The American edge

How the US is leaving its competitors behind through a mix of resource intensity and economic nationalism

It may be hard for some to remember, but just a couple of decades ago the United States and much of Europe were broadly comparable in terms of per capita income. This parity was reflected in the competitiveness of their products, and the global heft of their corporations. A gap opened up between the two halves of the West during the global financial crisis and the euro zone’s debt struggles that followed; it expanded during the pandemic, and in the nearly two years since the invasion of Ukraine has reached levels reminiscent of periods when Europe was devastated by war.

In 2008, output from the euro zone and that from the United States were separated by about half a trillion dollars; they were both between $14 trillion and $15 trillion. By 2023, the euro zone is stuck at around $15 trillion, while the US added $12 trillion to its annual output. Only a few European companies remain among the world’s largest, measured by revenues or by market capitalisation: these include the owners of luxury brands, like LVMH, or pharmaceutical majors, like Novartis.

What has driven this divergence? Many blame the power of the US dollar, which allows Washington to run sustained programmes of domestic support to its consumers and companies by borrowing from the rest of the world. Certainly, the EU’s tighter fiscal rules meant post-crisis austerity hurt it harder. Germany, the continent’s standout performer for two decades, is facing stagnation (or even recession), given it is hamstrung by a brake on its debt, which it is unable to find political consensus to ignore.

But there are other reasons as well. First, there is regulation, particularly of technological innovation; the most powerful companies in the world today (aside, arguably, from the legacy energy behemoths) are those that dominate Big Tech. These are all American, and are also behind the recent stock market rally in the US. Some of them are handicapped by their inability to access China’s vast consumer market — Apple, which still operates there, unlike Google or Facebook, earns 20 per cent of its revenue from the mainland. But most of Big Tech has largely overcome this obstacle and continued to post impressive numbers. Europe has a far more conservative approach to tech regulation, and seems to have given up any attempt to replicate Silicon Valley on its own shores.

But perhaps the largest contributor to this difference is one that is improperly appreciated: differential energy costs. In the 15 years since the financial crisis, the United States has once again become a resource superpower. It is easy to forget that cheap resources, including oil, powered their ascent a century ago. It is possible that John D Rockefeller’s Standard Oil, before it was broken up on orders of the US government in 1911, was the largest company to ever exist in the modern age, and its dominance may never again be matched. That was a world in which resource markets were far less integrated; economic historians have shown, in the words of Gavin Wright, that “the single most robust characteristic of American manufacturing exports [in the 1879-1940 period] was intensity in nonreproducible natural resources”, including oil and iron ore. This leadership broke down only when easy-to-extract resource endowments were depleted, and when these markets began to be more integrated globally.

In the past decades, the shale gas (and, to a lesser extent, shale oil) revolution in the US has reversed that trend, and returned the US to its pre-World War I position. It delivered energy independence first, and now the US is an energy exporter with the power to affect the competitiveness of its rivals through its management of energy prices.

Europe managed to stay marginally competitive by binging on Russian natural gas. But, after Ukraine, that no longer stayed a workable option. By late 2023, it was dependent instead on liquefied natural gas (LNG) shipped into its ports. The problem is that while pipelines — such as those that came into Europe from Russia— might not cause a major mark-up to energy costs in the country to which gas is exported, shipping LNG seaborne cargoes is different. Now that Europe depends on the latter instead of Russian pipelines, natural gas in Europe can cost over 3.5 times what it does in the US.

Cynics might note that the design of sanctions on Russia happens to hurt Europe far more than the US. For example, sanctions are focused on oil and gas, but exempt (for now) Russian-enriched uranium. It is this enriched uranium that powers the 90-plus nuclear reactors that the US depends on for 20 per cent or so of its energy mix.

They might also note that the US continues to squeeze its European competitors. Last week, the Joe Biden administration announced that it would freeze funding for new LNG terminals, necessary to scale up the amount of US gas that is exported to the rest of the world. This was sold as a concession to environmentalists in the US claiming about the effects of methane leakage from natural gas infrastructure. But both the administration and the supposedly environmentalist proponents of the restriction also mentioned that it would keep natural gas prices at home in America low. Europe, which was depending upon more US gas to moderate its energy prices, will have to continue to endure a competitive deficit with US producers high on cheap energy.

It is not hard to see why the external impact of the US’ economic policies has led to more and more of its allies and partners suspecting that it cloaks old-fashioned economic nationalism behind its sanctions regime and environmental policy. Its East Asian allies in Korea and Japan complain that US legislation forces them to cut Chinese suppliers out of their value chains while granting US-based rivals exemptions to the same laws. The Inflation Reduction Act provides enormous subsidies to US-based companies that other countries trying to, say, build up a clean hydrogen sector cannot possibly match. Heavy subsidies to electric vehicle purchasers in the US are paid out only if the cars are American-made.

A broad claim that could be made is that, across multiple fields of human endeavour, the US is retreating to the position it occupied during its rise in the late 19th and early 20th centuries. It is leveraging its natural resources and fractured global markets to maintain economic dominance while turning isolationist in its geopolitics. All those that have come to rely on the US over the past century — as a market, as a source of capital, as a security provider — may have to make new plans.

The writer is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi