Jakarta, IO – With a GDP of US$20.89 trillion in 2022, the United States of America (USA) is by far the world’s largest economy. It generates at least 20 percent of the global economic output. With such a significant economic size, needless to say, the US has tremendous influence on the global economy. When the US economy is growing strongly, the global economy tends to follow suit. Conversely, when the US economy is depressed, so is the global economy. In addition to GDP output, the US economy is also a major leader in global trade and investment. Even though its share in the global trade has begun to decline (overtaken by China), the US is still a dominant player. US investments are present in almost all parts of the world, making them a key part of the economy in most countries.
However, US dominance in the global economy is fading. New economies have emerged as global economic superpowers in recent decades, and are poised to replace US hegemony. According to Goldman Sachs, China is forecast to overtake the US as the world’s largest economy by around 2035, while India is expected to become the world’s second largest by 2075. Weakening of the US economy is caused, in large part, by the decline in its economic performance in recent years. Growth has steadily stalled. The US is also often blamed by other countries for triggering economic turmoil which eventually led to a global crisis.
First, the Global Financial Crisis of 2007-08 is still fresh in our minds. It was sparked by the US financial sector, to be more specific, cheap credit and lax lending standards that fueled a housing bubble. The global economy slumped and the financial sector was devastated. The impact of the subprime mortgage quickly morphed into debt crises in the European Union in 2012-13. The global economy was hit hard. Second, the trade war between the US and China in 2019 has led to a trade crisis. The US accused China of unfair trade practices. It began to protect its trade sector by increasing import tariffs on a number of commodities from China. China retaliated with similar measures. The trade war between the two largest economies has put pressure on global trade and engendered a global economic slowdown.
A trend toward de-dollarization
A major factor behind the world’s steep dependence on the US economy is the dominant use of US dollar. The currency has long been a primary medium of payment in international trade, following the end of the gold standard system. Dollarization is founded upon the Bretton Woods Agreement, which had fueled debate concerning inequality and global justice. It can be said that the US controls the global trade and monetary markets through its money management policies. It is believed that printing large amounts of US dollars will not have a material impact on the US (especially in terms of inflation) because the additional liquidity is fought over by countries to meet their needs for foreign exchange reserves. Such reserves are used to settle cross-border transactions (such as imports and debt payments). Not only that: the position of the US dollar as the world’s main reserve currency makes it the most sought after asset by investors, because it is considered the safest and most liquid instrument. Treating the US dollar as a “safe haven” exerts a negative impact on monetary markets in developing countries. It is often seen that when the US central bank (the Fed) raises its benchmark interest rate, capital outflows would follow, resulting in depreciation of the local currency. Criticism often arises for treating portfolios denominated in US dollars on a par with other assets, such as gold, even though literally gold is much more valuable because, it requires a process to obtain and only exists in limited quantities. By contrast, liquidity in the form of US dollar can be printed at any time, in unlimited quantities.
However, while the US dollar is still considered the strongest currency and the most important investment instrument outside of gold, its popularity as the world’s main reserve currency is on a decline. First, China’s rise has posed real challenge for the US, as the world’s largest economy. As mentioned before, the country is set to replace the US as the largest economy in the near future. China has also made various maneuvers, in terms of trade cooperation and investment. It has conceived many initiatives, from the OBOR (One Belt One Road), the establishment of the largest investment bank to trade cooperation with US enemies. Simultaneously, its currency, the Yuan, has grown in popularity. Reuters recently reported that the use of Yuan in cross-border transactions has now reached 48.4 percent compared to 46.7 percent for US dollars. Gradually, the Yuan is cementing its dominant position in global transactions. Not only that: the Yuan has also become a global reserve currency approved by the IMF.