the
Developing Nations and the Next Phase
of Globalization

Joe Quinlan
Bosch Public Policy Fellow, Transatlantic Academy
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Bucerius, the Robert Bosch Stiftung, and the Lynde and Harry Bradley Foundation, the Transatlantic Academy
serves as a forum for a select group of scholars from both sides of the Atlantic and from different academic and
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During their fellowship, they interact with the Academy’s long-term fellows, conduct their own research, write a
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Losing Control:
The Transatlantic Partnership, the Developing Nations,
and the Next Phase of Globalization

Transatlantic Academy Paper Series

March 2011

Joe Quinlan*
Bosch Public Policy Fellow, Transatlantic Academy

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Aftershocks of the Global Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . 3
“Made in America”: The First Post-War Phase of Globalization . . . . . . . . . . . . . . . 5
When the Financial Plumbing Blew Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Rise of the “Rest” and the Challenges to the Transatlantic Partnership . . . . . . . . 10
The Next Phase of Globalization — Made in China, Turkey, Brazil, Russia . . . . . . . . .20

*
Joe Quinlan was a Bosch Public Policy Fellow at the Transatlantic Academy from December 2010 to February 2011. He
is the managing director and chief market strategist at U.S. Trust – Bank of America Private Wealth Management. He also
lectures on finance and global economics at New York University.
Executive Summary

The financial economic crisis of late 2008 was a financial crises during this time frame but never
seminal moment for the post-war global economy. at the core of the global economy — or the United
The financial tsunami that swept over Wall Street States.
in September 2008 not only laid waste to venerable
institutions like Lehman Brothers and battered Those days are past, however. The financial crisis
the reputations of Goldman Sachs and other not only decimated the portfolios of investors all
financial stalwarts. The “Made in America” crisis over the world. The “Made in the U.S.” financial
also undermined the capacity and credibility of the debacle also demolished the ability and authority
world’s global economic architects — the United of the United States and Europe to lead the global
States and Europe, or the transatlantic partnership. economy. The world no longer beats to the tune
After years of living beyond their means and after of the United States. The transatlantic-centric
amassing mountains of debt, the music finally global economy of the past three decades is being
stopped for an economic alliance that had long reshaped. New economic powers are on the ascent
set the tune for the global economy and grown — lead by nations like China, India, Brazil, and
accustomed to standing at the pinnacle of the global Turkey, for instance — with these emerging players
economic order. less inclined to strictly follow the global rules
laid out by the United States and the West. The
The epic U.S. housing boom and bust culminated developing nations, or “the Rest,” have their own
in one of the worse financial crisis in U.S. history. ideas about how the global economy should be
In the ensuing months following the stunning managed, and are in very strong position vis-a-vis
collapse of Lehman Brothers, global growth the West to have more sway when it comes to issues
declined, world trade and investment plunged, and of global governance.
the rate of global unemployment soared. It was a
humbling and humiliating moment for the United As discussed below, the financial crisis accelerated a
States — the long-time champion of globalization. number of key long-range trends that were already
In the quarter century leading up to the financial in motion before the crisis struck. The relative
crisis, most of the world had little qualms with a economic decline of the developed nations and the
global economy largely groomed and managed by rising influence of the emerging markets in general
the West, principally the United States. Or little and China in particular were fast-forwarded by
resistance to the central tenets of globalization — the crisis and have, in turn, accelerated the move
namely industry deregulation, unfettered global toward a less U.S.-centric, more multi-polar world.
capital flows, trade and investment liberalization, While the global economy has recovered from the
and the primacy of the private sector. This crisis, we are not going back to “business as usual.”
acceptance was underwritten by superior results. The new world before us will be more complex,
From the early 1980s forward, the global economy fluid, and disruptive — notably for the architects
experienced a blessed period of muted inflation, of the post-war economic system. The United
low unemployment, and infrequent and shallow States and Europe have lost control of the global
recessions. Global trade and investment rose economic agenda and, critically, no longer control
sharply over this period. The integration of China, the key inputs of economic growth — labor, capital,
India, and Russia into a world economic order and natural resources. These inputs are increasingly
structured and headed by the United States helped concentrated in the developing nations, who
lift millions out of poverty. There were periodic have emerged from the crisis more confident and

Losing Control 1
emboldened. The future of globalization will be less
U.S.-centric and more encompassing of Chinese,
Turkish, Brazilian, and other characteristics of the
developing nations. This phase of globalization
heralds both promise and peril for the transatlantic
partnership.1

1
 Parts of this report are based on my research for “The Last
Economic Superpower: The Retreat of Globalization, the End of
American Dominance, and What We Can Do About It,” New
York, McGraw-Hill, 2010.
1 The Aftershocks of
the Global Financial Crisis

“Just as the world accommodated the rejuvenation the U.S. economy and the benefits of free market
of Europe in the post-War world, it must now capitalism. U.S.-led globalization — greater
accommodate the rise of new Asian economies in the openness to foreign trade and investment, industry
years that lie ahead.”2 deregulation, and the unfettered cross-border
—Manmohan Singh, Prime Minister of India movement of capital, goods, and people — was
the overarching mantra of many countries, a
It is commonplace to speak of the seminal shift in mega-trend so powerful and ubiquitous that it was
global economic activity. Early in the 21st century, universally deemed to be irreversible.
it is abundantly clear that some developing nations,
lead primarily by China, have emerged as the In the post-crisis world, however, the global Free-market
world’s new economic powerbrokers. Even before landscape is radically different. After living well capitalism will
the great financial crisis of 2008 — a financial beyond their means for years, and following survive but not in
calamity “Made in America” that undermined the massive bank bailouts and recession-fighting the unregulated,
economic capabilities and credibility of the West, policies, the developed nations are deep in debt and anything-goes,
while bolstering the global standing of China and condemned to a prolonged period of slow growth. shop ‘til you drop,
many developing nations — the global economic The burdens confronting the United States and leverage-to-the-hilt
clout of the so-called “Rest” was on the ascent. The Europe have structurally sapped the global clout guise of the past
financial crisis only served to expedite the global of both parties and by extension, the transatlantic
quarter century.
shift underway for the past decade, fast-forwarding alliance. America is exhausted by most accounts, its
the rise of China, India, and other emerging economic superpower status diminished by costly
markets, while accelerating the relative decline of wars, the financial crisis, and massive liabilities
the United States and Europe. associated with future entitlement programs.
Meanwhile, Japan
Global Shift: The Growing Role of the Developing Nations and Europe are
increasingly
1980-2005 2005-Forward impotent — too
Global Economic Growth Laggard/Dependent Leader/Independent demographically
Global Governance Passive Active stagnant, too
Global Commodity Prices Price Taker Price Setter much in debt, too
Global Innovation/Technology Imitation Innovation distracted by their
Global Industry Standards Adopt Create/Tweak own problems to
Global Corporate Strategy Passive/Reactive Proactive be anything but
Global M&A Recipient Originator passive players on
the global scene.
The Anglo-Saxon
economic model has been widely discredited by the
As a new decade dawns, the transatlantic financial crisis; so too has the Western version of
partnership confronts a different world from the globalization. Free-market capitalism will survive
one just a decade ago. At the beginning of the 21st but not in the unregulated, anything-goes, shop
century, few questioned the global primacy of ‘til you drop, leverage-to-the-hilt guise of the past
quarter century.
2
 Speech by Dr. Manmohan Singh, Prime Minister of India, to
the LSE Asia Forum 2006.

