paper series

Losing Control:
The Transatlantic Partnership, the
Developing Nations and the Next Phase
of Globalization

Joe Quinlan
Bosch Public Policy Fellow, Transatlantic Academy
© 2011 Transatlantic Academy. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or by any means without permission
in writing from the Transatlantic Academy. Please direct inquiries to:

Transatlantic Academy
1744 R Street, NW
Washington, DC 20009
T 1 202 745 3886
F 1 202 265 1662
E TA@gmfus.org

This publication can be downloaded for free at www.transatlanticacademy.org.

Transatlantic Academy Paper Series

The Transatlantic Academy Paper Series presents research on a variety of transatlantic topics by staff, fellows, and
partners of the Transatlantic Academy. The views expressed here are those of the author and do not necessarily
represent the view of the Transatlantic Academy. Comments from readers are welcome; reply to the mailing ad-
dress above or by e-mail to TA@gmfus.org.

About the Transatlantic Academy

Founded by the German Marshall Fund of the United States (GMF), the ZEIT-Stiftung Ebelin und Gerd
Bucerius, the Robert Bosch Stiftung, and the Lynde and Harry Bradley Foundation, the Transatlantic Academy
serves as a forum for a select group of scholars from both sides of the Atlantic and from different academic and
policy disciplines to examine a single set of issues. Working together from a transatlantic and interdisciplinary
perspective, Academy fellows use research, publications, and ideas to make policy-relevant contributions to
policy debates facing the transatlantic community. In addition, the Academy has received early support from
the Transatlantic Program of the Government of the Federal Republic of Germany through funds of the Euro-
pean Recovery Program (ERP) of the Federal Ministry of Economics and Technology. The Compagnia di San
Paolo joined as a financial partner in May 2009.

Chosen from the fields of public policy, business administration, economics, journalism, and NGOs/civil
society, Bosch Public Policy Fellows are in residence at the Transatlantic Academy from one to two months.
During their fellowship, they interact with the Academy’s long-term fellows, conduct their own research, write a
short paper for the Academy website, and make presentations to audiences of analysts and government officials
in the Washington area. The Bosch Public Policy Fellowship is made possible by a grant from the Robert Bosch
Stiftung of Stuttgart, Germany.
 Losing Control:
The Transatlantic Partnership, the Developing Nations,
and the Next Phase of Globalization

Transatlantic Academy Paper Series

March 2011

Joe Quinlan*
Bosch Public Policy Fellow, Transatlantic Academy

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Aftershocks of the Global Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . 3
“Made in America”: The First Post-War Phase of Globalization . . . . . . . . . . . . . . . 5
When the Financial Plumbing Blew Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Rise of the “Rest” and the Challenges to the Transatlantic Partnership . . . . . . . . 10
The Next Phase of Globalization — Made in China, Turkey, Brazil, Russia . . . . . . . . .20

*
Joe Quinlan was a Bosch Public Policy Fellow at the Transatlantic Academy from December 2010 to February 2011. He
is the managing director and chief market strategist at U.S. Trust – Bank of America Private Wealth Management. He also
lectures on finance and global economics at New York University.
Executive Summary
The financial economic crisis of late 2008 was a
seminal moment for the post-war global economy.
The financial tsunami that swept over Wall Street
in September 2008 not only laid waste to venerable
institutions like Lehman Brothers and battered
the reputations of Goldman Sachs and other
financial stalwarts. The “Made in America” crisis
also undermined the capacity and credibility of the
world’s global economic architects — the United
States and Europe, or the transatlantic partnership.
After years of living beyond their means and after
amassing mountains of debt, the music finally
stopped for an economic alliance that had long
set the tune for the global economy and grown
accustomed to standing at the pinnacle of the global
economic order.
The epic U.S. housing boom and bust culminated
in one of the worse financial crisis in U.S. history.
In the ensuing months following the stunning
collapse of Lehman Brothers, global growth
declined, world trade and investment plunged, and
the rate of global unemployment soared. It was a
humbling and humiliating moment for the United
States — the long-time champion of globalization.
In the quarter century leading up to the financial
crisis, most of the world had little qualms with a
global economy largely groomed and managed by
the West, principally the United States. Or little
resistance to the central tenets of globalization —
namely industry deregulation, unfettered global
capital flows, trade and investment liberalization,
and the primacy of the private sector. This
acceptance was underwritten by superior results.
From the early 1980s forward, the global economy
experienced a blessed period of muted inflation,
low unemployment, and infrequent and shallow
recessions. Global trade and investment rose
sharply over this period. The integration of China,
India, and Russia into a world economic order
structured and headed by the United States helped
lift millions out of poverty. There were periodic
financial crises during this time frame but never
at the core of the global economy — or the United
States.
Those days are past, however. The financial crisis
not only decimated the portfolios of investors all
over the world. The “Made in the U.S.” financial
debacle also demolished the ability and authority
of the United States and Europe to lead the global
economy. The world no longer beats to the tune
of the United States. The transatlantic-centric
global economy of the past three decades is being
reshaped. New economic powers are on the ascent
— lead by nations like China, India, Brazil, and
Turkey, for instance — with these emerging players
less inclined to strictly follow the global rules
laid out by the United States and the West. The
developing nations, or “the Rest,” have their own
ideas about how the global economy should be
managed, and are in very strong position vis-a-vis
the West to have more sway when it comes to issues
of global governance.
As discussed below, the financial crisis accelerated a
number of key long-range trends that were already
in motion before the crisis struck. The relative
economic decline of the developed nations and the
rising influence of the emerging markets in general
and China in particular were fast-forwarded by
the crisis and have, in turn, accelerated the move
toward a less U.S.-centric, more multi-polar world.
While the global economy has recovered from the
crisis, we are not going back to “business as usual.”
The new world before us will be more complex,
fluid, and disruptive — notably for the architects
of the post-war economic system. The United
States and Europe have lost control of the global
economic agenda and, critically, no longer control
the key inputs of economic growth — labor, capital,
and natural resources. These inputs are increasingly
concentrated in the developing nations, who
have emerged from the crisis more confident and
Losing Control 1
emboldened. The future of globalization will be less
U.S.-centric and more encompassing of Chinese,
Turkish, Brazilian, and other characteristics of the
developing nations. This phase of globalization
heralds both promise and peril for the transatlantic
partnership.1

1
 Parts of this report are based on my research for “The Last
Economic Superpower: The Retreat of Globalization, the End of
American Dominance, and What We Can Do About It,” New
York, McGraw-Hill, 2010.
1 The Aftershocks of
the Global Financial Crisis

