According to Jo Johnson, New Delhi correspondent at the Financial Times (formerly FT's Paris correspondent; Johnson worked for Deutsche Bank after graduating from Balliol College, Oxford, where he achieved a first class degree in Modern History, and also holds an MBA from INSEAD), Indian manufacturing is coming of age, despite previous doubts about its future that were widespread.[1]  --  What this portends for the U.S. economy may be indicated by a piece written a few months ago by Asad Ismi on U.S. economic destabilization and attendant imperial decline which globalization and other developments are producing.[2]  --  (Ismi's analysis is somewhat dependent on the petrodollar theory of the war, it should be noted.)  --  This, in other words, is what "brutal" portends in the following sentence from Jo Johnson's article:  "Such a shift would come just as the downsizing of blue-collar America enters a new and brutal phase with job losses at General Motors and the bankruptcy of Delphi, its spun-off parts supplier."  --  As many have noted, corporations, knowing no national loyalties, are increasingly taking the jobs upon which the American middle class has depended and looking abroad to find less expensive ways to fill them.  --  As Ismi notes, "Since 2000, the U.S. has lost close to three million manufacturing jobs. . . . An important factor behind the manufacturing decline is the abandonment of the U.S. by its own corporations, many of which have relocated operations to Asia from where they export to the U.S."  --  Thus, again in Jo Johnson's words:  "It [i.e. the 'new and brutal phase of the downsizing of blue-collar America'] would have a big impact not just on India and its 1bn-plus population but also on the growing number of multinationals looking to shift production to low-cost countries in a way that does not increase their exposure to China."  --  Should "economic Armageddon" seem hyperbolic, consider this paragraph from Asad Ismi's essay:  "The global move away from the dollar portends economic devastation for the U.S. Stephen Roach, chief economist at Morgan Stanley, one of the world's leading investor firms, has told clients that the U.S. does not have more than a 10% chance of avoiding 'economic Armageddon.'  He points out that the $2.6 billion the U.S. has to import every day to finance its trade deficit constitutes an incredible 80% of the world's net savings.  Obviously it's an unsustainable situation.  According to Roach, the dollar will keep falling due to the U.S.'s record trade deficit.  To attract foreign capital and check inflation, the Federal Reserve's Greenspan will be forced 'to raise interest rates further and faster than he wants.' U.S. consumers, already deep in debt, 'will get pounded.'  The record U.S. household debt is now equal to 85% of the economy [the U.S. national debt is $7.7 trillion, while total U.S. debt is an unfathomable $43 trillion].  Americans already spend a record proportion of their income on interest payments, and interest rates have not even substantially increased yet.  Thus the stage appears set for massive national bankruptcy."  --  In other words, the U.S. is well-placed to experience a crisis like the one Argentina experienced a few years ago.  --  No doubt this is all for the best from the point of view of global justice, as Ismi believes:  "A wave of Venezuelas is likely, leading to a redistribution of global wealth in the developing world's favor.  The European Union will have to come to a new arrangement with a resurgent South, and the result could lay the basis for an egalitarian world."  --  One wonders with some trepidation, though, what scapegoats the G.O.P. will find to blame for these developments, even as its corporate clients continue to reap the profits the "new and brutal phase" produces....


By Jo Johnson

Financial Times
November 29, 2005 (subscribers only)

At the Tata Motors plant in Pune, near Mumbai, a potholed "torture track" simulates the spine-jarring conditions of Indian roads. In five years' time, only one in every two of Tata's cars may need to go through the painful ordeal of preparing for life on the subcontinent's streets.

With a car coming off the end of the line about every 80 seconds, the group sees itself as competitive enough to make its biggest ever push into export markets, which could lift overseas revenues to half of the total by the end of the decade from a current 20 per cent.

"Made in India" is coming of age. With its call centers and software houses, India leads the world in offshored back-office services. It has so far failed, however, to fulfil its potential as a global manufacturing hub. India's exports account for just 0.8 per cent of world trade, compared with 6.4 per cent for China's, reflecting a myriad of infrastructural and regulatory barriers to competitiveness.

But its share of the pie could quadruple in a decade, according to McKinsey, the consultancy. Such a shift would come just as the downsizing of blue-collar America enters a new and brutal phase with job losses at General Motors and the bankruptcy of Delphi, its spun-off parts supplier. It would have a big impact not just on India and its 1bn-plus population but also on the growing number of multinationals looking to shift production to low-cost countries in a way that does not increase their exposure to China.