Losing Control 3
Developing nations, in contrast, have not Savings in the East, Debt in the West
only led the way forward in the past two (Total foreign exchange reserves as a percent of total world reserve holdings, quarterly)
75

years, emerging from the global economic 70


Developing Developed

recession far quicker and stronger than the 65


developed nations; they have also fortified 60
their presence in a number of key sectors 55
that have long been under the domain of 50
Global power and the West in general and the transatlantic 45
influence is now partnership in particular. Energy, mining, 40
more diffused steel, automobiles, telecommunications,
35

among nations power generation, alternative energies,


30

and regions, finance — these key sectors of the global


25
economy are increasingly being contested
making it more 99 00 01 02 03 04 05 06 07 08 09 10*

and controlled by developing nations, a Source: International Monetary Fund COFER database
challenging to *Preliminary data through the third quarter of 2010

trend that will radically reconfiguring


.

coordinate and In short, the aftermath of the global financial


global economic activity. The United
craft solutions to States and Europe have been caught flat-footed by crisis has yielded a global economic landscape
pressing global the fact that Chinese firms are now on the cusp that is more complex, fluid, and multi-polar.
problems. of becoming global leaders in electric cars, solar Global power and influence is now more diffused
panels, and wind turbines. Or that Brazil is now a among nations and regions, making it more
legitimate agricultural and energy powerhouse — challenging to coordinate and craft solutions to
and a direct threat to the energy and agricultural pressing global problems like climate change,
complexes of both the United States and Europe. the proliferation of nuclear weapons, the long-
India’s growing software industry, the expanding running Doha Round of multilateral trade
technology capabilities of South Korea and Taiwan, negotiations, and the development challenges of
the economic take off of some African countries, poverty-stricken Africa. This shifting backdrop
the increasing financial might of China — all of will require far-reaching adjustments on the part
these trends, and more, are being driven by non- of the transatlantic partnership and key post-war
Western forces and are emblematic of a new world multilateral institutions like the United Nations
economy whose rhythm reflects more the beat of Security Council, the International Monetary Fund,
the developing nations as opposed to the standard the World Bank, and other Western-dominated
bearers of the post-world global economic system institutions that have long held sway over global
— the United States and Europe. economic governance.

Notably worrisome for the West, as part of the Adjustments are required since these institutions
new world we live in, control of the world’s critical and their primary stakeholders — the United States
economic inputs — natural resources, capital, and and Europe — are no longer in control of the global
labor — are increasingly under the domain of the economy, and the developing nations know it. The
developing nations, a dynamic that could very well latter are bent on not going back to how things use
lead to more tension between the well-endowed to be. They have their own ideas and preferences as
Rest versus the depleted, resource-deficient West. to the next phase of globalization.

4 Transatlantic Academy
2 “Made in America”: The First Post-War
Phase of Globalization

“The best minds are not in government. If any were, to the private sector. Starting in the early 1980s,
business would hire them away.” a counterrevolution kicked in — policies were
—Ronald Reagan crafted that favored the deregulation of domestic
industries, the privatization of state enterprises,
If one were able to google the term “globalization” and the liberalization of international trade and
in the early 1980s, the search would have finance. Smaller government was the goal, entailing
yielded little. “Stagflation” would have been a lower tax rates and less regulation. Beginning in
far more popular term, reflecting the economic the early 1980s and continuing through the 1990s, Globalization
pain of the 1970s, a decade that saw the United free market capitalism was embraced around the blossomed over
States suffer two oil shocks, soaring prices, two world. In parallel, an old concept was reintroduced the last quarter
economic recessions, and the demoralizing effects to explain the borderless, interconnected world century of the
of stagflation. Slow growth and rising prices whereby information, capital, goods, and people
bedeviled the world economy as the 1980s dawned, 20th century, as
moved unimpeded to virtually all corners of the
culminating in the economic downturn of 1982, did the economic
planet: “globalization.” By the end of the 1980s,
one of the worst since the Great Depression. In primacy of the
hardly a day passed without “globalization” being
November 1982, the U.S. unemployment rate hit United States.
invoked by some business leader, politician, media
a post-war high of 10.8 percent and the prospects pundit, or academic as the most transforming event
for the United States and the world at large never of the time.
looked as bleak. The painful recession of 1982,
however, would prove to be a tipping point (ditto Against this backdrop, increased cross border
for the recession of 2008/2009) or the final straw capital flows, greater trade and investment
that would galvanize the United States, the United liberalization, privatization of state enterprises,
Kingdom, and, ultimately, others to rethink and industry deregulation became guiding
standard economic policies. economic norms the world over. The “visible
hand” of the government was downplayed for the
Over the 1980s, a consensus formed around the “invisible hand” of the markets. Privatization and
idea that governments and bureaucrats were no deregulation meant the hiving off of hundreds of
longer capable stewards of the economy, an idea businesses that used to be government owned or
that ultimately opened the door to a radical rethink controlled. State-run airlines, telecommunication
about the relationship between government and the companies, government-owned banks, utilities,
marketplace. The former was in retreat owing to the steel mills, and other companies were all put up
misery of the 1970s; the latter, meanwhile, needed for sale around the world. In the process, a global
a flag bearer and found one in the pro-market economy that had disintegrated in the face of two
ideology that came with the election of Ronald world wars and an economic depression in the first
Reagan in 1980 and the rise of Margaret Thatcher half of the century was once again reassembled.
the year before.
Globalization blossomed over the last quarter
Starting in the United Kingdom, swiftly embraced century of the 20th century, as did the economic
in the United States, and adopted in some shape primacy of the United States. The two dynamics
or form by key countries around the world, were largely viewed as synonymous since it was
control of the most important components of the United States that provided the template
the economy, or the “Commanding Heights” as of globalization — the embrace of free market
Vladimir Illyich Lenin put it, shifted from the state capitalism, industry deregulation, privatization,

Losing Control 5
and unfettered global capital flows — to the rest of point towards greater economic integration for
the world. In many respects, globalization really all three parties involved, notably Nafta’s junior
came in one size — America’s. And for the rest of member, Mexico. Operating under Deng Xiaoping
the world, following America’s lead was not that famous quip, “It doesn’t matter whether a cat is
difficult — not with the collapse of Communism black or white so long as it catches mice,” China’s
and the Soviet Union in the late 1980s and early links with the global economy continued to expand
1990s, and the economic implosion of Japan. in the 1990s, and was capped off with China’s
entry into the World Trade Organization in 2001.
A global Combined with these seismic shocks, the U.S. The newly liberated nations of central and eastern
consensus economy re-emerged as the envy of the world Europe, meanwhile, rushed to enter the European
emerged around over the “Roaring Nineties.” The Maestro, Federal Union over the 1990s and the early 2000s as the
the notion that Reserve chairman Alan Greenspan, became an first steps towards greater global linkages. In many
international rock star thanks to his deft handling emerging markets, policies that at one time favored
the best way
of an economy that produced steady growth, low nationalism and state-control of the “Commanding
to promote
inflation, and booming asset prices. So fine-tuned Heights” gave way to privatization, freer trade, and
growth and
was the U.S. economic growth engine that many unfettered capital flows. The global consensus was
create prosperity on Wall Street talked of the “Goldilocks economy,” that U.S.-led, free-market capitalism was the best
was through or an economy not-too-hot, not-too-cold. Others wealth-generating system ever concocted, with the
the embrace spoke of the “Great Moderation” — or a propitious Anglo-Saxon model at the forefront.
of free-market backdrop of steady economic growth, low inflation,
capitalism and its and infrequent recessions. This was quite different
central tenets. from the stagnant growth-cum-rising prices of the
1970s.