“Just as the world accommodated the rejuvenation the U.S. economy and the benefits of free market
of Europe in the post-War world, it must now capitalism. U.S.-led globalization — greater
accommodate the rise of new Asian economies in the openness to foreign trade and investment, industry
years that lie ahead.”2 deregulation, and the unfettered cross-border
—Manmohan Singh, Prime Minister of India movement of capital, goods, and people — was
the overarching mantra of many countries, a
It is commonplace to speak of the seminal shift in mega-trend so powerful and ubiquitous that it was
global economic activity. Early in the 21st century, universally deemed to be irreversible.
it is abundantly clear that some developing nations,
lead primarily by China, have emerged as the In the post-crisis world, however, the global Free-market
world’s new economic powerbrokers. Even before landscape is radically different. After living well capitalism will
the great financial crisis of 2008 — a financial beyond their means for years, and following survive but not in
calamity “Made in America” that undermined the massive bank bailouts and recession-fighting the unregulated,
economic capabilities and credibility of the West, policies, the developed nations are deep in debt and anything-goes,
while bolstering the global standing of China and condemned to a prolonged period of slow growth. shop ‘til you drop,
many developing nations — the global economic The burdens confronting the United States and leverage-to-the-hilt
clout of the so-called “Rest” was on the ascent. The Europe have structurally sapped the global clout guise of the past
financial crisis only served to expedite the global of both parties and by extension, the transatlantic
quarter century.
shift underway for the past decade, fast-forwarding alliance. America is exhausted by most accounts, its
the rise of China, India, and other emerging economic superpower status diminished by costly
markets, while accelerating the relative decline of wars, the financial crisis, and massive liabilities
the United States and Europe. associated with future entitlement programs.
Meanwhile, Japan
Global Shift: The Growing Role of the Developing Nations and Europe are
increasingly
1980-2005 2005-Forward impotent — too
Global Economic Growth Laggard/Dependent Leader/Independent demographically
Global Governance Passive Active stagnant, too
Global Commodity Prices Price Taker Price Setter much in debt, too
Global Innovation/Technology Imitation Innovation distracted by their
Global Industry Standards Adopt Create/Tweak own problems to
Global Corporate Strategy Passive/Reactive Proactive be anything but
Global M&A Recipient Originator passive players on
the global scene.
The Anglo-Saxon
economic model has been widely discredited by the
As a new decade dawns, the transatlantic financial crisis; so too has the Western version of
partnership confronts a different world from the globalization. Free-market capitalism will survive
one just a decade ago. At the beginning of the 21st but not in the unregulated, anything-goes, shop
century, few questioned the global primacy of ‘til you drop, leverage-to-the-hilt guise of the past
quarter century.
2
 Speech by Dr. Manmohan Singh, Prime Minister of India, to
the LSE Asia Forum 2006.

Losing Control 3
 Developing nations, in contrast, have not Savings in the East, Debt in the West
only led the way forward in the past two (Total foreign exchange reserves as a percent of total world reserve holdings, quarterly)
75

years, emerging from the global economic 70

Developing Developed

recession far quicker and stronger than the 65

developed nations; they have also fortified 60
their presence in a number of key sectors 55
that have long been under the domain of 50
Global power and the West in general and the transatlantic 45
influence is now partnership in particular. Energy, mining, 40
more diffused steel, automobiles, telecommunications,
35

among nations power generation, alternative energies,

30

and regions, finance — these key sectors of the global

25
economy are increasingly being contested
making it more 99 00 01 02 03 04 05 06 07 08 09 10*

and controlled by developing nations, a Source: International Monetary Fund COFER database
challenging to *Preliminary data through the third quarter of 2010

trend that will radically reconfiguring

.

coordinate and In short, the aftermath of the global financial

global economic activity. The United
craft solutions to States and Europe have been caught flat-footed by
pressing global the fact that Chinese firms are now on the cusp
problems. of becoming global leaders in electric cars, solar
panels, and wind turbines. Or that Brazil is now a
legitimate agricultural and energy powerhouse —
and a direct threat to the energy and agricultural
complexes of both the United States and Europe.
India’s growing software industry, the expanding
technology capabilities of South Korea and Taiwan,
the economic take off of some African countries,
the increasing financial might of China — all of
these trends, and more, are being driven by non-
Western forces and are emblematic of a new world
economy whose rhythm reflects more the beat of
the developing nations as opposed to the standard
bearers of the post-world global economic system
— the United States and Europe.
crisis has yielded a global economic landscape
that is more complex, fluid, and multi-polar.
Global power and influence is now more diffused
among nations and regions, making it more
challenging to coordinate and craft solutions to
pressing global problems like climate change,
the proliferation of nuclear weapons, the long-
running Doha Round of multilateral trade
negotiations, and the development challenges of
poverty-stricken Africa. This shifting backdrop
will require far-reaching adjustments on the part
of the transatlantic partnership and key post-war
multilateral institutions like the United Nations
Security Council, the International Monetary Fund,
the World Bank, and other Western-dominated
institutions that have long held sway over global
economic governance.

Notably worrisome for the West, as part of the
new world we live in, control of the world’s critical
economic inputs — natural resources, capital, and
labor — are increasingly under the domain of the
developing nations, a dynamic that could very well
lead to more tension between the well-endowed
Rest versus the depleted, resource-deficient West.
Adjustments are required since these institutions
and their primary stakeholders — the United States
and Europe — are no longer in control of the global
economy, and the developing nations know it. The
latter are bent on not going back to how things use
to be. They have their own ideas and preferences as
to the next phase of globalization.

4 Transatlantic Academy
2 “Made in America”: The First Post-War
Phase of Globalization
“The best minds are not in government. If any were,
business would hire them away.”
—Ronald Reagan
If one were able to google the term “globalization”
in the early 1980s, the search would have
yielded little. “Stagflation” would have been a
far more popular term, reflecting the economic
pain of the 1970s, a decade that saw the United
States suffer two oil shocks, soaring prices, two
economic recessions, and the demoralizing effects
of stagflation. Slow growth and rising prices
bedeviled the world economy as the 1980s dawned,
culminating in the economic downturn of 1982,
one of the worst since the Great Depression. In
November 1982, the U.S. unemployment rate hit
a post-war high of 10.8 percent and the prospects
for the United States and the world at large never
looked as bleak. The painful recession of 1982,
however, would prove to be a tipping point (ditto
for the recession of 2008/2009) or the final straw
that would galvanize the United States, the United
Kingdom, and, ultimately, others to rethink
standard economic policies.
Over the 1980s, a consensus formed around the
idea that governments and bureaucrats were no
longer capable stewards of the economy, an idea
that ultimately opened the door to a radical rethink
about the relationship between government and the
marketplace. The former was in retreat owing to the
misery of the 1970s; the latter, meanwhile, needed
a flag bearer and found one in the pro-market
ideology that came with the election of Ronald
Reagan in 1980 and the rise of Margaret Thatcher
the year before.
Starting in the United Kingdom, swiftly embraced
in the United States, and adopted in some shape
or form by key countries around the world,
control of the most important components of
the economy, or the “Commanding Heights” as
Vladimir Illyich Lenin put it, shifted from the state
to the private sector. Starting in the early 1980s,
a counterrevolution kicked in — policies were
crafted that favored the deregulation of domestic
industries, the privatization of state enterprises,
and the liberalization of international trade and
finance. Smaller government was the goal, entailing
lower tax rates and less regulation. Beginning in
the early 1980s and continuing through the 1990s, Globalization
free market capitalism was embraced around the blossomed over
world. In parallel, an old concept was reintroduced the last quarter
to explain the borderless, interconnected world century of the
whereby information, capital, goods, and people
20th century, as
moved unimpeded to virtually all corners of the
did the economic
planet: “globalization.” By the end of the 1980s,
primacy of the
hardly a day passed without “globalization” being
United States.
invoked by some business leader, politician, media
pundit, or academic as the most transforming event
of the time.
Against this backdrop, increased cross border
capital flows, greater trade and investment
liberalization, privatization of state enterprises,
and industry deregulation became guiding
economic norms the world over. The “visible
hand” of the government was downplayed for the
“invisible hand” of the markets. Privatization and
deregulation meant the hiving off of hundreds of
businesses that used to be government owned or
controlled. State-run airlines, telecommunication
companies, government-owned banks, utilities,
steel mills, and other companies were all put up
for sale around the world. In the process, a global
economy that had disintegrated in the face of two
world wars and an economic depression in the first
half of the century was once again reassembled.
Globalization blossomed over the last quarter
century of the 20th century, as did the economic
primacy of the United States. The two dynamics
were largely viewed as synonymous since it was
the United States that provided the template
of globalization — the embrace of free market
capitalism, industry deregulation, privatization,
Losing Control 5
 and unfettered global capital flows — to the rest of
the world. In many respects, globalization really
came in one size — America’s. And for the rest of
the world, following America’s lead was not that
difficult — not with the collapse of Communism
and the Soviet Union in the late 1980s and early
1990s, and the economic implosion of Japan.
A global Combined with these seismic shocks, the U.S.
consensus economy re-emerged as the envy of the world
emerged around over the “Roaring Nineties.” The Maestro, Federal
the notion that Reserve chairman Alan Greenspan, became an
international rock star thanks to his deft handling
the best way
of an economy that produced steady growth, low
to promote
inflation, and booming asset prices. So fine-tuned
growth and
was the U.S. economic growth engine that many
create prosperity on Wall Street talked of the “Goldilocks economy,”
was through or an economy not-too-hot, not-too-cold. Others
the embrace spoke of the “Great Moderation” — or a propitious
of free-market backdrop of steady economic growth, low inflation,
capitalism and its and infrequent recessions. This was quite different
central tenets. from the stagnant growth-cum-rising prices of the
1970s.
point towards greater economic integration for
all three parties involved, notably Nafta’s junior
member, Mexico. Operating under Deng Xiaoping
famous quip, “It doesn’t matter whether a cat is
black or white so long as it catches mice,” China’s
links with the global economy continued to expand
in the 1990s, and was capped off with China’s
entry into the World Trade Organization in 2001.
The newly liberated nations of central and eastern
Europe, meanwhile, rushed to enter the European
Union over the 1990s and the early 2000s as the
first steps towards greater global linkages. In many
emerging markets, policies that at one time favored
nationalism and state-control of the “Commanding
Heights” gave way to privatization, freer trade, and
unfettered capital flows. The global consensus was
that U.S.-led, free-market capitalism was the best
wealth-generating system ever concocted, with the
Anglo-Saxon model at the forefront.