"People have been rapidly disabusing themselves of the idea that India was going to leave manufacturing to China," says Jim Walker, chief economist at Credit Lyonnais Securities Asia.

The development has taken many by surprise. It was common until recently to hear commentators dismiss Indian manufacturing as a lost cause. India had missed the first wave of the industrial offshoring revolution, which saw labor-intensive industries such as toy and shoe manufacturing migrate to China, Thailand, and other low-cost countries, and seemed likely to miss out on the second, this time involving skill-intensive industries. In this context, to many economists, the preference of the country's Congress-led coalition government for manufacturing over services as a means of driving development seemed simply wrong-headed.

Stephen Roach, chief economist of Morgan Stanley, argued in a report in March, for example, that by reverting to "an economic model of yesteryear" and by regarding services as "elitist" in terms of their employment potential, the communist-backed government was jeopardizing India's growth miracle. Furthermore, by passing a weak budget that failed to lift investment in infrastructure towards Chinese levels as a share of gross domestic product, the government ran "the very real risk of compromising the very manufacturing strategy it now supports" as well as "an equally significant risk of failing to provide incentives for an already vibrant services sector."

No one denies that infrastructure remains the biggest single obstacle to "Made in India" emerging as a world force. With the exception of telecommunications, the cost of most infrastructure services is 50-100 per cent higher than in China, with Indian manufacturers paying twice as much for electricity and three times as much for rail freight.

The gap is widening, too. China spent seven times as much as India on infrastructure in 2003, the latest year for which figures are available, and three times as much relative to the size of its economy -- $150bn (10.6 per cent of gross domestic product) compared with $21bn in India (3.5 per cent of GDP), according to Morgan Stanley.

India's cash-strapped state and central governments are unlikely to be able to bring infrastructure up to Chinese standards any time soon, especially as politicians prefer to spray their limited resources at voters in the form of subsidies rather than invest in construction projects with a longer pay-back.

Specialists in process operations management say Indian factories are also years behind China's. Mark Gottfredson, global head of performance improvement at Bain, the management consultancy, says he has yet to see "any real stars" in Indian manufacturing. "China has world-class manufacturing. India has third-world manufacturing. I have been in a lot of auto plants, textile factories, and metal foundries and was not impressed. They do not pay as much attention to process flow, inventory management, continuous improvement, or safety. I've been in foundries where there are sparks flying around and the operators don't even have eye protection."

Yet pessimists are finding themselves confounded by the fact that structural reforms initiated by the Congress government in 1991 and supported by the subsequent Bharatiya Janata party administration have at last begun to bear fruit.

These reforms included the gradual abolition of import licensing and the reduction of extremely high industrial tariffs; the privatization of aluminium, car manufacturing, telecoms, and information technology companies; the liberalization of the exchange rate regime and the cautious relaxation of rules governing foreign direct investment. Their cumulative effect has triggered a consumption-led boom that, in turn, has for the first time created a genuine mass market for Indian manufacturers.

For Kamal Nath, India's commerce and industry minister, the game is just starting. "India has already shown its prowess in the service sector and now we want to become a global techno-manufacturing hub," he says in an interview." Manufacturing has started to enjoy its fastest growth in memory, expanding at 9.8 per cent in the five months to August compared with a year earlier, and business confidence indices are at their highest levels since 1995. After slashing their workforces in the 1990s, industrialists are adding capacity, not just to cater to domestic consumers but also to feed a growing appetite for "Made in India" abroad. Exports in the seven months to October, three-quarters of which were of manufactured products, were up 22 per cent.

In no sector is India's emergence as a force in global manufacturing more evident than in mobile telecommunications equipment. It is not difficult to see why. With its operators adding 2m subscribers a month -- and the figure is rising -- India is the world's fastest-growing big mobile telecoms market, with 52m subscribers today and probably more than 300m in 2009, analysts say.

Yet until South Korea's LG Electronics started a plant in Pune this March, none of the international market leaders offered a Made-in-India handset, preferring to import phones from around the world. Motorola will next month start to assemble phones in India in the "first step in a multi-phase manufacturing strategy for India," while Nokia plans to open its first Indian manufacturing facility in Tamil Nadu in the first half of next year.

