A bimonthly magazine on international affairs, edited in Germany's capital

The (Temporary) End of Economic History


Thirty years have passed since Francis Fukuyama wrote about “The End of History.” In politics, he was soon proven wrong. In economics, it took Donald Trump to restart history.

© REUTERS/Thomas Peter

In 1989, the global economy changed even more profoundly than global politics. While political rivalry actually never disappeared entirely, and nations like Russia never became liberal democracies, the “End of Economic History” could indeed be recorded, quite in the sense of Francis Fukuyama’s famous article.

1989 was not only the year that saw the Central European nations revolt against Communism, it was also the year that Japan suffered its biggest ever financial debacle, and the Soviet Union started its economic decline. Both developments deprived the world of two economic powerhouses. Scenarios of Japan becoming the world’s number one economy were quickly forgotten and gave way to the idea that the US would enter the era of “unlimited wealth,” as US economist Paul Pilzer wrote.

The major difference between the “post-historical” global economy that emerged in the 1990s and the traditional industrial economy of the 19th and 20th centuries was a new type of cooperation between major economic areas. Previously nations that tried to “catch up” actually used the same technologies as the others, but in a more effective way; this very fact explains why their economic rivalry only reinforced the political one. The fight for markets excluded compromises simply because it was a pure “zero-sum” game.

The post-industrial revolution of the 1970s and the 1980s changed all this. In the new globalized world, the US became the front runner in producing computers and semiconductors, in creating the operational systems these computers used, and in making the most effective economic use of new technologies. When selling software, the US and other Western powers didn’t sell the knowledge embodied in the original programs; they just sold copies, which could be reproduced in any quantity at zero cost. At the same time, the newly emerged economies in Asia used US technologies to create sophisticated hardware, producing these goods in increasing amounts.

This new configuration was perfectly “post-historical” in Francis Fukuyama’s sense. Both parts of the world’s economy became dependent on each other, and in this new order, there were no reasons for economic wars and quarrels. The United States was an absolute economic superpower. By 1992 it produced 26 percent of world’s gross product, according to IMF data, and controlled around half of the patents in force. But the economic policy it pursued vis-à-vis all potential rivals was super-friendly and extremely decent.

Benevolent Superpower

The US supported the economic reforms in Russia in the early 1990s; it bailed out Mexico from its debt crisis in 1994; it refrained from introducing any restrictions on cheap Asian imports after the 1997-98 financial crisis; and it advocated the accession of China to the WTO on conditions designed for a mid-sized developing economy rather than for a rising industrial powerhouse. During these decades, the peripheral economies grew fast, increasing the demand for US technologies and software, and supplying Western nations with affordable industrial goods, thus improving the quality of life in the global North. To my mind, this perfect interdependence was the essence of globalization. The globalized world was indeed a “post-historical” one.

The consequences of globalization are well known. Between 1991 and 2015, more than 1 billion people were brought out of extreme poverty, with “emerging Asia” accounting for roughly 75 percent of this number. China became the world’s largest exporter of goods in 2009, the largest industrial producer in 2010, and the world’s largest economy in 2016 (by GDP based on purchasing power parity). The “Asian century,” observers claimed, was set to begin.

The US share in the global GDP as measured by purchasing parity ratio decreased to 15.1 percent by 2018, and its trade deficit grew from $31 billion in 1991 to $622 billion in 2015. Asian nations turned into the largest holders of foreign currency reserves (China, Hong Kong, South Korea, Taiwan, Malaysia, and Thailand account for more than $4.65 trillion in combined international currency reserves), while the US is now the largest debtor nation in the world. It seemed that the newly industrialized world was successively challenging the post-industrial one, and the final outcome of this epic battle was far from predetermined. But while these numbers indeed appear to show that the gap between the leader and the follow-ups has narrowed dramatically, they do not reflect the whole situation. Look at the United States’ technological dominance instead―here, nothing much has changed.

Chips and Systems

As of early 2019, it’s true that more than a half of all desktop or notebook computers in the world were produced in China. But the country is able to furnish less than one-third of them with locally-produced microchips and remains highly dependent on imports. Meanwhile, up to 60 percent of all global makes rely on Intel microchips. In server processors, Intel’s domination is even greater―98 percent. Both Intel and AMD lead the development of new generations of chips, while mass manufacturing of the devices has been relocated to Asia. Companies like SK Hynix of South Korea or TSMC and UMC of Taiwan position themselves as American firms’ competitors, but continue to depend on them for the most vital technologies.

In 2018, more than 65 percent of all smartphones produced in the world were manufactured in China―and 78 percent of them were built by “genuine” Chinese brands, from Huawei and Xiaomi to OPPO and Vivo. But at the same time 97.98 percent of all the smartphones in the world run on either Windows, Android, or iOS operating systems. If all computers and computer-like devices are counted, the share of Microsoft, Google, and Apple software comes to an impressive 95.93 percent. As for the market for online searches, Google has a market share of 92.82 percent compared to 1.02 percent held by Baidu, the Chinese search engine, and 0.54 percent held by Yandex, which pretends to be the undisputed leader of the Russian high-tech sector. Among the 10 most popular social networks, US-based Facebook, YouTube, WhatsApp, and Instagram account for 8.12 billion users, while the Chinese or Chinese-oriented QQ, Douyin, and Sina Weibo only have 1.67 billion users. Of close to 300 billion e-mails exchanged in the world daily, up to 92 percent are received by inboxes registered with US-based companies. Apple and Google-built services are clearly in the lead with a 75 percent market share.