As the United States, the underwriter of

globalization, reaped the massive rewards of more
liberalized global flows of trade, investment, and
finance, the rest of the world jumped quickly on the
bandwagon. A global consensus emerged around
the notion that the best way to promote growth
and create prosperity was through the embrace of
free-market capitalism and its central tenets. This
overriding assumption helped convince many
emerging markets to embrace and pursue the
“Made in America” brand of globalization.

Over the 1990s, the economic policies of China,

Mexico, Russia, Brazil, Poland, and a host of
other large developing nations centered largely
around how to further integrate their economies
with the global economy. Evident of this trend,
Mexico agreed to the North American Free Trade
Agreement (NAFTA) in 1994, a historic turning

6 Transatlantic Academy
3 When the Financial Plumbing Blew Up
“Wall Street got drunk.”
—President George W. Bush
Commenting on the financial crisis of September
2008 that brought to the global economy to its
knees, the Bank for International Settlements put
forth the following vivid comment: “The financial
system is the economy’s plumbing. And like the
plumbing in a house, it is taken for granted when it
works, but when it doesn’t, watch out.”3
Following this train of thought, the financial
plumbing of the United States blew up in
September 2008. The month that rocked and
shocked the global financial markets saw the U.S.
government put Fannie Mae and Freddie Mac into
conservatorship; the demise of Lehman Brothers as
it filed for Chapter 11 bankruptcy protection; the
bailout of insurance giant, A.I.G., by the Federal
Reserve at a cost that would reach over $170 billion;
and the conversion of Wall Street’s most respected
investment banks, Goldman Sachs and Morgan
Stanley, into commercial banks. All of the above
took place in a matter of weeks.
And the pain was not contained to the United
States. Across the Atlantic, things were not much
better. By the end of September 2008, HBOS,
Britain’s largest mortgage lender, had fallen under
the control of Lloyds TSB. U.K. mortgage lender
Bradford & Bingley had been nationalized, while
the Dutch banking and insurance company, Fortis,
required a capital injection from three European
governments. To stave off its demise, German
commercial property lender Hypo Real Estate had
to secure a government credit line. Also feeling the
effects of the crisis were Russian oil companies,
German capital goods manufacturers, Spanish
home owners, and various developing nations.
Many banks in the emerging markets had steered
3
 Bank for International Settlements, 79th Annual Report, June
29, 2009.
clear and avoided taking on the toxic subprime
loans exported from the United States; nevertheless,
in a tightly woven global economy, emerging
market assets imploded in value on the broad fears
that financial crisis in the United States would lead
to a global recession, a plunge in commodity prices,
and a flight to safer asset classes.
These fears, unfortunately, came to fruition. All The financial
totaled, the bursting of the U.S. housing bubble set plumbing of the
off a chain reaction of defaults and foreclosures United States
that would ultimately infect one part of the global blew up in
financial sector after another — prime mortgages,
September 2008.
commercial paper, bond insurers, auto loans,
corporate loans, credit cards, student loans, and
the sovereign debt of nations like Iceland, Latvia,
Greece, Ireland, and Portugal. It was easy credit
that triggered the great U.S. housing boom, with
the credit boom itself underpinned by the global
savings glut, an extended period of very easy
monetary policies, lax regulation, and financial
innovation — all of which increased risk taking and
leverage ratios among banks, households, and even
governments.
As the global credit markets froze in September
2008, the fallout from the U.S.-led financial crisis
was swift and widespread. Trade-dependent
developed nations like Germany and Japan were
brutally hit by a downturn in export demand, which
triggered a downturn in capital investment and new
hiring. As the global credit crisis intensified, the
high-flying residential and commercial property
markets of the United Kingdom, Spain, and Ireland
collapsed, taking their respective economies down
with them. With their earnings impaired by one of
the worst financial crises in history, large and small
corporations in the developed nations slashed their
payrolls and suspended capital investment projects,
adding even more pressure on to staggered global
economy.
Losing Control 7
 Not surprisingly, it did not take long for the global
fallout to reach the developing nations. Indeed, a
steep decline in global demand for exports, along
with a plunge in commodity prices and capital
inflows left many developing nations battered and
bruised. By the end of 2008, many developing
nations were challenged by depreciating currencies,
As the second plunging exports, soaring external financing costs,
decade of the 21st and swooning equity prices. The debate about
century dawned, global “decoupling” had ended — the painful and
globalization inconvenient truth was that a world economy
was being wired together by unfettered global capital flows,
rethought and which supported ever-rising levels of trade and
investment, advanced or declined together. No
America’s global
nation escaped the effects of the global financial
dominance was
crisis-cum-global recession that shook the world at
in a relative and
the end of the first decade of the 21st century.
absolute decline.
Not even the high-flying Chinese economy escaped
from the wreckage. While China’s economy grew
9.2 percent in 2009, the annual rate of growth was
well below the 13 percent rate of growth achieved
in 2007. India and Indonesia also managed positive
growth in 2009, although collectively, the total
output of the developing nations rose by just 1.2
percent for the year, down sharply from 8.1 percent
in 2007, one year before the crisis struck.
It was only through massive government
intervention that the global financial panic of late
2008 was arrested. In the frantic months after the
shocking events of September, the world’s central
banks slashed interest rates and undertook a
number of unconventional measures to reliquefy
and recapitalize the global capital markets.
Concurrently, fiscal policies around the world
became hyper-expansionary as governments
rushed to stave off economic armegeddon. Albeit
reluctantly, the U.S. Congress approved a $700
billion bank bailout package in late 2008, which
was followed by a $787 billion stimulus package
shortly after President Obama was sworn into
office in January 2009. Even before Mr. Obama
8 Transatlantic Academy
assumed the Presidency, the U.S. Congress,
Department of Treasury, and the Federal Reserve
threw whatever resources available at the badly
impaired U.S. economy. Similar frantic moves
were pursued and implemented around the world.
The European Union, Japan, China, South Korea,
Brazil — policymakers in all of these nations went
into overdrive to stave off a global depression by
boosting public sector spending and increasing
the availability of credit. Many central banks cut
interest rates to virtually zero. Rarely had the
world ever mobilized in such a concerted and
synchronized effort to fight a common cause — the
great financial crisis of 2008.
The extraordinary dose of fiscal and monetary
medicine worked. Despite being labeled a once-
in-a-century event by the International Monetary
Fund, the financial crisis of 2008 did not lead to
a global depression as many prominent analysts
feared. Yet the ensuing global recession was deep
and nasty by almost any measurement, and even
with the global economy in recovery mode in 2009,
no one was ready to claim “Mission Accomplished.”
And no one — notably the developing nations —
was ready to go back to “business as usual.”
Sensing a shift towards a new era, a grim
recognition emerged among the policy elites at
the annual World Economic Forum in Davos,
Switzerland, in January 2010 that globalization had
largely failed, that banks needed more regulation,
and that states needed to be more involved in
running their respective economies. Against this
backdrop, as the second decade of the 21st century
dawned, globalization was being rethought and
America’s global dominance was in a relative and
absolute decline — both casualties of the U.S.-led
financial crisis of 2008.
In one critical sense, the financial crisis of 2008
was a circuit breaker — the global financial
meltdown broke the supposed inexorable advance
of free-market capitalism, throttled the primacy
and influence of global finance, and undermined
the economic superpower status of the United
States. In another sense, the crisis accelerated a
number of key secular trends that were already
in motion before the crisis struck. The relative
economic decline of the developed nations,
the rising influence of the emerging markets in
general and China in particular, the rise of state-
owned enterprises — these seminal trends were
fast-forwarded by the crisis and have, in turn,
accelerated the move towards a less U.S.-centric,
more multi-polar world.