"India's telecoms sector is exploding and all the big handset makers are talking about setting up manufacturing facilities here so that they can cater to this strong domestic demand," says Shirish Sankhe, a partner at McKinsey in India. "They will then use India as a global manufacturing hub to source markets around the world, which is exactly what happened in China 10-15 years ago.

"This goes to show that even in a sector where it has traditionally been cheaper to import because of zero duties, 'Made in India' is starting to take off in a big way. Capacities are getting expanded and India is emerging as a global source. There is no doubt in my mind that it is happening."

Few now argue that India should ignore orthodox models of manufacturing-led development, however tempting it might be to prioritize a service sector that plays to the country's strengths in human capital and information technology while circumventing its massive infrastructural flaws. Morgan Stanley's Mr. Roach admits he was "quick to rush to judgment" after the budget.

"It is never black or white in India, i.e., manufacturing or services. The coalition is more in the grey area of fine-tuning the reformist moves that began in the early 1990s to meet new political realities. I find that surprisingly pragmatic -- and encouraging."

Sustaining manufacturing growth at 10-12 per cent is a priority for the government, which sees it not just as a second engine of economic growth but also as a tool to tackle one of its biggest headaches: unemployment. Only by boosting manufacturing's weight in the economy does the government believe it can solve India's problem of jobless growth.

While agriculture's share of GDP has fallen to barely 20 per cent from 32 per cent in 1991 and that of services has soared to 52 per cent from 41 per cent, industry has remained flat at 27 per cent. And within industry, manufacturing has been stagnant at 17 per cent of GDP. The government says this must rise to nearer the 30–35 per cent seen in China, Thailand and Malaysia.

If "Made in India" is to live up to these ambitions, however, the government needs to enact a second generation of reforms, giving a warmer welcome to foreign direct investment. India attracted less than $6bn in FDI last year -- one-tenth of the amount, most of it in manufacturing, that went to China. Few emerging economies have built a manufacturing base without relying heavily on FDI, as a source of capital and a means of transferring technology and knowhow.

Resistance to FDI comes from Indian industrial houses that want to keep their home market to themselves and communist-backed unions that fear the consequences of greater competition. Daring to take on these vested interests will be one of the most important economic policy decisions facing the government.

Baba Kalyani, chairman of Bharat Forge, a world-class maker of crankshafts -- it exports half its Indian production -- warns that manufacturing is unlikely to create jobs in the numbers the government hopes. "Manufacturing jobs will get created but it will not be like before, when unskilled laborers from rural areas got work. They will need to find jobs in construction, building roads, ports and power infrastructure . . . What makes Indian manufacturing competitive today is technology, not cheap labor. We tried it the other way around before and it didn't work."

This makes it all the more important for the government to relax rigid labor laws, such as the requirement that companies with more than 100 employees receive approval from state authorities to shed staff, and further reduce the number of sectors, such as handloom, in which only inefficient small-scale production is permitted.

Even if it does all this, India would still struggle to find jobs for a working-age population set to expand by 71m to reach 762m in the next five years, let alone cater for the millions leaving the land for the cities and the 38m backlog of unemployed. "India has a serious employment problem and manufacturing on its own is not a panacea," says Bibek Debroy, an economist helping the government to devise a national manufacturing strategy.

If a second generation of reforms is undertaken, McKinsey estimates India could lift its share in world trade to 3.5 per cent by 2015, a new global manufacturing hub would be born and millions would be lifted out of poverty at a much faster rate than would otherwise be the case. Without such reforms, India's infrastructural shortcomings might prove ultimately overwhelming. Mr. Kalyani warns that unless the Mumbai-based Maharashtra state government improves the business environment in Pune, the heartland of Indian manufacturing will lose its appeal.

He has a clear warning to policy­makers: "Today I'm the world's most competitive forging company, but this city's population has doubled over the last decade and there have been no new roads. Existing infrastructure is overloaded and has an impact on our costs.

"In three years' time, if we are double the size we are today and nothing has changed, this is not going to work. For our next phase of development, we would have to find another site."


The prevalence of labor-saving techniques in higher-end Indian manufacturing may look odd given the country's reputation for low labor costs but, executives insist, they are none the less necessary to achieve international competitiveness, write Khozem Merchant, Peter Marsh, and Jo Johnson.

"We now employ very expensive labor," says one local industrialist, citing salaries that range to Rs30,000 ($655, £380, 555 euros) a month, but the work requires "many fewer people than in the 1980s."