All the Big Players Are American

In 2007, PetroChina became the first trillion-dollar company by market value, and in 2008 Russia’s Gazprom advanced to the fourth position on the list of world’s most valuable companies. But as of March 2017, all the top 10 companies by market capitalization were once again American―for the first time since the 1970s! Therefore, the idea of a “US retreat from the world” looks a bit questionable. The same is true when looking at the financial side of things. As of April 2019, mainland China and Hong Kong together held around $1.33 trillion in US Treasury bonds. But even if they tried to sell them off, a “financial tsunami” would remain unlikely, since US banks can easily buy them out and get loans from the Federal Reserve using Treasury bonds as a perfect collateral. Just remember that between 2008 and 2011 the Federal Reserve’s balance sheet grew by $2.1 trillion. This could well be repeated if China engaged in full-scale financial confrontation.

In short, two decades into the 21st century, the US still appears the undisputed global leader in terms of technological domination and enjoys clear superiority in each and every domain of the information economy. If any other nation tried to wage “economic war” against the United States, it would be certainly defeated―and not so much by financial sanctions, asset freezes, or trade embargoes, but by denial of access to US-made or US-controlled technological and/or communication capabilities.

If all this is true, why do the other powers do nothing to counter this dominance? My answer is simple: because the American political leadership never used this component of US strategic power to subjugate any foreign government or foreign company―at least not until now. Since 1990, the US has waged many wars and boldly made use of its military power in Iraq (twice), Bosnia, Serbia, Kosovo, Afghanistan, Somalia, Libya, Syria, and many other corners of the globe. But it never relied on its technological superiority for promoting its political goals. As far as the information technology domain is concerned, the history of war and conflict seemed firmly over in all the years that have passed since Francis Fukuyama outlined his famous hypothesis.

Crossing the Red Line

But much of this has changed in recent years as President Donald Trump decided to “get tough” with China and launched a full-scale trade war against Beijing. Without any doubt, the US has good reasons, since China has for years imposed protective tariffs on US goods (in 2017, the US took $13.5 billion in custom duties from $506 billion Chinese imports, while the Chinese authorities levied $14.1 billion in duties on $127 billion worth of US imports). Chinese companies have also violated many US laws protecting intellectual property and forced foreign investors to share their technologies when outsourcing production facilities to China. More examples could be added.

The fundamental difference to all the previous economic tensions is that the US authorities have recently invoked sanctions against several Chinese high-tech companies―most notably Huawei and ZTE―actually accusing them of industrial espionage in the United States. And even this wouldn’t change the situation much if the restrictions imposed were aimed at curbing the companies’ imports from the US or their purchases of US-manufactured components. But as of June 1, 2019, several US companies, following the authorities’ orders, effectively banned Huawei from their services: Microsoft discontinued the supply of its Windows operating systems for Huawei laptops and other content-related services, and Google announced that it was blocking some elements of its Android operating system (GoogleMaps, YouTube, GooglePlay, Gmail) on Huawei smartphones.

Here, it seems to me, the US government crossed an important red line. It undermined the trust foreign hi-tech companies had in the technological platforms that for decades secured America’s dominance in the globalized world. Microsoft or Google don’t just produce American software―for a long time, they have been producing American soft power. It now appears that this soft power can easily be turned into a hard variety. The long-term consequences of such a change may be profound.

Chinese Retaliation

What will happen next? Of course, the affected Chinese corporations will suffer a major blow; Huawei and ZTE may well be stopped from their expected expansion―but I would be surprised if the Chinese government did not retaliate. Unlike the oil-producing countries or other commodity economies, China already produces billions of units of hi-tech products and will definitely continue its industrial expansion. Therefore it is crucial for Chinese companies to develop their own operating system (Huawei already announced it will have one available by the end of 2019)―and the Chinese government will do its best to help them achieve this end. At the same time, Chinese producers will want to devise their own microchips (today not a single Chinese company is listed among the top 25 semiconductor producers in the world), which will not be a huge problem since they have already acquired or stolen all the major technology from Western companies. So sooner or later, technological platforms will emerge that will be able to compete with the dominant American companies.

It should be noted that Chinese software and social networks are predominantly used either in China itself or by overseas Chinese. This hasn’t changed for years―while goods manufactured in China conquered the world, Chinese software has so far remained limited to the Chinese community. Now, however, the US would appear to be facilitating the internationalization of the Chinese hi-tech sector. This is helped by China’s incredible sway over the most important consumer markets in the world. In the case of Russia, for instance, consumer products account for less than 3.1 percent of overall exports; in the case of China, the figure exceeds 59 percent. The users of China-made computers and mobile devices abroad―serving around 2 billion people around the globe―are China’s main economic asset, which it will use with all possible ardor. As a result, a real alternative to the US technological platforms will emerge for the first time.

