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National Interest: The (Almost) Triumph of Offshore Balancing

January 27, 2012

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The U.S. Defense Strategic Guidance (DSG) reflects the reality that offshore balancing has jumped from the cloistered walls of academe to the real world of Washington policymaking, says Christopher Layne.

Although cloaked in the reassuring boilerplate about American military preeminence and global leadership, in reality the Obama administration's new Defense Strategic Guidance (DSG) is the first step in the United States' adjustment to the end of the Pax Americana—the sixty-year period of dominance that began in 1945. As the Pentagon document says—without spelling out the long-term grand-strategic implications—the United States is facing "an inflection point." In plain English, a profound power shift in international politics is taking place, which compels a rethinking of the U.S. world role.

The DSG is a response to two drivers. First, the United States is in economic decline and will face a serious fiscal crisis by the end of this decade. As President Obama said, the DSG reflects the need to "put our fiscal house in order here at home and renew our long-term economic strength." The best indicators of U.S. decline are its GDP relative to potential competitors and its share of world manufacturing output. China's manufacturing output has now edged past that of the United States and accounts for just over 18 or 19 percent of world manufacturing output. With respect to GDP, virtually all leading economic forecasters agree that, measured by market-exchange rates, China's aggregate GDP will exceed that of the United States by the end of the current decade. Measured by purchasing-power parity, some leading economists believe China already is the world's number-one economy. Clearly, China is on the verge of overtaking the United States economically. At the end of this decade, when the ratio of U.S. government debt to GDP is likely to exceed the danger zone of 100 percent, the United States will face a severe fiscal crisis. In a June 2011 report, the Congressional Budget Office warned that unless Washington drastically slashes expenditures--including on entitlements and defense--and raises taxes, it is headed for a fiscal train wreck. Moreover, concerns about future inflation and America's ability to repay its debts could imperil the U.S. dollar's reserve-currency status. That currency status allows the United States to avoid difficult "guns-or-butter" trade-offs and live well beyond its means while enjoying entitlements at home and geopolitical preponderance abroad. But that works only so long as foreigners are willing to lend the United States money. Speculation is now commonplace about the dollar's long-term hold on reserve-currency status. It would have been unheard of just a few years ago.

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