Investment in automation and efficient processes is in evidence among the market leaders. At Bajaj Auto's gleaming $60m factory at Chakan, near Pune in western India, yellow robots help to manufacture a top-selling premium motorcycle for India's young middle-class professionals.

Further north, in the Mumbai suburb of Kandivli, Mahindra & Mahindra's "dust-free" factory -- where clean air diminishes the scope for defects -- is rolling out record numbers of engines in the country's largest integrated tractor assembly complex.

If Indian manufacturing is moving ahead, its wheels are being turned by the likes of Bajaj and Mahindra, where labor-saving factory practices and tougher management attitudes are helping to produce globally competitive Indian manufacturers. Their engineering-based competitiveness contrasts with Chinese rivals' strength in volume-driven, low-cost production.

Mahindra this year launched joint ventures to assemble cars in India with Renault of France and to develop lorries for local and global markets with International Trucks of the U.S., adding to its home-developed tractors and sports utility vehicles.

"If we had not taken the bold initiatives during the depths, we'd have faced a bleak future," says Pawan Goenka, president of Mahindra's automotive unit, recalling the limping manufacturing group he joined from General Motors more than a decade ago. Then, he says, 5,000 people worked overtime to assemble 60 vehicles a day at Kandivli; now 2,000 staff roll out 160 a day, with no regular overtime.

Similarly, two years ago, Bajaj required a workforce of 810 people to make 244,000 motorbikes a year at Chakan. Today, the plant has just 90 more people, yet is producing machines at nearly three times that rate, thanks to productivity improvements such as self-checking by workers to reduce the number of defective products.

Mahindra began its transformation in the early 1990s by overhauling manufacturing practices, then turning to product development -- a big step up for a company with no research and development culture -- and finally, in 2002, launched a group-wide globalization drive.

Besides moves such as the tie-up with International Trucks, one highlight was the acquisition this year of a weak Chinese tractor maker, giving Mahindra's farm equipment division a foothold in the third largest market and a low-cost base from which to export tractor kits to the U.S., where the products are popular with weekend "hobby farmers."

Perhaps the most significant change at the automotive unit has been product development, which led to the first internally designed and developed vehicle, the popular and stylish Scorpio SUV.

With a development cost of $120m, one-fifth of a comparable project in the west, the Scorpio has "broken the myth of economies of scale," says Mr. Goenka.

"Few vehicle manufacturers can produce on a scale of 40,000-50,000 units and achieve profitability. We did and we intend to repeat the feat in our Renault venture."

The company had 120 Indian engineers working on the Scorpio over five years and, budget-conscious, took big risks by working with unproven component suppliers that were one-third cheaper than the best in Europe and Japan. The measure paid off but more procurement may be brought in-house, giving rise to a components and engineering services division.

But perhaps the foremost aspiration is to become a globally competitive entity. By 2008, Mahindra wants to export one-fifth of group volumes, from just 1.5 per cent at present. While it describes the partnership with Renault as a "limited" move to learn the volume car business, Mahindra is determined for its tractors and SUVs to become world-beaters.


The New Economic World Order, Part I

By Asad Ismi

Canadian Centre for Policy Alternatives Monitor
May 2005

Empires collapse usually due to a combination of military overreach and economic weakness, and, judged by these criteria, the U.S. imperial order seems headed for an imminent fall. Washington's occupation of Iraq has been a disaster. Even after two years, the U.S. military has failed to subdue the Iraqi resistance. A recent report by Knight Ridder Newspapers declared the war "unwinnable."

Developments on the economic front are even more dangerous for the U.S. Its power rests on two main buttresses: 1) military superiority, and 2) the role of the dollar as the world's reserve currency. Iraq is making a mockery out of the first, and the second is in jeopardy. The U.S. massive trade and budget deficits ($630 billion and $500 billion, respectively) are driving down the dollar to such an extent that its status as the global reserve currency is imperilled. Since world trade is largely conducted in U.S. currency, most countries have to export goods and services in order to earn these dollars, but all the U.S. has to do is print more dollars. As economist James K. Galbraith explains: "[The U.S. gets] real goods and services, the product of hard labor by people much poorer than ourselves, in return for chits that require no effort to produce."

The purchase of massive amounts of dollars by the rest of the world allows Washington to borrow cheaply, keep interest rates low, and run up a trade deficit that no other country could get away with. The world thus pays for U.S. overconsumption and underproduction. This arrangement, as economist Andre Gunder Frank puts it, is "a global confidence racket" -- a racket that can continue as long as other countries keep on buying dollar assets such as U.S. Treasury bills, thus financing Washington's enormous deficits.