Losing Control 9
 The Rise of the “Rest” and the
4 Challenges to the Transatlantic
Partnership
“The next 20 years of transition toward a new
international system are fraught with risk.”
—Global Trends 2025, National Intelligence
Council
For the United States and Europe, the unfolding
multi-polar world is potholed with numerous risks
and challenges. Adding to the heightened sense
of uncertainty, the transatlantic partnership is no
longer in control of the global economy and the
rest of the world knows it. The days are past when
the developed nations dictated the global economic
agenda, dominated multilateral institutions, and
determined the key forces influencing global
economic activity. To paraphrase China’s President
Hu Jintao, the students are no longer willing to take
orders from the teachers.
Developing Translation: the policies and structures of the past
nations are are unacceptable to the developing nations —
poised to flex notably China — who feel the time is long gone
when the rich led and the poor followed. The
their new muscle
financial crisis of 2008 and ensuing global recession
and prepared
has left the United States and Europe morally and
to challenge financial bankrupt. In contrast, confident and
the status quo emboldened, and sensing that their time has come,
constructed by the developing nations are poised to flex their new
West, notably the muscle and prepared to challenge the status quo
United States. constructed by the West, notably the United States.
Giving rise to the new-found confidence of the
Rest is the fact that it is the developing nations that
increasingly control the world’s critical inputs —
natural resources, capital, and labor. Early in the
21st century, the developing nations are not only
making more demands on the world’s physical
infrastructure, but also find themselves in control
of the world’s major supplies of critical inputs like
10 Transatlantic Academy
oil, rare earth minerals, copper, coal, and a variety
of other commodities.
On the demand side of the equation, the West
has not recognized the critical fact that it is now
in direct competition with the Rest for natural
resources. In other words, the long-standing
monopoly the West has enjoyed in devouring
the world’s natural resources is over. In years
and decades past, as long as consumers in the
developing nations remained poor and lacked the
income to purchase a computer or car, or afford a
good meal, the West did not have to compete with
the developing nations for oil, copper, soybeans,
and other commodities. For much of the post-
Cold War era, the equation was rather simple: the
developing nations produced commodities, the
West consumed them. However, The Economist
notes, “During the past 15 years, a new middle class
has sprung up in emerging markets, producing a
silent revolution in human affairs — a revolution of
wealth-creation and new aspirations.”4
How big is this cohort? According to the World
Bank, the middle class of the developing nations is
relatively sizeable and poised to expand rapidly over
the next few decades. This group already numbers
some 400 million people, according to the Bank, a
figure roughly one-third larger than the entire U.S.
population. More importantly, the middle class of
the developing nations is expected to triple in size
over the next two decades, increasing to 1.2 billion
shoppers by 2030. By then, developing nations
will account for 93 percent of the global middle
class, up from 56 percent in 2000.5 This estimate
suggests ever rising levels of consumption from the
developing nations, yet even today, the emerging
market consumer outspends the U.S. consumer. In
2010, for instance, the United States accounted for
4
 “Two Billion More Bourgeois,” The Economist, February 14,
2009.
5
 World Bank, Global Economic Prospects, 2009, Washington DC
 Control of Key Commodities: Developing vs. Developed
(Share of World Production)

1999 2009 1999 2009

Oil Wheat
Developing 75.9 81.1 Developing 69.3 73.1
Developed 24.1 18.9 Developed 30.7 26.9
Natural Gas Soybeans
Developing 57.1 64.5 Developing 53.3 58.4
Developed 42.9 35.5 Developed 46.7 41.6
Coal Geothermal*
Developing 62.4 75.1 Developing 48.9 46.7
Developed 37.6 24.9 Developed 51.1 53.1
In a seminal
Iron Ore Solar
shift, global
Developing 73.2 80.8 Developing 51.1 87 consumption is
Developed 26.8 19.2 Developed 48.9 13 tilting towards the
Bauxite Wind developing nations
Developing 61.9 67.6 Developing 11.5 27.9 and away from
Developed 38.1 32.4 Developed 88.5 72.1 the United States
Copper Ethanol and the West.
Developing 76.6 83.5 Developing 69.2 41.5
Developed 23.4 16.5 Developed 30.8 58.5
Palladium & Platinum Sources: BP Statistical Review 2010, U.S. Geological
Developing 92.2 91.9 Survey, United Nations Food & Agriculture Organization
*2000 (latest available)
Developed 7.8 8.1

roughly 27 percent of global consumption versus
a 34 percent share in the emerging markets. Eight
years ago, the percentages were roughly reversed —
that is when the U.S. consumer was the most potent
spending machine on earth and when the United
States, with a population less than 5 percent of the
global total, accounted for nearly one-fifth of global
imports in 2000. By 2009, America’s share had
dropped to 13 percent.
Times have changed, in other words. Where in the
past, factory workers in Asia would trudge off to
work on Saturday morning, today they are more
likely to head for the local shopping malls for a day
of socializing and shopping. Granted, those trolling
the shopping centers on the weekends in the
emerging markets are the lucky few relative to the
rest of the general population. But the size and scale
of these urban buyers, and their pent-up demand
for electronic goods, appliances, automobiles,
skin-care products, clothing, and other goods
has reached the point where emerging market
consumers are increasingly setting global trends,
leading in global fashion, and driving global sales
in a number of industries. In a seminal shift, global
consumption is titling towards the developing