As the United States, the underwriter of


globalization, reaped the massive rewards of more
liberalized global flows of trade, investment, and
finance, the rest of the world jumped quickly on the
bandwagon. A global consensus emerged around
the notion that the best way to promote growth
and create prosperity was through the embrace of
free-market capitalism and its central tenets. This
overriding assumption helped convince many
emerging markets to embrace and pursue the
“Made in America” brand of globalization.

Over the 1990s, the economic policies of China,


Mexico, Russia, Brazil, Poland, and a host of
other large developing nations centered largely
around how to further integrate their economies
with the global economy. Evident of this trend,
Mexico agreed to the North American Free Trade
Agreement (NAFTA) in 1994, a historic turning

6 Transatlantic Academy
3 When the Financial Plumbing Blew Up

“Wall Street got drunk.” clear and avoided taking on the toxic subprime
—President George W. Bush loans exported from the United States; nevertheless,
in a tightly woven global economy, emerging
Commenting on the financial crisis of September market assets imploded in value on the broad fears
2008 that brought to the global economy to its that financial crisis in the United States would lead
knees, the Bank for International Settlements put to a global recession, a plunge in commodity prices,
forth the following vivid comment: “The financial and a flight to safer asset classes.
system is the economy’s plumbing. And like the
plumbing in a house, it is taken for granted when it These fears, unfortunately, came to fruition. All The financial
works, but when it doesn’t, watch out.”3 totaled, the bursting of the U.S. housing bubble set plumbing of the
off a chain reaction of defaults and foreclosures United States
Following this train of thought, the financial that would ultimately infect one part of the global blew up in
plumbing of the United States blew up in financial sector after another — prime mortgages,
September 2008. The month that rocked and
September 2008.
commercial paper, bond insurers, auto loans,
shocked the global financial markets saw the U.S. corporate loans, credit cards, student loans, and
government put Fannie Mae and Freddie Mac into the sovereign debt of nations like Iceland, Latvia,
conservatorship; the demise of Lehman Brothers as Greece, Ireland, and Portugal. It was easy credit
it filed for Chapter 11 bankruptcy protection; the that triggered the great U.S. housing boom, with
bailout of insurance giant, A.I.G., by the Federal the credit boom itself underpinned by the global
Reserve at a cost that would reach over $170 billion; savings glut, an extended period of very easy
and the conversion of Wall Street’s most respected monetary policies, lax regulation, and financial
investment banks, Goldman Sachs and Morgan innovation — all of which increased risk taking and
Stanley, into commercial banks. All of the above leverage ratios among banks, households, and even
took place in a matter of weeks. governments.
And the pain was not contained to the United As the global credit markets froze in September
States. Across the Atlantic, things were not much 2008, the fallout from the U.S.-led financial crisis
better. By the end of September 2008, HBOS, was swift and widespread. Trade-dependent
Britain’s largest mortgage lender, had fallen under developed nations like Germany and Japan were
the control of Lloyds TSB. U.K. mortgage lender brutally hit by a downturn in export demand, which
Bradford & Bingley had been nationalized, while triggered a downturn in capital investment and new
the Dutch banking and insurance company, Fortis, hiring. As the global credit crisis intensified, the
required a capital injection from three European high-flying residential and commercial property
governments. To stave off its demise, German markets of the United Kingdom, Spain, and Ireland
commercial property lender Hypo Real Estate had collapsed, taking their respective economies down
to secure a government credit line. Also feeling the with them. With their earnings impaired by one of
effects of the crisis were Russian oil companies, the worst financial crises in history, large and small
German capital goods manufacturers, Spanish corporations in the developed nations slashed their
home owners, and various developing nations. payrolls and suspended capital investment projects,
Many banks in the emerging markets had steered adding even more pressure on to staggered global
economy.
3
 Bank for International Settlements, 79th Annual Report, June
29, 2009.

Losing Control 7
Not surprisingly, it did not take long for the global assumed the Presidency, the U.S. Congress,
fallout to reach the developing nations. Indeed, a Department of Treasury, and the Federal Reserve
steep decline in global demand for exports, along threw whatever resources available at the badly
with a plunge in commodity prices and capital impaired U.S. economy. Similar frantic moves
inflows left many developing nations battered and were pursued and implemented around the world.
bruised. By the end of 2008, many developing The European Union, Japan, China, South Korea,
nations were challenged by depreciating currencies, Brazil — policymakers in all of these nations went
As the second plunging exports, soaring external financing costs, into overdrive to stave off a global depression by
decade of the 21st and swooning equity prices. The debate about boosting public sector spending and increasing
century dawned, global “decoupling” had ended — the painful and the availability of credit. Many central banks cut
globalization inconvenient truth was that a world economy interest rates to virtually zero. Rarely had the
was being wired together by unfettered global capital flows, world ever mobilized in such a concerted and
rethought and which supported ever-rising levels of trade and synchronized effort to fight a common cause — the
investment, advanced or declined together. No great financial crisis of 2008.
America’s global
nation escaped the effects of the global financial
dominance was The extraordinary dose of fiscal and monetary
crisis-cum-global recession that shook the world at
in a relative and medicine worked. Despite being labeled a once-
the end of the first decade of the 21st century.
absolute decline. in-a-century event by the International Monetary
Not even the high-flying Chinese economy escaped Fund, the financial crisis of 2008 did not lead to
from the wreckage. While China’s economy grew a global depression as many prominent analysts
9.2 percent in 2009, the annual rate of growth was feared. Yet the ensuing global recession was deep
well below the 13 percent rate of growth achieved and nasty by almost any measurement, and even
in 2007. India and Indonesia also managed positive with the global economy in recovery mode in 2009,
growth in 2009, although collectively, the total no one was ready to claim “Mission Accomplished.”
output of the developing nations rose by just 1.2 And no one — notably the developing nations —
percent for the year, down sharply from 8.1 percent was ready to go back to “business as usual.”
in 2007, one year before the crisis struck.
Sensing a shift towards a new era, a grim
It was only through massive government recognition emerged among the policy elites at
intervention that the global financial panic of late the annual World Economic Forum in Davos,
2008 was arrested. In the frantic months after the Switzerland, in January 2010 that globalization had
shocking events of September, the world’s central largely failed, that banks needed more regulation,
banks slashed interest rates and undertook a and that states needed to be more involved in
number of unconventional measures to reliquefy running their respective economies. Against this
and recapitalize the global capital markets. backdrop, as the second decade of the 21st century
Concurrently, fiscal policies around the world dawned, globalization was being rethought and
became hyper-expansionary as governments America’s global dominance was in a relative and
rushed to stave off economic armegeddon. Albeit absolute decline — both casualties of the U.S.-led
reluctantly, the U.S. Congress approved a $700 financial crisis of 2008.
billion bank bailout package in late 2008, which
was followed by a $787 billion stimulus package In one critical sense, the financial crisis of 2008
shortly after President Obama was sworn into was a circuit breaker — the global financial
office in January 2009. Even before Mr. Obama meltdown broke the supposed inexorable advance