But, if the value of the dollar keeps going down, why should anyone continue to invest in it? The dollar has dropped by 47% against the euro since 2001, and by 24% against the yen. The greenback hit a record low of $1.37 against the euro in December 2004. There is no end in sight to the dollar's fall, since the Bush administration is content to let it drop (in the hope of reducing the trade deficit) and has shown no inclination to rein in overall spending. The dollar is expected to shrink by another 30% during the second Bush term, which, according to one observer, "will wipe out anyone holding dollar assets and bury the dollar as a global reserve currency."

With these dire prospects, surely anyone in possession of a lot of dollars would be inclined to sell. As U.S. Federal Reserve Chairman Alan Greenspan warned in November 2004, "foreigners may tire of financing the record U.S. current account deficit and diversify into other currencies or demand higher U.S. interest rates." He repeated this warning last March. Currently, Washington needs to borrow $2.6 billion a day -- 90% of it from foreigners -- to finance its trade deficit and to prevent a dollar collapse. The main lenders are Japan and China, whose central banks hold the largest amount of U.S. dollars ($720 billion and $600 billion, respectively). Taiwan owns $235 billion and South Korea $200 billion.

If these countries were to move away from the dollar, the U.S., with its immense borrowing needs, would face bankruptcy. Yet this is precisely what is happening. On January 26, 2005, prominent Chinese economist Fan Gang announced at the World Economic Forum that China had lost faith in the U.S. dollar. "The U.S. dollar is no longer in our opinion . . . (seen) as a stable currency, and is devaluating all the time, and that's creating trouble all the time," Fan said. He added: "So the real issue is how to change the regime from a U.S. dollar pegging . . . to a more manageable reference, say euros, yen -- those kinds of more diversified systems . . . If you do this, in the beginning you will have some kind of initial shock, you have to deal with some devaluation pressures . . . Now people understand the dollar will not stop devaluating."

Fan is director of the state-run National Economic Research Institute in Beijing. He is not a government official, but for traders the connection was close enough and they found "great relevance" in his statement. As Paul Donovan, senior global economist at UBS AG, said, "This in fact is a scenario we consider to be highly likely." And the dollar promptly dropped. Japan's Prime Minister, Junichiro Koizumi, also made clear in March that "diversification is necessary" when a parliamentary committee questioned him about the dangers of holding too much of one currency. China and Japan have lost hundreds of billions of dollars during the past two years because of the greenback's decline.

According to the Financial Times, "Central banks are shifting reserves away from the U.S. and towards the Eurozone in a move that looks set to deepen the Bush administration's difficulties in financing its ballooning current account deficit." The Asia Times (Hong Kong) confirms that Asian central banks have been replacing their dollar reserves with regional currencies for the past three years. A report by the Bank of International Settlements states that the ratio of dollar reserves held in Asia declined from 81% in the third quarter of 2001 to 67% in September 2004. China reduced its dollar holdings from 83% to 68%, India from 68% to 43%, and Thailand from 80% to 50%. A January 2005 report sponsored by the Royal Bank of Scotland states that 39 nations out of 65 interviewed were increasing their euro holdings, while 29 were reducing the amount of dollars they owned.

Significantly, the move from the dollar to the euro has spread to the central banks of OPEC countries, which own the most valuable traded resource: oil. The Bank for International Settlements reported in December 2004 that OPEC members' dollar-denominated deposits fell to 61.5% of their total deposits in the second quarter of 2004, from 75% in 2001. During the same period, euro deposits increased from 12% to 20%. Russia, the biggest non-OPEC oil producer, has switched 25% to 30% of its currency reserves from dollars to euros.

At the end of February, comments by South Korea's central bank sparked another round of dollar declines. The bank announced its intention to move away from the U.S. dollar and increase holdings of Canadian and Australian dollars. The New York Times described the impact of this "innocuous" statement: "As the Korean comment ping-ponged around the world, all hell broke loose, with currency traders selling dollars for fear that the central banks of Japan and China, which hold immense dollar reserves . . . might follow suit. That would be the United States' worst economic nightmare. If it appeared that the flow of investment from abroad was not enough to cover the nation's gargantuan deficits, interest rates would soar, the dollar would plunge, and the economy would stall."