Losing Control 11
 nations and away from the United States and the
West.
What is now While the West is condemned to a prolonged
good for China is period of thrift and austerity, conspicuous
good for General consumption is rapidly becoming the rage in places
Motors, a market like Brazil, India, Turkey, and other emerging
leader in China. markets. Emblematic of this trend, China’s
automobile market is now larger than America’s.
Against this backdrop, what is now good for China
is good for General Motors, a market leader in
China. GM’s automobile sales to China soared to
over 1.8 million vehicles in 2009 and expanded by
nearly 30 percent again last year. Other transatlantic
multinationals — capital goods manufacturers,
technology providers, global consumer brand
leaders, and luxury goods providers — have all
enjoyed robust demand from the emerging markets
over the past year, with the likes of China, Russia,
Turkey, and other emerging markets becoming a
critical source of earnings for many companies.
But while some companies stand to benefit from
surging consumer demand in the emerging nations,
the effects on the macro balance sheet of both the
United States and Europe is more problematic.
For instance, while booming auto sales in the
emerging markets is a blessing for U.S. automobile
manufacturers, the same dynamic is a curse for the
average American. The more consumers in China,
Turkey, Egypt, and other countries take to the road
in their shiny new cars, the more upward pressure
on world oil prices and the higher the cost of oil for
an energy-dependent United States.
Most average Americans are oblivious to the rising
middle classes of the developing nations and what
this new consuming cohort means for the world’s
already stretched natural resource base. They have
yet to recognize that as the new global consuming
class adopts and acquires Western life styles —
moves from the village to the city, works in air-
conditioned offices, drives to work, consumes more
12 Transatlantic Academy
protein — the more the demand and the higher
the prices for energy, water, agricultural goods, and
other natural resources.
In particular, the transatlantic energy future
remains fraught with risk. One danger lies with the
global concentration of oil supplies. More and more
of the world’s proven oil reserves are controlled by
states and state-owned companies whose interests
are not aligned with either the United States or
Europe. While ExxonMobil, Chevron, Total, and
British Petroleum rank as some of the largest
energy firms in the United States and Europe, these
Western oil giants, in terms of proven reserves, pale
in comparison to Gazprom of Russia, Sinopec and
PetroChina of China, Petronas of Malaysia, and the
Middle East giants that set atop a huge share of the
world’s proven oil reserves. Today and in the future,
“Big Oil” has a whole different meaning.
It is proven reserves that matter in the energy
patch — and that said, more than 90 percent of
the world’s proven oil reserves are held by national
oil companies that are either partially or fully
controlled by governments. Energy is too big an
industry, too profitable a sector to be left to the
private sector in nations like Saudi Arabia, Mexico,
Venezuela, Malaysia, Kuwait, and others, who,
over the past few years, have restricted the access
of its oil industry to Western oil companies. In a
stunning shift in energy power, privately owned
multinationals now produce just ten percent of
the world’s oil and hold just three percent of its
reserves.
Another risk to America’s energy future lies on the
demand side of the equation and the attendant rise
in wealth and consumption in Asia. The United
States and Europe should not only be worried about
their overriding dependence on foreign oil — they
should also be concerned about the stunning
 Asia 's Insatiable Thirst for Oil Asia, in other words, is
(Percent of global total) basically running on empty
35 — even after taking into
1999 2009 account efforts at energy
30 31.1
conservation and the
25
27.3 development of alternative
energy sources. The
20 region’s share of global oil
15
production has slipped over
the past decade, sliding from
10
10.4 10.0
a share of 10.4 percent in
1999 to 10 percent in 2009.
5
3.7
Asia produces plenty of
3.2
0 things, but unfortunately
Proven Oil reserves Production Consumption
oil is not one of them. At current
Source: British Petroleum (BP Statistical Review of World Energy July 2010)
Data through December 31, 2009 Barring the discovery of production
significant new oil fields, the rates, China’s
disconnect between Asia’s inexorable rise in oil oil reserves will
region’s contribution to global oil production is in
consumption on the one hand versus the region’s
a secular decline. That is hardly an encouraging be exhausted in
paltry oil reserves on the other.
trend for the West since Asia’s secular decline in just 11 years.
A region that accounts for over 30 percent of global production comes against a backdrop of soaring
output, is home to half of the world’s population, secular demand. Fed by rapid industrialization
is the industrial workhorse of the global economy, and urbanization, along with soaring automobile
and is in the midst of an urban boom — in light of ownership, Asia’s oil consumption soared by 25
all this, Asia’s proven oil reserves are a proverbial percent between 1999 and 2009; over the same
drop in the bucket. The region’s proven reserves period, oil production rose just 5.5 percent in Asia,
accounted for just 3.2 percent of the global total while proven oil reserves increased 5.6 percent.
at the end of 2009. That is down from 3.7 percent This is the oil disconnect that will ultimately effect
a decade ago, a decline due in large part to falling U.S. consumers.
reserves in China, the region’s largest oil producer.
Oil consumption in China nearly doubled in the
The mainland’s reserves totaled 14.8 billion barrels
past decade, rising from 4.5 million barrels per day
at the end of 2009, a 7.5 percent decline from two
in 1999 to nearly 9 million in 2009. Oil production,
decades ago.6 At current production rates, China’s
however, rose just 18 percent over the same period;
oil reserves will be exhausted in just 11 years. As for
the nation’s production in 2009 was less than half
all of Asia, the region’s reserves-to-production ratio
the nation’s total consumption, a gap that has forced
(an indicator of how long proven reserves would
China to step up its overseas search for oil. And
last at current production rates) is slightly higher
Beijing has done just that over the past decade,
than China’s, at 14.5 years.
emerging as a key investor, donor, and creditor
in resource-rich nations like Nigeria, Angola,
Argentina, Venezuela, Equatorial Guinea, Gabon,