Of course, the US will not simply roll over. In recent years, it initiated at least two major economic shifts of global importance. First, the so-called Fourth Industrial Revolution introduced fully automated production techniques, thereby endangering the position of labor in the production chain. This undermines China’s and other rapidly developing countries’ main competitive advantage: the relatively low labor costs that propelled them toward global industrial leadership. In the future, US companies may be able to discard their overseas production capacities and bring not only their capital but also their industrial facilities back to the US, increasing their independence from China. Second, the US and Europe have embarked on a journey toward energy independence―focusing either on nonconventional extraction techniques (the US) or on developing renewable energy sources (Europe). Both trends will make the West far less dependent on commodity economies like OPEC or Russia.

The End of “Chimerica”

All this will definitely produce a kind of division in the current “post-historical” economic system. Both parts of what analysts had prematurely started to call “Chimerica” will increasingly rely on their strongholds. In the case of China, it’s the hardware produced on the mainland and supplied all over the world. In quite a short time, these devices will be furnished with Chinese operational systems and Chinese microchips―and the Chinese will do their best to make sure that their software cannot be uninstalled. I would also expect all Chinese smartphone manufacturers to replicate Apple’s system of free iMessages and FaceTime calls etc., which will lift overall demand for their products.

On the US side, there are many competitive advantages as well: first of all, the US will make full use of its total domination of the microchip market, which can hurt Chinese manufacturers dramatically; second, it may increase its pressure on Chinese consumers as an increasing number of software applications will not work on Chinese smartphones, and, last but not least, the West can use the global internet projects it is currently developing to increase its dominance. It can, for example, announce that China-produced devices will be barred from space-based internet providers. As the result, the global economic and informational realm that exists today will split apart, and countries and companies will lean to the one or the other dominant technological “core.” It’s difficult to say how far this division will go, but the general trend is easy to see.

Undoubtedly, the ongoing economic and technological split will be followed by the reinforcement of political contradictions between different blocs and alliances. Today, the US has by far the largest number of loyal supporters: in Europe, Latin America, and Japan, most will side with the Americans. The United States’ financial capabilities, its economic reach, and its long-term strategic alliances will contribute to creating a Western economic and technological space that cautiously opposes the one created by China. But the Chinese have made remarkable progress over the past two decades.

Between 2005 and 2018, China’s investments in Africa went from $23 to $352.7 billion; Chinese companies invested around $170 billion in Latin America; the government started the Belt and Road Initiative; and, of course, Beijing worked hard to turn Moscow into its economic vassal (all the leading Russian mobile communication companies opted for Huawei’s hardware to comply with a new law that obliges them to collect and keep all the customers records for at least a year). Both economic superpowers are likely to press their allies and economically dependent nations to adopt their technological and software standards.

How high is the probability of “Chimerica” being destroyed for good in the current economic showdown? It’s entirely possible. Even though China exported more than $539.5 billion worth of goods to the US in 2018, this accounted for only 4 percent of its nominal GDP. During the same year, Beijing increased the bank loans provided to local companies and households by more than 16.2 trillion renminbi ($2.4 trillion or 17.9 percent of country’s nominal GDP). The Chinese authorities seem oblivious to the danger of creating the greatest credit bubble in history as they seek to increase economic growth by boosting local demand.

Do Not Fear

So the preparations for a “decoupling” from the US are in full swing. Of course, if things take a turn for the worse, the world may face a full-scale economic recession. But it could well be the last recession of the globalized world. The political rhetoric that goes along with it―praise for protectionism, export substitution, and reliance on different nations’ own competitive advantages―may contribute to the creation of “multiple globalizations” centered around either the US or China.

Back in 2008, a young American strategist called Parag Khanna first described the model for this new era of economic and political competition. Khanna argued that the coming world will be led by three “empires”: the United States, China, and the European Union, which are capable of projecting their economic and societal models across the globe. All the other nations, Khanna argued, will be downgraded to either “second” or “third world countries;” the first group will at least be able to influence “imperial” competition, while the latter will no longer play any role in world affairs at all. This scenario looks more realistic as the technological showdown advances.

Should we fear the advance of this “post-globalized” world? I don’t think so. Economic progress is often uneven, fluctuating between cooperation and fierce competition between major rivals. As potential adversaries mature, the contradictions between them increase. But the most crucial point here is that since World War II, economic competition has played out increasingly peacefully. The 1989 economic revolution that left the US at the top of the economic hierarchy didn’t provoke any political quarrels―on the contrary, it caused a short “post-historical” era in world politics. In the economic and technological sphere, this “post-historical” age lasted even longer―and even now it seems that while economic tensions rise, the risk of political confrontation isn’t increasing. Francis Fukuyama, it would seem, had a point after all.