The global move away from the dollar portends economic devastation for the U.S. Stephen Roach, chief economist at Morgan Stanley, one of the world's leading investor firms, has told clients that the U.S. does not have more than a 10% chance of avoiding "economic Armageddon." He points out that the $2.6 billion the U.S. has to import every day to finance its trade deficit constitutes an incredible 80% of the world's net savings. Obviously it's an unsustainable situation. According to Roach, the dollar will keep falling due to the U.S.'s record trade deficit. To attract foreign capital and check inflation, the Federal Reserve's Greenspan will be forced "to raise interest rates further and faster than he wants." U.S. consumers, already deep in debt, "will get pounded." The record U.S. household debt is now equal to 85% of the economy [the U.S. national debt is $7.7 trillion, while total U.S. debt is an unfathomable $43 trillion]. Americans already spend a record proportion of their income on interest payments, and interest rates have not even substantially increased yet. Thus the stage appears set for massive national bankruptcy.

According to the Los Angeles Times, higher interest rates "would be disastrous for a country weaned on cheap credit." A rise in interest rates would particularly affect a real estate market built on low interest and mortgage rates. This market is now the main engine of U.S. consumption. Millions of Americans have taken out loans against the rising value of their homes and use them (in Roach's words) as "massive ATM machines." As André Gunder Frank explains, higher interest rates threaten "a collapse of the housing price bubble [which] with increased interest and mortgage rates would drastically undercut house prices, thereby having a domino effect on their owners' enormous second and third re-mortgages and credit-card and other debt, their consumption, corporate debt and profit, and investment."

Echoing Roach, Former Federal Reserve Chairman Paul Volcker puts the likelihood of a financial disaster at 75%, while the U.S. Comptroller-General (head auditor), David Walker, "makes no bones about the fact that the situation is dire." For Martin Wolf, associate editor of the Financial Times (U.K.), "The U.S. is now on the comfortable path to ruin. It is being driven along a road of ever-rising deficits and debt . . . that risk destroying the country's credit and the global role of its currency."

Paul Krugman, economics professor at Princeton University who writes a column for the New York Times, told Reuters in January: "We've become a banana republic . . . If you ask the question, do we look like Argentina, the answer is a whole lot more than anyone is willing to admit at this point." Argentina defaulted on a $100 billion in debt in 2001, with catastrophic effects: its currency plunged and the economy collapsed, bankrupting thousands of businesses within weeks. National income plummeted by 67%, pushing half the population below the poverty line.

Professor Laurence Kotlikoff, chairman of the economics department at Boston University, agrees with Krugman, saying: "This administration [Bush] and previous administrations have set us up for a major financial crisis on the order of what Argentina experienced a couple of years ago." Former U.S. Treasury Secretary Robert Rubin similarly warns that "the traditional immunity of advanced countries like America to the Third World-style crisis is not a birthright," and that the U.S. faces "a day of serious reckoning."

Peter Schiff, CEO of Euro Pacific Capital, also thinks that the falling dollar could mean major financial disaster. According to him, "This looming dollar crisis cannot be prevented, only delayed, and only at the expense of exacerbating the collapse." Schiff told Forbes magazine" in January that he expects the dollar to drop by 50% against the Chinese and Japanese currencies. This will wreck U.S. consumption. As Schiff states: "Spending on cars, clothing, and electronics will all drop dramatically -- perhaps right out of the economy."

An abrupt drop in the dollar could cause a stock market crash and make the real estate market dive. "When the dollar collapses," says Professor Immanuel Wallerstein, "everything will change geopolitically . . . it will be a vastly different U.S -- no longer able to live far beyond its means, to consume at the rest of the world's expense. Americans may begin to feel what countries in the Third World feel when faced with IMF-imposed structural readjustment: a sharp downward thrust of their standard of living."


The weakness of the dollar and the huge deficits are symptoms of the decline of U.S. manufacturing. "Americans don't produce enough and don't save enough," says Schiff. U.S. manufacturing is only 13% of GDP and, according to Roach, "Manufacturing employment currently stands at only about 13% of the U.S.' private non-farm workforce -- down sharply from 23% . . . in the mid-1980s." Since 2000, the U.S. has lost close to three million manufacturing jobs. Between 1989 and 2004, the U.S. savings rate fell from 6% to 1%. Foreigners now produce most of the goods Americans are consuming and lend Washington the money to buy these goods, leading to skyrocketing deficits.