8 Transatlantic Academy
of free-market capitalism, throttled the primacy
and influence of global finance, and undermined
the economic superpower status of the United
States. In another sense, the crisis accelerated a
number of key secular trends that were already
in motion before the crisis struck. The relative
economic decline of the developed nations,
the rising influence of the emerging markets in
general and China in particular, the rise of state-
owned enterprises — these seminal trends were
fast-forwarded by the crisis and have, in turn,
accelerated the move towards a less U.S.-centric,
more multi-polar world.

Losing Control 9
The Rise of the “Rest” and the
4 Challenges to the Transatlantic
Partnership
“The next 20 years of transition toward a new oil, rare earth minerals, copper, coal, and a variety
international system are fraught with risk.” of other commodities.
—Global Trends 2025, National Intelligence
Council On the demand side of the equation, the West
has not recognized the critical fact that it is now
in direct competition with the Rest for natural
For the United States and Europe, the unfolding resources. In other words, the long-standing
multi-polar world is potholed with numerous risks monopoly the West has enjoyed in devouring
and challenges. Adding to the heightened sense the world’s natural resources is over. In years
of uncertainty, the transatlantic partnership is no and decades past, as long as consumers in the
longer in control of the global economy and the developing nations remained poor and lacked the
rest of the world knows it. The days are past when income to purchase a computer or car, or afford a
the developed nations dictated the global economic good meal, the West did not have to compete with
agenda, dominated multilateral institutions, and the developing nations for oil, copper, soybeans,
determined the key forces influencing global and other commodities. For much of the post-
economic activity. To paraphrase China’s President Cold War era, the equation was rather simple: the
Hu Jintao, the students are no longer willing to take developing nations produced commodities, the
orders from the teachers. West consumed them. However, The Economist
notes, “During the past 15 years, a new middle class
Developing Translation: the policies and structures of the past has sprung up in emerging markets, producing a
nations are are unacceptable to the developing nations — silent revolution in human affairs — a revolution of
poised to flex notably China — who feel the time is long gone wealth-creation and new aspirations.”4
when the rich led and the poor followed. The
their new muscle
financial crisis of 2008 and ensuing global recession How big is this cohort? According to the World
and prepared
has left the United States and Europe morally and Bank, the middle class of the developing nations is
to challenge financial bankrupt. In contrast, confident and relatively sizeable and poised to expand rapidly over
the status quo emboldened, and sensing that their time has come, the next few decades. This group already numbers
constructed by the developing nations are poised to flex their new some 400 million people, according to the Bank, a
West, notably the muscle and prepared to challenge the status quo figure roughly one-third larger than the entire U.S.
United States. constructed by the West, notably the United States. population. More importantly, the middle class of
the developing nations is expected to triple in size
Giving rise to the new-found confidence of the over the next two decades, increasing to 1.2 billion
Rest is the fact that it is the developing nations that shoppers by 2030. By then, developing nations
increasingly control the world’s critical inputs — will account for 93 percent of the global middle
natural resources, capital, and labor. Early in the class, up from 56 percent in 2000.5 This estimate
21st century, the developing nations are not only suggests ever rising levels of consumption from the
making more demands on the world’s physical developing nations, yet even today, the emerging
infrastructure, but also find themselves in control market consumer outspends the U.S. consumer. In
of the world’s major supplies of critical inputs like 2010, for instance, the United States accounted for

4
 “Two Billion More Bourgeois,” The Economist, February 14,
2009.
5
 World Bank, Global Economic Prospects, 2009, Washington DC

10 Transatlantic Academy
Control of Key Commodities: Developing vs. Developed
(Share of World Production)

1999 2009 1999 2009


Oil Wheat
Developing 75.9 81.1 Developing 69.3 73.1
Developed 24.1 18.9 Developed 30.7 26.9
Natural Gas Soybeans
Developing 57.1 64.5 Developing 53.3 58.4
Developed 42.9 35.5 Developed 46.7 41.6
Coal Geothermal*
Developing 62.4 75.1 Developing 48.9 46.7
Developed 37.6 24.9 Developed 51.1 53.1
In a seminal
Iron Ore Solar
shift, global
Developing 73.2 80.8 Developing 51.1 87 consumption is
Developed 26.8 19.2 Developed 48.9 13 tilting towards the
Bauxite Wind developing nations
Developing 61.9 67.6 Developing 11.5 27.9 and away from
Developed 38.1 32.4 Developed 88.5 72.1 the United States
Copper Ethanol and the West.
Developing 76.6 83.5 Developing 69.2 41.5
Developed 23.4 16.5 Developed 30.8 58.5
Palladium & Platinum Sources: BP Statistical Review 2010, U.S. Geological
Developing 92.2 91.9 Survey, United Nations Food & Agriculture Organization
*2000 (latest available)
Developed 7.8 8.1

roughly 27 percent of global consumption versus likely to head for the local shopping malls for a day
a 34 percent share in the emerging markets. Eight of socializing and shopping. Granted, those trolling
years ago, the percentages were roughly reversed — the shopping centers on the weekends in the
that is when the U.S. consumer was the most potent emerging markets are the lucky few relative to the
spending machine on earth and when the United rest of the general population. But the size and scale
States, with a population less than 5 percent of the of these urban buyers, and their pent-up demand
global total, accounted for nearly one-fifth of global for electronic goods, appliances, automobiles,
imports in 2000. By 2009, America’s share had skin-care products, clothing, and other goods
dropped to 13 percent. has reached the point where emerging market
consumers are increasingly setting global trends,
Times have changed, in other words. Where in the leading in global fashion, and driving global sales
past, factory workers in Asia would trudge off to in a number of industries. In a seminal shift, global
work on Saturday morning, today they are more consumption is titling towards the developing