6
 BP Statistical Review of World Energy, 2010.

Losing Control 13
 the Republic of Congo, Afghanistan, and a host
of other emerging nations. Access to oil lies at the
heart of most of these deals, although many projects
are bundled around Chinese foreign aid, which
typically includes soft loans, trade agreements, arms
sales, debt forgiveness, and massive construction
projects and aid packages.
Simply put, the All of the items just mentioned are carrots the
debt is in the West, notably the United States, have long used to
West, the savings curry favor in developing nations deemed geo-
in the East. strategically important to the West. The game,
however, is now being played by China and others
like India, Brazil, and Russia to the consternation
and frustration of the United States and Europe.
When it comes to carving out geo-strategic spheres
of influence in places like Africa and central Asia,
there are new players in town: notably China. A
global race for resources is underway.
“Authoritarian governments,” according to
The Economist, “are using their money to buy
influence abroad. Sometimes the money comes as a
commercial loan; sometimes, as a grant; frequently,
as both. These flows are changing the business of
aid, undermining attempts by Western countries to
improve their programs and encouraging recipients
to play donors off against each other.”7
Asia’s other giant, India, has embarked on similar
mission to China’s, increasingly scouring the world
for stable energy supplies. In a country where over
two-thirds of the population is under the age of
35, India’s oil consumption is just 37 percent of
China. This gap, no doubt, will likely narrow in
the future as more and more Indian consumers
embrace cars and as more people migrate from the
farm to the cities. The end result: even more stress
and strain on the world’s oil infrastructure. Hence,
on the energy front, the transatlantic economy
confronts the double threat of more oil being
7
 “An (Iron) Fistful of Help,” The Economist, June 6, 2009.
14 Transatlantic Academy
concentrated and controlled by state-owned firms
whose interests are not aligned with America and
by soaring demand from Asia, given the region’s
rapidly evolving consumer base juxtaposed against
its empty gas tank.
And the search for resources goes beyond oil.
Copper, silver, iron ore, meat, corn, wheat,
soybeans — the future price of these commodities
and others will increasingly reflect the rising per
capita incomes and attendant jump in consumption
among consumers in developing nations. Thanks
to the latter, between now and 2030, worldwide
demand for food is expected to rise by 50 percent
and demand for meat will jump 85 percent between
now and 2030, according to the World Bank. This
will leave U.S. and European consumers paying
even higher prices for commodities barring a huge
jump in supplies. Rising water scarcity is another
critical issue, one that directly affects the prices of
food, industrial inputs, real estate, and a host of
other products.
In a seminal shift, then, prices paid for world
resources will increasingly be set by forces outside
the transatlantic economy, leaving Western
consumers in the unusual position of being price
takers, not price setters, subject to the whims of
suppliers and consumers in the emerging markets.
The New Financial Power Brokers
Capital is yet another critical input increasingly
in possession of the Rest. Indeed, towards the
end of 2010, nearly 80 percent of the world’s total
foreign exchange reserves — in effect, the globe’s
excess savings — were in the vaults of developing
nations. That equates to roughly $7 trillion, a
figure that includes China’s $2.8 trillion in reserves,
accumulated largely by running a massive trade
surplus with the United States, and over $300
billion among Middle East oil producers, obtained
with the help of the secular run up in oil prices.
These variables, coupled with the surge in debt Ditto for sovereign wealth funds (SWF) — or
among the developed nations have triggered a government-controlled investment firms whose
stunning shift in global financial power. Simply put, numbers and pools of capital have increased
the debt is in the West, the savings in the East, or over the past decade. The size of SWFs, their
the developing nations. The poor are “rich,” the rich motivations for investing (economic or political?),
“poor.” their lack of transparency, and the potential for In that China
these funds to seek control of strategic assets in the now owns more
In this new world, the U.S. Federal Reserve United States and Europe — all of these elements than $1 trillion in
chairman has competition when it comes lead many in Washington to conclude before the U.S. Treasuries,
influencing the U.S. and global capital markets. If financial crisis that sovereign wealth funds were Communist
central bankers in China and the Middle East are a clear and present danger to the West. At the China now holds
not comfortable or confident in Mr. Bernanke’s height of SWF paranoia in 2005 and 2006, the
financial stewardship, they can either sell their U.S.
considerable
U.S. Congress considered proposals that ranged financial sway over
dollar holdings or refuse to buy more U.S. securities from establishing a Code of Conduct for SWFs to
at any given time, greatly complicating Mr. capitalist America.
formalizing standards that would result in greater
Bernanke’s life. In that China is now owns over $1 transparency, better corporate governance, and
trillion in U.S. Treasuries, Communist China now clearer accounting rules. Some on Capitol Hill
holds considerable financial sway over capitalist even broached the idea of establishing behavioral
America. In the aggregate, roughly half of all guidelines for SWFs.
marketable U.S. Treasuries are owned by foreigners.
In the end, where the relatively unknown central Then the financial crisis struck in 2008. Almost
bankers of the developing nations decide to invest overnight, SWFs suddenly became White Knights
their massive savings, and in what particular assets, — the only entities around with the cash and
directly impacts the credit markets of both Europe financial wherewithal to rush to the aid of battered
and the United States every single day. Western financial institutions. And rush they
did — with the sovereign
Developing Countries’ Share of World International Reserves
(Percent of Global Total) wealth funds of Qatar, Abu
80%
Dhabi, Singapore, Kuwait,
and South Korea pumping
75%
billions of dollars into U.S.
70%
banks between mid-2007
65%
and late 2008. For their
60%
efforts, however, they
55%
suffered huge losses and
50%
have subsequently redirected
45% their investment into more
40% tangible things like oil
35% and gas fields, agriculture
30% and commodity-related
25% goods. The funds are also
thought to have become
1 9 90 1 9 91 1 9 92 1 9 93 1 9 94 1 9 95 1 9 96 1 9 97 1 9 98 1 9 99 2 0 00 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 10

Source: International Monetary Fund, International Financial Statistics

Data through September 30, 2010 more diversified since the

Losing Control 15
 China's Holdings of U.S. Treasuries More highly skilled workers
(Billions of $) that would have done
1,200 virtually anything in the
past to reach the shores of
1,000 the United States are staying
home. Meanwhile, talented
800 immigrants in the United
States are returning home,
600 prompting some to warn
of “reverse brain drain”
400 in the United States, the
U.K., and other Western
200 nations. Behind both of
these trends are a number
0 of factors, notably the global
00 01 02 03 04 05 06 07 08 09 10
Sources: U.S. Treasury
diffusion of research and
development, with more and
Largely overlooked financial crisis and more populated with such assets more of the world’s top-
as foreign currencies, real estate, foreign bonds, notch research now conducted in the hyper-growth
by many in the
precious metals, and equities. markets of China and India. Microsoft, Intel,
West, both India
Google, IBM, and General Electric are just a few
and China are high tech leaders that have opened R&D centers in
The Coming Battle for Talent
actively courting India over the past decade, keeping local talent at
their fellow Consumers, natural resources, capital — most of home, while luring overseas workers back home.
country men the critical inputs to economic growth now lie
and women to outside the control of the transatlantic economy, a Largely overlooked by many in the West, both
return home. turn that has reduced the global influence of both India and China are actively courting their fellow
the United States and Europe. In the future, both country men and women to return home, hoping
parties will have to compete for these resources, in to lure these migrating brains by doling out
addition to another input: skilled labor. grants, cash awards, lab equipment, apartments,
and other goodies. Whether they succeed or not
The war for global talent is underway, with the directly matters to the United States since skilled
likes of China, India, Brazil, and others increasingly immigrants have been key drivers of America’s
drawing from a dwindling pool of globally skilled high tech industry for decades. According to
labor at the expense of the United States and the research by Vivek Wadhwa, immigrant-founded
West. America is losing its first-mover advantage tech companies generated $52 billion in revenue
when it comes to attracting the world’s best and and employed 450,000 workers in 2005.8 In terms
brightest. Even though Silicon Valley and America’s of creating new companies, immigrants founded
world-class university system continue to attract 35 percent of the startups in the semiconductor
some of the world’s most talented scientists and
engineers, the draw of America is not as powerful
8
 Vivek Wadhwa, “A Reverse Brain Drain,” Issues in Science and
as it was before. Technology, Summer 2009 and “Is the U.S. Experiencing Its
First Brain Drain?” New America Media, March 31, 2009.

