Photo: Flickr/Tommaso Galli
For the time being, the United States remains the world’s largest economy in absolute terms. The IMF estimate for US Gross Domestic Product in US dollars in 2012 was $16.2 trillion, almost double the size of the Chinese economy at $8.2 trillion. Although the relative size between the Chinese and US economies varies according to the measure used (the gap is much smaller on a purchasing power parity basis), the centrality of the US economy to the state of the global economy is unlikely to change for the foreseeable future, even if it’s dominance will be somewhat modified by China’s rapid growth.
That the United States still remains as the largest single country destination for global exports, importing some $2.3 trillion worth of goods and services in 2013, highlights its integral place in the global economy. With American financial firms responsible for US$39.6 trillion of the global long-term conventional asset market, around 45 per cent of the international total, America also continues to function as the major locus of global finance. While both of these positions will likely be ceded to China within the coming decades, America’s position as an importer and exporter of higher-end goods and services within the context of global value chains will continue to give it an important and on-going role in the negotiation of the economic rules that underpin the global trading and financial systems.
The decisions taken within Washington also have major implications for the conduct and process of global economic governance. This is evident in the United States’ effective veto rights over decisions made within the IMF, and its ability to pick the president of the World Bank through convention. The US-led push to establish new mega-regional preferential trading agreements outside of the World Trade Organization, namely the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership, also points to the continued influence the United States wields in setting the rules of the global economy.
However the domestic monetary and fiscal policies of the United States also play an important role in determining the state of the global investment environment. This was demonstrated during the global economic crisis, which has pushed much of the world into an uncharted macroeconomic policy environment. The extraordinary monetary policy response implemented in the United States by the Federal Reserve, known as quantitative easing, has kept US interest rates low so as to boost the post-crisis American recovery.
However, quantitative easing in the United States has seen investors shifting their investments to and from overseas emerging markets to take advantage of higher interest rates, often at a rate that has had negative repercussions for fragile economies that are not equipped to deal with volatile capital flows. Meanwhile, the large amount of fiscal debt that the US government has incurred after successive budget deficits, has contributed to the large volume of treasury securities now held in overseas markets, not least in China, which exacerbated the problem of global economic imbalances.
The patterns and trends within the global economy, and their connection to US economic policy settings, is naturally of great interest to the work of the International Economy Program at the Lowy Institute for International Policy, and also to the G20 Studies Centre. Researchers at the Lowy Institute provide regular analysis on economic matters affected by the US fiscal, monetary and financial systems, through media commentary, public panels and also via the Lowy Interpreter.