Losing Control 11
nations and away from the United States and the protein — the more the demand and the higher
West. the prices for energy, water, agricultural goods, and
other natural resources.
What is now While the West is condemned to a prolonged
good for China is period of thrift and austerity, conspicuous In particular, the transatlantic energy future
good for General consumption is rapidly becoming the rage in places remains fraught with risk. One danger lies with the
Motors, a market like Brazil, India, Turkey, and other emerging global concentration of oil supplies. More and more
leader in China. markets. Emblematic of this trend, China’s of the world’s proven oil reserves are controlled by
automobile market is now larger than America’s. states and state-owned companies whose interests
Against this backdrop, what is now good for China are not aligned with either the United States or
is good for General Motors, a market leader in Europe. While ExxonMobil, Chevron, Total, and
China. GM’s automobile sales to China soared to British Petroleum rank as some of the largest
over 1.8 million vehicles in 2009 and expanded by energy firms in the United States and Europe, these
nearly 30 percent again last year. Other transatlantic Western oil giants, in terms of proven reserves, pale
multinationals — capital goods manufacturers, in comparison to Gazprom of Russia, Sinopec and
technology providers, global consumer brand PetroChina of China, Petronas of Malaysia, and the
leaders, and luxury goods providers — have all Middle East giants that set atop a huge share of the
enjoyed robust demand from the emerging markets world’s proven oil reserves. Today and in the future,
over the past year, with the likes of China, Russia, “Big Oil” has a whole different meaning.
Turkey, and other emerging markets becoming a
critical source of earnings for many companies. It is proven reserves that matter in the energy
patch — and that said, more than 90 percent of
But while some companies stand to benefit from the world’s proven oil reserves are held by national
surging consumer demand in the emerging nations, oil companies that are either partially or fully
the effects on the macro balance sheet of both the controlled by governments. Energy is too big an
United States and Europe is more problematic. industry, too profitable a sector to be left to the
For instance, while booming auto sales in the private sector in nations like Saudi Arabia, Mexico,
emerging markets is a blessing for U.S. automobile Venezuela, Malaysia, Kuwait, and others, who,
manufacturers, the same dynamic is a curse for the over the past few years, have restricted the access
average American. The more consumers in China, of its oil industry to Western oil companies. In a
Turkey, Egypt, and other countries take to the road stunning shift in energy power, privately owned
in their shiny new cars, the more upward pressure multinationals now produce just ten percent of
on world oil prices and the higher the cost of oil for the world’s oil and hold just three percent of its
an energy-dependent United States. reserves.

Most average Americans are oblivious to the rising Another risk to America’s energy future lies on the
middle classes of the developing nations and what demand side of the equation and the attendant rise
this new consuming cohort means for the world’s in wealth and consumption in Asia. The United
already stretched natural resource base. They have States and Europe should not only be worried about
yet to recognize that as the new global consuming their overriding dependence on foreign oil — they
class adopts and acquires Western life styles — should also be concerned about the stunning
moves from the village to the city, works in air-
conditioned offices, drives to work, consumes more

12 Transatlantic Academy
Asia 's Insatiable Thirst for Oil Asia, in other words, is
(Percent of global total) basically running on empty
35 — even after taking into
1999 2009 account efforts at energy
30 31.1
conservation and the
25
27.3 development of alternative
energy sources. The
20 region’s share of global oil
15
production has slipped over
the past decade, sliding from
10
10.4 10.0
a share of 10.4 percent in
1999 to 10 percent in 2009.
5
3.7
Asia produces plenty of
3.2
0 things, but unfortunately
Proven Oil reserves Production Consumption
oil is not one of them. At current
Source: British Petroleum (BP Statistical Review of World Energy July 2010)
Data through December 31, 2009 Barring the discovery of production
significant new oil fields, the rates, China’s
disconnect between Asia’s inexorable rise in oil oil reserves will
region’s contribution to global oil production is in
consumption on the one hand versus the region’s
a secular decline. That is hardly an encouraging be exhausted in
paltry oil reserves on the other.
trend for the West since Asia’s secular decline in just 11 years.
A region that accounts for over 30 percent of global production comes against a backdrop of soaring
output, is home to half of the world’s population, secular demand. Fed by rapid industrialization
is the industrial workhorse of the global economy, and urbanization, along with soaring automobile
and is in the midst of an urban boom — in light of ownership, Asia’s oil consumption soared by 25
all this, Asia’s proven oil reserves are a proverbial percent between 1999 and 2009; over the same
drop in the bucket. The region’s proven reserves period, oil production rose just 5.5 percent in Asia,
accounted for just 3.2 percent of the global total while proven oil reserves increased 5.6 percent.
at the end of 2009. That is down from 3.7 percent This is the oil disconnect that will ultimately effect
a decade ago, a decline due in large part to falling U.S. consumers.
reserves in China, the region’s largest oil producer.
Oil consumption in China nearly doubled in the
The mainland’s reserves totaled 14.8 billion barrels
past decade, rising from 4.5 million barrels per day
at the end of 2009, a 7.5 percent decline from two
in 1999 to nearly 9 million in 2009. Oil production,
decades ago.6 At current production rates, China’s
however, rose just 18 percent over the same period;
oil reserves will be exhausted in just 11 years. As for
the nation’s production in 2009 was less than half
all of Asia, the region’s reserves-to-production ratio
the nation’s total consumption, a gap that has forced
(an indicator of how long proven reserves would
China to step up its overseas search for oil. And
last at current production rates) is slightly higher
Beijing has done just that over the past decade,
than China’s, at 14.5 years.
emerging as a key investor, donor, and creditor
in resource-rich nations like Nigeria, Angola,
Argentina, Venezuela, Equatorial Guinea, Gabon,

6
 BP Statistical Review of World Energy, 2010.

Losing Control 13
the Republic of Congo, Afghanistan, and a host concentrated and controlled by state-owned firms
of other emerging nations. Access to oil lies at the whose interests are not aligned with America and
heart of most of these deals, although many projects by soaring demand from Asia, given the region’s
are bundled around Chinese foreign aid, which rapidly evolving consumer base juxtaposed against
typically includes soft loans, trade agreements, arms its empty gas tank.
sales, debt forgiveness, and massive construction
projects and aid packages. And the search for resources goes beyond oil.
Copper, silver, iron ore, meat, corn, wheat,
Simply put, the All of the items just mentioned are carrots the soybeans — the future price of these commodities
debt is in the West, notably the United States, have long used to and others will increasingly reflect the rising per
West, the savings curry favor in developing nations deemed geo- capita incomes and attendant jump in consumption
in the East. strategically important to the West. The game, among consumers in developing nations. Thanks
however, is now being played by China and others to the latter, between now and 2030, worldwide
like India, Brazil, and Russia to the consternation demand for food is expected to rise by 50 percent
and frustration of the United States and Europe. and demand for meat will jump 85 percent between
When it comes to carving out geo-strategic spheres now and 2030, according to the World Bank. This
of influence in places like Africa and central Asia, will leave U.S. and European consumers paying
there are new players in town: notably China. A even higher prices for commodities barring a huge
global race for resources is underway. jump in supplies. Rising water scarcity is another
critical issue, one that directly affects the prices of
“Authoritarian governments,” according to food, industrial inputs, real estate, and a host of
The Economist, “are using their money to buy other products.
influence abroad. Sometimes the money comes as a
commercial loan; sometimes, as a grant; frequently, In a seminal shift, then, prices paid for world
as both. These flows are changing the business of resources will increasingly be set by forces outside
aid, undermining attempts by Western countries to the transatlantic economy, leaving Western
improve their programs and encouraging recipients consumers in the unusual position of being price
to play donors off against each other.”7 takers, not price setters, subject to the whims of
suppliers and consumers in the emerging markets.
Asia’s other giant, India, has embarked on similar
mission to China’s, increasingly scouring the world The New Financial Power Brokers
for stable energy supplies. In a country where over
two-thirds of the population is under the age of Capital is yet another critical input increasingly
35, India’s oil consumption is just 37 percent of in possession of the Rest. Indeed, towards the
China. This gap, no doubt, will likely narrow in end of 2010, nearly 80 percent of the world’s total
the future as more and more Indian consumers foreign exchange reserves — in effect, the globe’s
embrace cars and as more people migrate from the excess savings — were in the vaults of developing
farm to the cities. The end result: even more stress nations. That equates to roughly $7 trillion, a
and strain on the world’s oil infrastructure. Hence, figure that includes China’s $2.8 trillion in reserves,
on the energy front, the transatlantic economy accumulated largely by running a massive trade
confronts the double threat of more oil being surplus with the United States, and over $300
billion among Middle East oil producers, obtained
with the help of the secular run up in oil prices.
7
 “An (Iron) Fistful of Help,” The Economist, June 6, 2009.

