Warning that America could face its very own Suez crisis

PUBLISHED : Wednesday, 31 August, 2011, 12:00am
UPDATED : Wednesday, 31 August, 2011, 12:00am


The September edition of Foreign Affairs magazine carries an essay entitled 'The inevitable superpower: why China's dominance is a sure thing'.

Written by Arvind Subramanian, a senior fellow at the Peterson Institute in Washington, the article asserts that China is poised not just to catch up with the United States, but utterly to eclipse America as the world's leading economic and geopolitical power.

Over the next two decades, Subramanian argues, China's share of global economic output will climb to 20 per cent, while America's will slump to less than 15 per cent.

What's more, by 2030 China will generate more than twice as much international trade as the US.

'By 2030,' writes Subramanian, 'relative US decline will have yielded not a multipolar world but a near-unipolar one dominated by China'.

There is plenty in Subramanian's projections with which you could argue, not least his assumption that China will be able to sidestep the middle income trap and maintain a rapid 7 per cent average annual growth rate over the next 20 years.

But the most interesting thing about Subramanian's essay is not his belief that China will surpass the US as an economic power, but just how he sees a weakened America losing its geopolitical crown.

The United States, he believes, may be heading for its very own version of the 1956 Suez crisis, in which Britain was forced to abandon its remaining pretensions of international power.

The crisis was precipitated by Egyptian president Gamal Abdel Nasser's decision in July 1956 to nationalise the Suez Canal, which since 1888 had been controlled by the British.

Outraged by what he saw as a threat to Britain's vital trade routes, as well as its international prestige, prime minister Anthony Eden ordered Britain's military to reassert control of the canal by force, which it duly did in November 1956.

The military operation went smoothly enough. But for Britain the crisis precipitated by its seizure of the Suez canal was not military but financial. At the time Britain, like other countries, maintained a fixed exchange rate against the US dollar, with the pound pegged at US$2.80.

Following Britain's seizure of the canal, however, the pound came under heavy selling pressure in the foreign exchange market.

And the Bank of England found itself rapidly selling off its reserves in an attempt to preserve the currency's exchange rate against the US dollar.

By December the situation was unsustainable. Running out of foreign reserves, Britain would either have to go cap in hand to the International Monetary Fund for an emergency loan or be forced to devalue the pound. Devaluation wasn't an option. The government feared any reduction in the value of the pound would simply prompt mass sales of the currency by Britain's former imperial possessions, whose foreign reserves were held in pounds. That would be an economic catastrophe.

But to secure a payout from the IMF, Britain would need to command a majority of votes on the fund's executive board - impossible without American support.

And that wasn't likely. US president Dwight Eisenhower had been infuriated by Britain's seizure of the Suez Canal just days before the US presidential election.

Aggrieved, US officials made it clear to Britain's chancellor of the Exchequer Harold Macmillan that he would get no financial assistance unless Britain declared a ceasefire and agreed to withdraw from the canal zone.

Faced with the threat of a financial disaster, the British government backed down and pulled its forces out of Suez. It was the end of Britain's delusions of international power.

Before long, believes Subramanian, the US could find itself facing its own version of the Suez crisis, only with China playing the role of Eisenhower's America.

He imagines a time, not too many years from now, when China could deploy its economic and financial muscle to force a US military withdrawal from Asia and the Pacific.

At a time of geopolitical tension, Beijing could begin selling down some of its holdings of US Treasury debt. That would not only put the US dollar under pressure, it would scare off lenders, driving the interest rates paid by a heavily indebted US government sharply higher.

Just like Greece or Portugal in recent months, the US would be forced to turn to the IMF for emergency funding to avert a default.

But like Britain in 1956, the US could find that IMF cash comes with political conditions. China, by then the IMF's largest contributor and a benefactor to many of its members, could 'easily' block the US request for funds, argues Subramanian, unless, say, the US agreed to withdraw its naval forces from the Asian side of the Pacific.

Facing economic calamity, the US would have little choice but to comply. It would be America's Suez moment, sealing its demise as a global player and confirming China's status as the world's sole economic and geopolitical super-power.

Looking back on 1956, Britain's Harold Macmillan described the Suez crisis as 'the last gasp of a declining power', adding that, 'perhaps in 200 years the United States would know how we felt'.

If Subramanian is right, it could be a lot less than 200 years.