16 Transatlantic Academy
industry, according to Wadhwa. In computers/
communications and software, the figures were 31.7
percent and 27.9 percent, respectively, underscoring
the phenomenal success of immigrants in driving
U.S. technological innovation.
In the future, neither the United States nor Europe
can take for granted that they have first dibs on the
world’s skilled labor pool. Numerous opportunities
abound for the world’s best and brightest, and the
West is increasingly just one among others vying
for the world’s most talented workers. What’s
more, the looming war for talent hardly comes at
a propitious time for the United States and Europe
given both parties’ aging workforce. In the United
States, an aging labor force coupled with the
deteriorating quality of public education and dearth
of U.S- born students taking advanced degrees
in science and engineering is a particular cause
for concern. Regarding the latter point, during
the 2004-05 academic year, roughly 60 percent of
engineering doctoral students and 40 percent of
master’s degree students were foreign nationals; in
addition, non-U.S. citizens comprised the bulk of
the U.S. graduate student population in science,
technology, engineering, and medicine.
That is hardly an encouraging sign for the U.S.
technology sector in particular, or for the U.S.
manufacturing base that is fast running out of
skilled manufacturing workers. The same issue
confronts Germany, where skilled labor shortages
have been a pressing issue for the past few years.
Looking ahead, the war for talent could very well
determine and reshape the global landscape for
business innovation. The nation with the most
talent has a leg up on others when it comes to
driving innovation and creating new industry
standards. For decades, these tasks fell to the
developed nations, although the past will not be
prologue. The skilled labor set of the developing
nations is rapidly being upgraded, with The
Economist recently noting that “the rich world is
losing its leadership in the sort of breakthrough
ideas that transform industries.”
Going Global:
The Hunted are Now the Hunters
Finally, yet another challenge to the transatlantic Cross-border
partnership lies with the global focus and outward mergers and
push of multinationals domiciled in the developing acquisitions used
nations. As mentioned above, shopping has become
to be the exclusive
a favorite pastime for consumers in the developing
preserve of the
nations. But they are not alone—also acquiring a
West, but that is
taste for shopping, notably foreign shopping, are
large corporations headquartered in Mexico, Brazil, rapidly changing.
China, India, and other emerging markets. In other
words, cross-border mergers and acquisitions used
to be the exclusive preserve of the West, but that is
rapidly changing.
Global mergers and acquisitions have been the
domain of multinationals from the developed
nations. Well-endowed with capital and possessing
superior brands and extensive logistics networks,
Western multinationals have long been the
global hunters, or the commercial entities with
the wherewithal to purchase foreign assets
or companies via cross-border mergers and
acquisitions. For decades, then, global mergers
and acquisitions (M&A) was largely a corporate
strategy deployed by Western multinationals with
the deep pockets, the technological capabilities, and
the managerial expertise to venture far from home.
And a favorite hunting ground for these companies
has been resource-rich developing nations and a
handful of other emerging markets.
For decades, the hunted (firms from the developing
nations) were no match for the hunters since they
lacked the capital, management expertise, brands,
and other core competencies to effectively compete
beyond their home market. In some cases, capital
Losing Control 17
 controls and other government restrictions keep
companies firmly rooted in local markets.
Emerging global Times, however, have changed. Global deal-making
giants have joined is but another lost monopoly of the West. Aspiring
multinationals from the developing nations are not
the fray in hunting
only becoming more aggressive bidders for assets in
for global assets.
other emerging markets — crowding out Western
multinationals from acquiring oil fields in central
Asia, telecommunication companies in Africa, and
banks in Argentina, for instance. These same firms
have boldly set their strategic sites on assets and
popular brands in the United States and Europe,
creating, in the process, a whole new competitive
landscape for many Western firms.
In the past few years, Saudi Basic Industries
Corporation has bought GE Plastics; Lenovo
of China snapped up IBM’s personal computer
business; Brazilian mining company Vale bought
Canadian nickel miner Inco and the Australian
mining company AMCI; and the South African
firm Suzlon was part of a deal that acquired
Germany’s Repower. Meanwhile, Chinese banks
have bought large stakes in U.S. and British banks.
Going Global: Developing Nations Rising Penchant for Deal-Making
(Percent)
40
35 Developing Countries (ex-China) China
30
25
20
15
10
5 For many U.S. states and
0
99 00 01 02 03 04 05
Source: Bloomberg
*Data through January 13, 2011
18 Transatlantic Academy
Russian energy companies have purchased strategic
assets in Europe and Australia, while firms from
the Middle East have taken control of companies in
the U.K. and the United States. India’s Tata Motors
is now the proud owner of Land Rover and Jagaur.
Geely Motors of China owns Volvo, the one-time
Swedish automobile manufacturer.
Taking all of the above, the emerging global giants
have joined the fray in hunting for global assets,
spending nearly $650 billion in foreign mergers and
acquisitions in 2007, the peak year of global M&A
activity. That compares with a decade-earlier total
of just $60 billion. Then, the developing nations
accounted for less than 5 percent of the global total;
their global share jumped to nearly 35 percent in
2010. Where cross-border M&A deals initiated
by the developing nations have traditionally been
directed at other developing nations, it is the
developed nations that are increasingly in the
cross-hairs of corporate entities from South Korea,
Mexico, China, and others for a number of reasons.
The appeal of the developed markets is manifold
— access to global brands, cutting edge technology,
wealthy consumers, and
distribution channels are all
key variables driving more
M&A deals from the Rest to
the West. And these same
variables are also spurring
on many emerging market
corporations to invest
directly in the United States,
building out their U.S.-
based operations organically
or through green field
operations.
local communities, that
means more new jobs, new
06 07 08 09 10 11*
taxes, and more economic
growth. At the national
level, however, the risk is that rising investment
from the developing nations — notably from state-
owned companies — will ignite another backlash
on Capitol Hill as witnessed in 2005 and again
in early 2006. An uproar followed when China
National Offshore Oil Corporation proposed to buy
U.S. oil company, Unocal, in 2005. The offer was
pulled after intense U.S. opposition related national
security concerns. A year later, another deal was
torpedoed over U.S. opposition to the Dubai Port
deal, a venture that would have granted control of
some U.S. ports to a state-owned company from
the United Arab Emirates. Both deals were vocally
opposed by various constituents in the United
States and served as a warning shot to emerging
market corporations to tread carefully in the United
States.
Yet even with this shot across the bow, emerging
nations will continue to eye U.S. and European
investment opportunities for no other reason
than when it comes to having an in-country
presence in the transatlantic economy, still one
of the wealthiest markets in the world, most
globally-inspired companies from the developing
nations are woefully unrepresented. Their U.S.
investment presence is nominal — in fact, of total
foreign direct investment stock of $2.3 trillion in
the United States in 2009, the developing nations
accounted for only roughly 8 percent. In other
words, even after inflows from the developing
Emerging nations
nations to the United States rose more than seven-
will continue
fold in the first decade of this century from the
prior decade, their investment position in the to eye U.S.
United States remains minisucle. To this point, total and European
investment of the Netherlands in the United States investment
over the last decade — roughly $200 billion — was opportunities.
greater than the total investment of the developing
nations. Hence, the rush among emerging market
corporations to catch up in the developed markets
of the United States, Europe, and, for that matter,
even Japan. They are woefully underrepresented in
the West and want to expand their market presence
via foreign investment, not just through trade. The
emerging market corporate giants are coming —
not content to just trade anymore with the West,
but intent on investing and competing locally in
South Carolina, California, Texas, and elsewhere.
Losing Control 19
 5 The Next Phase of Globalization —
Made in China, Turkey, Brazil, Russia….
“Today, the 5.6 billion people who live outside the
Western universe will no longer accept decisions
made on their behalf in Western capitals.
—Kishore Mahbubani, author, “The New Asian
Hemisphere”
In the multipolar The world has changed — and yet the change
afoot could result in a more dynamic and inclusive
world that is
phase of globalization. We have reached the end of
unfolding, the Rest
globalization as determined and designed by the
will set the tempo
United States but not the end of globalization itself
of global growth if America, Europe, and the West in general can
and demand a embrace a new global configuration with different
greater say in characteristics — Chinese, Indian, Brazilian,
global governance. Egyptian, and many others. This represents a
significant challenge to a partnership that has long
called the shots for the world economy, and for a
nation, the United States, that thinks of itself as
“indispensible” and is long accustomed to sitting
at the head of the table, giving orders, not taking
them.
And the challenges in front of China, India,
Russia, and other key developing nations are no
less daunting. Having arrived on the global stage,
are these nations ready to assume the mantle of
global leadership? Will they be able and willing
to subordinate national self-interests for the good
of the global commons when it comes to tackling
weighty global issues like climate change, the
proliferation of nuclear weapons, and aid and
development for the world’s poorest nations? The
answers to these questions are unclear. What is
clear is that globalization is likely to survive but
take on and assume more non-U.S. characteristics.
The globalization of the late 20th century was
largely driven and dictated by the West. Under
this framework, globalization was only nominally
“global” given that cross-border flows of trade,
capital and people pivoted on the United States and
the developed nations, namely developed Europe.
In the pre-crisis world, the bulk of foreign direct
20 Transatlantic Academy
investment flowed to and from the developed
nations, with a few outliers like China. Global
mergers and acquisitions were the exclusive
preserve of the rich nations. Trade and investment
ties between the developing nations were shallow
and underdeveloped, leaving many countries like
Brazil, Turkey, Poland, and Mexico reliant on
the United States and Europe for export growth.
Companies from the developing nations were
mainly traders — dependent on delivering goods to
foreign customers through exports. Multinationals
from the West were largely investors, relying on
in-country foreign affiliates to delivered goods and
services to overseas markets. Meanwhile, the cross-
border flow of people was largely one-way — from
poor to rich nations. World commodity prices were
set by the West; meanwhile, the world’s best minds
only wanted to migrate to the United States and
Europe.
In the years ahead, the axis of the global economy
will increasingly pivot around the developing
nations, with China front and center. In the multi-
polar world that is unfolding, the Rest will set the
tempo of global growth and demand a greater say
in global governance. The pace of cross border
trade and investment among the developing
nations will accelerate. Traditional foreign direct
investment flows will be altered, with more
investment emanating from the developing nations
and flowing to developed and developing nations
alike. Global M&A will increasingly bear the
hallmark of developing nations as new emerging
corporate giants from Brazil, Mexico, India, and
other nations increase their global footprint. Once
imitators, the developing nations are poised to
emerge as technological innovators. While the
transatlantic economy remains a beacon of hope
and a primary destination for many of the world’s
workers, explosive growth in India, China, and a
host of other developing nations will entice more
of the best and brightest to return home or not to
leave in the first place. The flow of global talent is
shifting, albeit very slowly. Africa, long the “lost
continent,” is rapidly being integrated into the
global economy thanks to foreign investment from
the Rest, namely China, plugging the “last frontier”
into the world economy. Meanwhile, Turkey, an
emerging power unto itself, is pulling more of the
troubled Middle East into the global economy
through more regional trade and investment deals.
Many in the United States and Europe see all of
the above as a threat. This is not surprising — not
with the U.S. unemployment rate hovering above
9 percent and with much of Europe in the grips
of austerity. The status quo is in flux. Change is in
the offing: the transatlantic partnership has lost its
ability to impose its economic will on the rest of the
world, its credibility and ability to lead devalued by
the U.S.-led financial meltdown of 2008. The West’s
lack of confidence in the future is palpable.
It does not, however, have to end badly for
the transatlantic partnership. If the West and
the Rest can come to recognize their mutual
interdependence and move down the path of
mutual cooperation, the
future could very well be a Developing Countries Share of World Imports and Exports
(Percent of Global Total)
win-win for both parties as
opposed to zero-sum game. 45%
becoming real global stakeholders, a new era of
globalization is possible.
The Urgent Task of Re-Fortifying the West
Globalization cannot re-emerge stronger and more Globalization
inclusive without the participation and support cannot re-emerge
of the transatlantic partnership. Although the stronger and more
brand of the West has been devalued, and while inclusive without
the collective global influence of the United States, the participation
Europe, and Japan has been eroded by the financial
and support of
crisis of 2008, the West has to figure prominently
the transatlantic
in the next phase of globalization. By its sheer
economic size, the transatlantic economy still
partnership.
matters, yet in order for globalization to work in
the future, the United States and Europe must re-
energize the transatlantic partnership, a partnership
that remains vital to the future growth and
management of the global economy.
That said, many key issues threaten to divide the
transatlantic relationship, with the U.S.-led wars
in the Middle East, differences over global climate
change, and the scope and scale of financial reform
chief among them. Yet a productive relationship