An important factor behind the manufacturing decline is the abandonment of the U.S. by its own corporations, many of which have relocated operations to Asia from where they export to the U.S. John Chambers, Chairman of Cisco, said recently: "What we're trying to do is outline an entire strategy of becoming a Chinese company." Cisco is the leading U.S. supplier of networking equipment for the Internet. The company manufactures $5 billion worth of products in China, where it employs 10,000 people.

In fact, the U.S. economy has been in decline for more than three decades, accounting for a plummeting share of world economic output. The first dollar crisis occurred at the end of the 1960s when U.S. President Lyndon Johnson's escalation of the Vietnam war led to increasing public deficits. This coincided with the rise of Western Europe and Asia as strong exporters, to whom Washington lost its manufacturing lead. To retain its global domination, the U.S. then depended on its military superiority and the dollar's role as the world's reserve currency. As the U.S. deficits rose due to the Vietnam war, France demanded gold in exchange for the dollars it held, since at the time the greenback was backed by Washington's gold reserves. Other countries followed suit and, as U.S. gold reserves were drained, President Richard Nixon delinked the dollar from gold and floated it against other currencies.

This coincided with the oil crisis of the 1970s, when crude prices shot up 400%. Suddenly, oil became the most important traded resource, and Nixon linked the dollar to it. In June 1974, U.S. Secretary of State Henry Kissinger made a deal with Saudi Arabia (the biggest OPEC oil producer) stipulating that oil could only be bought in dollars. In return, the U.S. agreed to militarily protect the Saudi regime. In 1975, OPEC (following the Saudi lead) officially agreed to sell oil only in dollars. The age of the petrodollar was thus born. As long as oil was traded in dollars, so would other goods, and the dollar would remain the world's reserve currency. This arrangement allowed the U.S. to continue its dominant imperial role despite its crucial economic weakness: the inability to compete with the European and Asian countries in manufacturing and export capacity. But now the U.S. position became highly vulnerable to the whims of the oil-producing countries and to the fate of the resource itself.

The first challenge to the petrodollar system came with the Third World debt crisis. Awash in petrodollars, Western banks loaned hundreds of billions of these to developing countries, which could not repay the loans when Washington raised interest rates to nearly 20% in 1979 to save the falling dollar. It was crucial for the future of the petrodollar system that this money be recycled back to the West, and so the U.S. used the World Bank and IMF to ensure this would happen. The loans were repaid several times over (the payments continue), and the petrodollar system was saved -- but at the cost of decimating Third World economies with structural adjustment programs that devastated their industry, employment, and health and education sectors. As F. William Engdahl perceptively points out, the U.S.'s petrodollar hegemony "was based on ever-worsening economic decline in living standards across the world as IMF policies destroyed national economic growth."

The second challenge to the petrodollar system came from Iraq when it started trading oil in euros in November 2000. If other OPEC countries followed suit, that would be the end of the reserve role of the dollar. The 2003 U.S. invasion of Iraq was partly aimed at staving off this possibility by forcibly returning Iraq to the dollar, warning other OPEC members not to switch to the euro, and starting the process of physically controlling Iraqi and Middle Eastern oil in order to gain leverage over European countries.

This strategy has clearly failed, and it now appears that in the military arena, too, the U.S. cannot prevail, not even against lightly armed Iraqis. The petrodollar system is falling apart as the world rejects a U.S. imperialism in which it expects other countries to not only supply it with a massive amount of consumer goods in exchange for increasingly worthless bits of paper, but also wants them to pay for its gigantic military machine with which it attacks or threatens them. As American journalist Seymour Hersh said in a recent interview: "The minute the rest of the world gets tired of our belligerence, they can turn us off economically as easily as flicking a light switch."


The collapse of the dollar and that of the U.S. economy will end American superpower status as Washington becomes incapable of financing a colossal military machine that currently occupies 725 bases around the world with 446,000 troops. Economic power will centER around the European Union, China, and India, which are already creating new global structures that exclude the U.S. These endeavours show that the U.S. is already, to some extent, a "has-been" global power whose desperate military aggression only makes it weaker on the world stage.

The Financial Times explains: "A new world order is indeed emerging -- but its architecture is being drafted in Asia and Europe at meetings to which the Americans have not been invited." In contrast to Washington's endless military ventures, Europe and China emphasize economic might as the main instrument of foreign policy. As Newsweek points out, "the strongest tool for both is access to huge markets."