14 Transatlantic Academy
These variables, coupled with the surge in debt Ditto for sovereign wealth funds (SWF) — or
among the developed nations have triggered a government-controlled investment firms whose
stunning shift in global financial power. Simply put, numbers and pools of capital have increased
the debt is in the West, the savings in the East, or over the past decade. The size of SWFs, their
the developing nations. The poor are “rich,” the rich motivations for investing (economic or political?),
“poor.” their lack of transparency, and the potential for In that China
these funds to seek control of strategic assets in the now owns more
In this new world, the U.S. Federal Reserve United States and Europe — all of these elements than $1 trillion in
chairman has competition when it comes lead many in Washington to conclude before the U.S. Treasuries,
influencing the U.S. and global capital markets. If financial crisis that sovereign wealth funds were Communist
central bankers in China and the Middle East are a clear and present danger to the West. At the China now holds
not comfortable or confident in Mr. Bernanke’s height of SWF paranoia in 2005 and 2006, the
financial stewardship, they can either sell their U.S.
considerable
U.S. Congress considered proposals that ranged financial sway over
dollar holdings or refuse to buy more U.S. securities from establishing a Code of Conduct for SWFs to
at any given time, greatly complicating Mr. capitalist America.
formalizing standards that would result in greater
Bernanke’s life. In that China is now owns over $1 transparency, better corporate governance, and
trillion in U.S. Treasuries, Communist China now clearer accounting rules. Some on Capitol Hill
holds considerable financial sway over capitalist even broached the idea of establishing behavioral
America. In the aggregate, roughly half of all guidelines for SWFs.
marketable U.S. Treasuries are owned by foreigners.
In the end, where the relatively unknown central Then the financial crisis struck in 2008. Almost
bankers of the developing nations decide to invest overnight, SWFs suddenly became White Knights
their massive savings, and in what particular assets, — the only entities around with the cash and
directly impacts the credit markets of both Europe financial wherewithal to rush to the aid of battered
and the United States every single day. Western financial institutions. And rush they
did — with the sovereign
Developing Countries’ Share of World International Reserves
(Percent of Global Total) wealth funds of Qatar, Abu
80%
Dhabi, Singapore, Kuwait,
and South Korea pumping
75%
billions of dollars into U.S.
70%
banks between mid-2007
65%
and late 2008. For their
60%
efforts, however, they
55%
suffered huge losses and
50%
have subsequently redirected
45% their investment into more
40% tangible things like oil
35% and gas fields, agriculture
30% and commodity-related
25% goods. The funds are also
thought to have become
1 9 90 1 9 91 1 9 92 1 9 93 1 9 94 1 9 95 1 9 96 1 9 97 1 9 98 1 9 99 2 0 00 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 10

Source: International Monetary Fund, International Financial Statistics


Data through September 30, 2010 more diversified since the

Losing Control 15
China's Holdings of U.S. Treasuries More highly skilled workers
(Billions of $) that would have done
1,200 virtually anything in the
past to reach the shores of
1,000 the United States are staying
home. Meanwhile, talented
800 immigrants in the United
States are returning home,
600 prompting some to warn
of “reverse brain drain”
400 in the United States, the
U.K., and other Western
200 nations. Behind both of
these trends are a number
0 of factors, notably the global
00 01 02 03 04 05 06 07 08 09 10
Sources: U.S. Treasury
diffusion of research and
development, with more and
Largely overlooked financial crisis and more populated with such assets more of the world’s top-
as foreign currencies, real estate, foreign bonds, notch research now conducted in the hyper-growth
by many in the
precious metals, and equities. markets of China and India. Microsoft, Intel,
West, both India
Google, IBM, and General Electric are just a few
and China are high tech leaders that have opened R&D centers in
The Coming Battle for Talent
actively courting India over the past decade, keeping local talent at
their fellow Consumers, natural resources, capital — most of home, while luring overseas workers back home.
country men the critical inputs to economic growth now lie
and women to outside the control of the transatlantic economy, a Largely overlooked by many in the West, both
return home. turn that has reduced the global influence of both India and China are actively courting their fellow
the United States and Europe. In the future, both country men and women to return home, hoping
parties will have to compete for these resources, in to lure these migrating brains by doling out
addition to another input: skilled labor. grants, cash awards, lab equipment, apartments,
and other goodies. Whether they succeed or not
The war for global talent is underway, with the directly matters to the United States since skilled
likes of China, India, Brazil, and others increasingly immigrants have been key drivers of America’s
drawing from a dwindling pool of globally skilled high tech industry for decades. According to
labor at the expense of the United States and the research by Vivek Wadhwa, immigrant-founded
West. America is losing its first-mover advantage tech companies generated $52 billion in revenue
when it comes to attracting the world’s best and and employed 450,000 workers in 2005.8 In terms
brightest. Even though Silicon Valley and America’s of creating new companies, immigrants founded
world-class university system continue to attract 35 percent of the startups in the semiconductor
some of the world’s most talented scientists and
engineers, the draw of America is not as powerful
8
 Vivek Wadhwa, “A Reverse Brain Drain,” Issues in Science and
as it was before. Technology, Summer 2009 and “Is the U.S. Experiencing Its
First Brain Drain?” New America Media, March 31, 2009.

