A More Multi-Polar Mundo

Two headlines today in the London Financial Times are indicative of a multi-polar world:

Beijing studies severing peg to US dollar

Eurozone eyes IMF-style fund

The first is about China moving away from fixing their currency to the dollar, and allowing it to appreciate. The article also discusses China's growing economic and political ties to Africa and an oil pipeline between China and Russia.

The second is about Europe developing a European Monetary Fund, in contrast to the International Monetary Fund (IMF), whose largest shareholder is the United States. This news comes as the Chiang Mai Initiative moves forward to form a similar monetary fund for Asia.

What does this news mean for the United States?

The bottom line is that moving forward in the 21st century will require a different leadership style than we've had in the past. We will still be the largest economy of any single country - by far - and we'll have the most powerful military for the foreseeable future. But we now share power with real rivals.

Europe as a whole represents more economic might than the United States. Our debt to China means our economy is intimately linked with theirs. And our military might is stretched thin over two conflicts - we wouldn't want to take on any more.

To be more specific about today's headlines:

A strengthening Chinese currency will produce winners and losers in the United States.

The winners:
(1) Exporters. The Chinese will be able to buy more American goods and services.
(2) Import-competitors. Americans will buy more American goods & services, fewer Chinese.

(Aside: the biggest winners are other developing countries who compete for US market share, like Mexico!)

The losers:
American consumers. We'll have to pay more for Chinese goods. That could put a real damper on most Americans' spending patterns.

In the long-run, this is good news for the United States... and for global monetary stability. It will help address our debt to China. But in the short to medium run, we'll be tightening our belts as we adjust.

(Aside: For me personally, it is exciting - a stronger Chinese currency means that more students from China can afford to study abroad here in the United States... And maybe more Chinese Universities will invite me to lecture over there. No, this is not an advertisement - sadly, Blogger is blocked in China.)

The European Monetary Fund is less of a big deal. In the 1950s, 60s, and 70s, European countries borrowed from the IMF and had to accept the conditions attached. With the United States as the largest shareholder of the IMF, this gave our country some influence over policy in Europe. But Europe turned away from the IMF a long time ago. With Greece flirting with the idea of turning to the IMF for a loan, Germany and France are moving to make the divorce more final; Europe will deal with European monetary affairs.

But this European monetary move adds impetus to other regional organizations, like the Chiang Mai Initiative for Asia, and the Banco del Sur for South America. Global governance going forward will be increasingly based along regional lines. The United States will no longer have as much influence - neither directly, nor through its influence at the IMF.

So, the United States needs a new leadership style. We should continue to invest regionally, promoting our relations with neighbors, Canada and Mexico. And we should look to lead the world by engaging multilaterally. The days of effective US unilateralism are over. Cooperation with friends is the key moving forward.