In April 2004, 10 new countries joined the European Union and six more are expected to in the near future. Newsweek lauded this development by emphasizing that "no single policy has contributed as much to Western peace and security." This is a highly important statement. It recognizes that Europe has changed the very definition of security. After two world wars, the Europeans appear to have realized that the best guarantor of security is economic inclusion, not mass murder. And now the EU is considering Turkey's membership, which would actually make Europe part of the Middle East, and vice versa. According to Newsweek, "When historians look back, they may see this policy as being the truly epochal event of our time, dwarfing in effectiveness the crude power of America."

Similarly, China and the Association of South East Asian Nations (ASEAN) are creating an Asian trade bloc to rival the EU. The ASEAN Plus Three (China, Japan, and South Korea) summit meeting in December 2004 laid the groundwork for an East Asian Community (EAC) that "should build a free trade area, cooperate on finance ,and sign a security pact . . . that will transform East Asia into a cohesive economic block." This is a significant defeat for the U.S., which scuttled a similar intiative in 1990. The Asian agreement creates a market zone of two billion people, the largest global trading bloc "dwarfing the EU and NAFTA." India has also become an ASEAN summit partner and wants an economic zone stretching from its borders to Japan.

No single country has posed more of a challenge to Washington than China, which recently replaced the U.S. as the leading consumer market in the world. Beijing has economically displaced the U.S. all over Asia and is now doing so in the latter's so-called back-yard, Latin America. China is now Chile's largest export market and Brazil's second biggest trading partner. In November 2004, Chinese President Hu Jintao went on a tour of Latin America and agreed to invest $30 billion in the region. Most importantly, China and Venezuela signed a bilateral energy pact in December 2004, under which the latter agreed to supply Beijing with 120,000 barrels of fuel oil a month. China pledged to invest in 15 Venezuelan oil-fields. China has become the world's second largest importer of oil after the U.S. Venezuela is the U.S.'s fourth largest oil supplier, and the deal with China cuts into one of Washington's "few remaining relatively stable sources of crude." China intends to make a similar move towards Canada, the U.S.'s biggest oil supplier. What can Washington do about such incursions into its "vital interests"? Not much, since Beijing could cripple the U.S. economy simply by stopping its purchase of American Treasury bills.

The demise of the United States as a superpower will be particularly beneficial for the Third World -- the 80% of humanity that has suffered most under Washington's economic and military heel. Since 1945, the U.S. has unleashed a reign of death, destruction and plunder on developing countries, killing more than 20 million people through wars, coups, bombings, assassinations, massacres, embargoes, and economic destabilization. The purpose was to ensure that 80% of the world's wealth was owned by 20% of its people. Third World countries have fought back, inflicting significant defeats on Washington. It was the Vietnam war that started the U.S.'s economic downslide, and today Iraq is an important nail in Washington's financial coffin.

Third World resistance has made it impossible for the U.S. to continue dominating the world economically and militarily. Without U.S. muscle behind them, Washington's client states all over the South will have to give way to nationalist regimes that want to use their countries' resources for the benefit of their own people: A wave of Venezuelas is likely, leading to a redistribution of global wealth in the developing world's favor. The European Union will have to come to a new arrangement with a resurgent South, and the result could lay the basis for an egalitarian world.

--Asad Ismi is a writer on international politics specializing in U.S. policy towards the Third World and the role of Canadian corporations there. The author of 90 articles, seven reports and a book, he has been published in 21 magazines, including Z Magazine, Covert Action Quarterly, the Canadian Centre for Policy Alternatives Monitor, Briarpatch, and This Magazine. He has written reports for the Canadian Auto Workers, the Canadian Labour Congress, the Communications, Energy & Paperworkers Union, the Halifax Initiative Coalition, MiningWatch Canada, and the NGO Working Group on the Export Development Corporation. His book on U.S. policy towards Vietnam is used as a text in U.S. universities. He is winner of a 2003 Project Censored Award for his article "The Ravaging of Africa." Asad holds a Ph.D. in War Studies from the University of London and taught for two years in Vietnam. He has been interviewed by BBC Radio, Radio France International and CBC Radio. He is a regular guest on community radio stations across Canada and the U.S. During 1998-99 he hosted "Rights Radio" at the University of Toronto station CIUT, and recently completed a five-part radio series on privatization, aired on Toronto's CKLN 88.1fm. He has appeared several times on CBC TV's "Counterspin".