16 Transatlantic Academy
industry, according to Wadhwa. In computers/ Economist recently noting that “the rich world is
communications and software, the figures were 31.7 losing its leadership in the sort of breakthrough
percent and 27.9 percent, respectively, underscoring ideas that transform industries.”
the phenomenal success of immigrants in driving
U.S. technological innovation. Going Global:
The Hunted are Now the Hunters
In the future, neither the United States nor Europe
can take for granted that they have first dibs on the Finally, yet another challenge to the transatlantic Cross-border
world’s skilled labor pool. Numerous opportunities partnership lies with the global focus and outward mergers and
abound for the world’s best and brightest, and the push of multinationals domiciled in the developing acquisitions used
West is increasingly just one among others vying nations. As mentioned above, shopping has become
to be the exclusive
for the world’s most talented workers. What’s a favorite pastime for consumers in the developing
preserve of the
more, the looming war for talent hardly comes at nations. But they are not alone—also acquiring a
West, but that is
a propitious time for the United States and Europe taste for shopping, notably foreign shopping, are
large corporations headquartered in Mexico, Brazil, rapidly changing.
given both parties’ aging workforce. In the United
States, an aging labor force coupled with the China, India, and other emerging markets. In other
deteriorating quality of public education and dearth words, cross-border mergers and acquisitions used
of U.S- born students taking advanced degrees to be the exclusive preserve of the West, but that is
in science and engineering is a particular cause rapidly changing.
for concern. Regarding the latter point, during Global mergers and acquisitions have been the
the 2004-05 academic year, roughly 60 percent of domain of multinationals from the developed
engineering doctoral students and 40 percent of nations. Well-endowed with capital and possessing
master’s degree students were foreign nationals; in superior brands and extensive logistics networks,
addition, non-U.S. citizens comprised the bulk of Western multinationals have long been the
the U.S. graduate student population in science, global hunters, or the commercial entities with
technology, engineering, and medicine. the wherewithal to purchase foreign assets
That is hardly an encouraging sign for the U.S. or companies via cross-border mergers and
technology sector in particular, or for the U.S. acquisitions. For decades, then, global mergers
manufacturing base that is fast running out of and acquisitions (M&A) was largely a corporate
skilled manufacturing workers. The same issue strategy deployed by Western multinationals with
confronts Germany, where skilled labor shortages the deep pockets, the technological capabilities, and
have been a pressing issue for the past few years. the managerial expertise to venture far from home.
And a favorite hunting ground for these companies
Looking ahead, the war for talent could very well has been resource-rich developing nations and a
determine and reshape the global landscape for handful of other emerging markets.
business innovation. The nation with the most
talent has a leg up on others when it comes to For decades, the hunted (firms from the developing
driving innovation and creating new industry nations) were no match for the hunters since they
standards. For decades, these tasks fell to the lacked the capital, management expertise, brands,
developed nations, although the past will not be and other core competencies to effectively compete
prologue. The skilled labor set of the developing beyond their home market. In some cases, capital
nations is rapidly being upgraded, with The

Losing Control 17
controls and other government restrictions keep Russian energy companies have purchased strategic
companies firmly rooted in local markets. assets in Europe and Australia, while firms from
the Middle East have taken control of companies in
Emerging global Times, however, have changed. Global deal-making the U.K. and the United States. India’s Tata Motors
giants have joined is but another lost monopoly of the West. Aspiring is now the proud owner of Land Rover and Jagaur.
multinationals from the developing nations are not Geely Motors of China owns Volvo, the one-time
the fray in hunting
only becoming more aggressive bidders for assets in Swedish automobile manufacturer.
for global assets.
other emerging markets — crowding out Western
multinationals from acquiring oil fields in central Taking all of the above, the emerging global giants
Asia, telecommunication companies in Africa, and have joined the fray in hunting for global assets,
banks in Argentina, for instance. These same firms spending nearly $650 billion in foreign mergers and
have boldly set their strategic sites on assets and acquisitions in 2007, the peak year of global M&A
popular brands in the United States and Europe, activity. That compares with a decade-earlier total
creating, in the process, a whole new competitive of just $60 billion. Then, the developing nations
landscape for many Western firms. accounted for less than 5 percent of the global total;
their global share jumped to nearly 35 percent in
In the past few years, Saudi Basic Industries 2010. Where cross-border M&A deals initiated
Corporation has bought GE Plastics; Lenovo by the developing nations have traditionally been
of China snapped up IBM’s personal computer directed at other developing nations, it is the
business; Brazilian mining company Vale bought developed nations that are increasingly in the
Canadian nickel miner Inco and the Australian cross-hairs of corporate entities from South Korea,
mining company AMCI; and the South African Mexico, China, and others for a number of reasons.
firm Suzlon was part of a deal that acquired The appeal of the developed markets is manifold
Germany’s Repower. Meanwhile, Chinese banks — access to global brands, cutting edge technology,
have bought large stakes in U.S. and British banks. wealthy consumers, and
distribution channels are all
Going Global: Developing Nations Rising Penchant for Deal-Making
(Percent) key variables driving more
40 M&A deals from the Rest to
the West. And these same
35 Developing Countries (ex-China) China
variables are also spurring
30 on many emerging market
corporations to invest
25
directly in the United States,
20 building out their U.S.-
based operations organically
15
or through green field
10
operations.

5 For many U.S. states and


local communities, that
0
means more new jobs, new
99 00 01 02 03 04 05 06 07 08 09 10 11*

Source: Bloomberg
taxes, and more economic
*Data through January 13, 2011
growth. At the national

18 Transatlantic Academy
level, however, the risk is that rising investment globally-inspired companies from the developing
from the developing nations — notably from state- nations are woefully unrepresented. Their U.S.
owned companies — will ignite another backlash investment presence is nominal — in fact, of total
on Capitol Hill as witnessed in 2005 and again foreign direct investment stock of $2.3 trillion in
in early 2006. An uproar followed when China the United States in 2009, the developing nations
National Offshore Oil Corporation proposed to buy accounted for only roughly 8 percent. In other
U.S. oil company, Unocal, in 2005. The offer was words, even after inflows from the developing
Emerging nations
pulled after intense U.S. opposition related national nations to the United States rose more than seven-
will continue
security concerns. A year later, another deal was fold in the first decade of this century from the
torpedoed over U.S. opposition to the Dubai Port prior decade, their investment position in the to eye U.S.
deal, a venture that would have granted control of United States remains minisucle. To this point, total and European
some U.S. ports to a state-owned company from investment of the Netherlands in the United States investment
the United Arab Emirates. Both deals were vocally over the last decade — roughly $200 billion — was opportunities.
opposed by various constituents in the United greater than the total investment of the developing
States and served as a warning shot to emerging nations. Hence, the rush among emerging market
market corporations to tread carefully in the United corporations to catch up in the developed markets
States. of the United States, Europe, and, for that matter,
even Japan. They are woefully underrepresented in
Yet even with this shot across the bow, emerging the West and want to expand their market presence
nations will continue to eye U.S. and European via foreign investment, not just through trade. The
investment opportunities for no other reason emerging market corporate giants are coming —
than when it comes to having an in-country not content to just trade anymore with the West,
presence in the transatlantic economy, still one but intent on investing and competing locally in
of the wealthiest markets in the world, most South Carolina, California, Texas, and elsewhere.

Losing Control 19
5 The Next Phase of Globalization —
Made in China, Turkey, Brazil, Russia….