43% Imports Exports

Against this backdrop,
41%
it is not impossible to
39%
envision the full bloom
of globalization — with 37%

the world economy more 35%

integrated and interwoven 33%

than ever before. With an
31%
effective G20 governing the
29%
global economy, with the
United States and Europe 27%

adapting to their diminished 25%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
role in the world, and with
key developing nations Source: International Monetary Fund, Direction of Trade Statistics

Losing Control 21
 between the United States and Europe is required
if the world is going to stand any chance of
maintaining a free and open trading environment,
stop the proliferation of nuclear weapons, answer
the challenge of global climate change, and assist in
raising millions of people out of poverty.
The mentality The United States and Europe must work together
“they win, we to forge a more predictable and less messy multi-
polar world. Jointly, the United States and Europe
lose” needs to be
should take the lead in restructuring existing
replaced with a
multilateral institutions like the IMF and the
more enlightened
World Bank, giving more votes and chairs at the
debate about the table to the developing nations. They should also
risks and rewards breathe new life into the Doha trading round,
of participating and collectively push on the frontier of renewable
in the new energies, and wherever possible, enlist the support
global economy and participation of India, China, Russia, and other
unfolding. emerging market stakeholders in such endeavors.
The more the United States and Europe work
together in tackling the pressing economic issues
of our times, the more respect the Rest will have
for the West, and by extension, the greater their
willingness to cooperate with the United States and
Europe.
Critically, the United States and Europe must
also get their own economic houses in order,
engendering confidence not only between
themselves but also among the developing nations.
22 Transatlantic Academy
The best way for the West to regain its credibility
with the Rest is by implementing necessary but
painful economic reforms at home. For the United
States, that means reducing the federal budget
deficit to more manageable levels and reducing
the nation’s dependence on foreign capital and
oil. For Europe, that means fiscal restraint, along
with measures that create a more flexible and
competitive labor market.
Of particularly importance, leaders in both the
United States and Europe need to work harder in
educating their respective populations/constituents
of the potential benefits of greater cooperation
and coordination with the emerging markets. The
mentality “they win, we lose” needs to be replaced
with a more enlightened debate about the risks and
rewards of participating in the new global economy
unfolding. The political courage must be mustered
to tell citizens the simple truth — that the world
has changed, the transatlantic partnership has lost
control of the global economic agenda, and that the
next phase of globalization, while fraught with risk,
holds tremendous upside.
The bottom line: more than ever before, the
economic future of the transatlantic partnership is
inextricably tied to the success of the developing
nations.
1744 R Street NW

Washington, DC 20009

T: 1 202 745 3886

F: 1 202 265 1662

E: TA@gmfus.org

www.transatlanticacademy.org