“Today, the 5.6 billion people who live outside the investment flowed to and from the developed
Western universe will no longer accept decisions nations, with a few outliers like China. Global
made on their behalf in Western capitals. mergers and acquisitions were the exclusive
—Kishore Mahbubani, author, “The New Asian preserve of the rich nations. Trade and investment
Hemisphere” ties between the developing nations were shallow
and underdeveloped, leaving many countries like
In the multipolar The world has changed — and yet the change Brazil, Turkey, Poland, and Mexico reliant on
afoot could result in a more dynamic and inclusive the United States and Europe for export growth.
world that is
phase of globalization. We have reached the end of Companies from the developing nations were
unfolding, the Rest
globalization as determined and designed by the mainly traders — dependent on delivering goods to
will set the tempo
United States but not the end of globalization itself foreign customers through exports. Multinationals
of global growth if America, Europe, and the West in general can from the West were largely investors, relying on
and demand a embrace a new global configuration with different in-country foreign affiliates to delivered goods and
greater say in characteristics — Chinese, Indian, Brazilian, services to overseas markets. Meanwhile, the cross-
global governance. Egyptian, and many others. This represents a border flow of people was largely one-way — from
significant challenge to a partnership that has long poor to rich nations. World commodity prices were
called the shots for the world economy, and for a set by the West; meanwhile, the world’s best minds
nation, the United States, that thinks of itself as only wanted to migrate to the United States and
“indispensible” and is long accustomed to sitting Europe.
at the head of the table, giving orders, not taking
them. In the years ahead, the axis of the global economy
will increasingly pivot around the developing
And the challenges in front of China, India, nations, with China front and center. In the multi-
Russia, and other key developing nations are no polar world that is unfolding, the Rest will set the
less daunting. Having arrived on the global stage, tempo of global growth and demand a greater say
are these nations ready to assume the mantle of in global governance. The pace of cross border
global leadership? Will they be able and willing trade and investment among the developing
to subordinate national self-interests for the good nations will accelerate. Traditional foreign direct
of the global commons when it comes to tackling investment flows will be altered, with more
weighty global issues like climate change, the investment emanating from the developing nations
proliferation of nuclear weapons, and aid and and flowing to developed and developing nations
development for the world’s poorest nations? The alike. Global M&A will increasingly bear the
answers to these questions are unclear. What is hallmark of developing nations as new emerging
clear is that globalization is likely to survive but corporate giants from Brazil, Mexico, India, and
take on and assume more non-U.S. characteristics. other nations increase their global footprint. Once
imitators, the developing nations are poised to
The globalization of the late 20th century was
emerge as technological innovators. While the
largely driven and dictated by the West. Under
transatlantic economy remains a beacon of hope
this framework, globalization was only nominally
and a primary destination for many of the world’s
“global” given that cross-border flows of trade,
workers, explosive growth in India, China, and a
capital and people pivoted on the United States and
host of other developing nations will entice more
the developed nations, namely developed Europe.
of the best and brightest to return home or not to
In the pre-crisis world, the bulk of foreign direct

20 Transatlantic Academy
leave in the first place. The flow of global talent is becoming real global stakeholders, a new era of
shifting, albeit very slowly. Africa, long the “lost globalization is possible.
continent,” is rapidly being integrated into the
global economy thanks to foreign investment from The Urgent Task of Re-Fortifying the West
the Rest, namely China, plugging the “last frontier” Globalization cannot re-emerge stronger and more Globalization
into the world economy. Meanwhile, Turkey, an inclusive without the participation and support cannot re-emerge
emerging power unto itself, is pulling more of the of the transatlantic partnership. Although the stronger and more
troubled Middle East into the global economy brand of the West has been devalued, and while inclusive without
through more regional trade and investment deals. the collective global influence of the United States, the participation
Many in the United States and Europe see all of Europe, and Japan has been eroded by the financial
and support of
the above as a threat. This is not surprising — not crisis of 2008, the West has to figure prominently
the transatlantic
with the U.S. unemployment rate hovering above in the next phase of globalization. By its sheer
economic size, the transatlantic economy still
partnership.
9 percent and with much of Europe in the grips
of austerity. The status quo is in flux. Change is in matters, yet in order for globalization to work in
the offing: the transatlantic partnership has lost its the future, the United States and Europe must re-
ability to impose its economic will on the rest of the energize the transatlantic partnership, a partnership
world, its credibility and ability to lead devalued by that remains vital to the future growth and
the U.S.-led financial meltdown of 2008. The West’s management of the global economy.
lack of confidence in the future is palpable. That said, many key issues threaten to divide the
It does not, however, have to end badly for transatlantic relationship, with the U.S.-led wars
the transatlantic partnership. If the West and in the Middle East, differences over global climate
the Rest can come to recognize their mutual change, and the scope and scale of financial reform
interdependence and move down the path of chief among them. Yet a productive relationship
mutual cooperation, the
future could very well be a Developing Countries Share of World Imports and Exports
(Percent of Global Total)
win-win for both parties as
opposed to zero-sum game. 45%

43% Imports Exports


Against this backdrop,
41%
it is not impossible to
39%
envision the full bloom
of globalization — with 37%

the world economy more 35%

integrated and interwoven 33%


than ever before. With an
31%
effective G20 governing the
29%
global economy, with the
United States and Europe 27%

adapting to their diminished 25%


80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
role in the world, and with
key developing nations Source: International Monetary Fund, Direction of Trade Statistics

Losing Control 21
between the United States and Europe is required The best way for the West to regain its credibility
if the world is going to stand any chance of with the Rest is by implementing necessary but
maintaining a free and open trading environment, painful economic reforms at home. For the United
stop the proliferation of nuclear weapons, answer States, that means reducing the federal budget
the challenge of global climate change, and assist in deficit to more manageable levels and reducing
raising millions of people out of poverty. the nation’s dependence on foreign capital and
oil. For Europe, that means fiscal restraint, along
The mentality The United States and Europe must work together with measures that create a more flexible and
“they win, we to forge a more predictable and less messy multi- competitive labor market.
polar world. Jointly, the United States and Europe
lose” needs to be
should take the lead in restructuring existing Of particularly importance, leaders in both the
replaced with a
multilateral institutions like the IMF and the United States and Europe need to work harder in
more enlightened
World Bank, giving more votes and chairs at the educating their respective populations/constituents
debate about the table to the developing nations. They should also of the potential benefits of greater cooperation
risks and rewards breathe new life into the Doha trading round, and coordination with the emerging markets. The
of participating and collectively push on the frontier of renewable mentality “they win, we lose” needs to be replaced
in the new energies, and wherever possible, enlist the support with a more enlightened debate about the risks and
global economy and participation of India, China, Russia, and other rewards of participating in the new global economy
unfolding. emerging market stakeholders in such endeavors. unfolding. The political courage must be mustered
The more the United States and Europe work to tell citizens the simple truth — that the world
together in tackling the pressing economic issues has changed, the transatlantic partnership has lost
of our times, the more respect the Rest will have control of the global economic agenda, and that the
for the West, and by extension, the greater their next phase of globalization, while fraught with risk,
willingness to cooperate with the United States and holds tremendous upside.
Europe.
The bottom line: more than ever before, the
Critically, the United States and Europe must economic future of the transatlantic partnership is
also get their own economic houses in order, inextricably tied to the success of the developing
engendering confidence not only between nations.
themselves but also among the developing nations.

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