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3.2 International trade and industrial competitiveness
The US trade deficit
The worsening position of the US economy is documented first of all by the growing current account deficit of the balance of payments, that increased from $8.1 billion in 1982 to $41 billion in 1983, $107 billion in 1984, $117 billion in 1985, $140 billion in 1986, with estimates of 147 billion for 1987 (OECD 1986a: 58, OECD 1987a: 68). At the same time, Japan has continuously expanded its current account surplus and Europe has turned its deficit into a surplus since 1983.
Figure 3.2: Gross fixed asset formation and employment
Sources: OECD. Labour Force Statistics and Annual National Accounts. Graphs taken from OECD Economic Outlook 38 (Dec. 1985): 35. 1. France, Germany, United Kingdom and Italy.
The US deficit is particularly serious in the trade balance, as the graphs in Figure 3.3 show. In 1986 the US trade deficit was $170 billion, 4 per cent of GNP (Business Week, 20 April 1987, p.46), showing a further increase over the $148.5 billion deficit of 1985. Of that, manufacturing products accounted for $112.8 billion, with the $145.4 billion of US exports that was only a little more than half the $258.2 billion of manufacturing imports, according to data of the US Commerce Department (The Washington Post, 31 January 1986). Until 1980 the US manufacturing sector never registered a trade deficit; now one-third of it is due to trade with Japan alone, and Europe in 1984 managed to reverse its traditional deficit into a $27.4 billion surplus (ibid.).
While the overvalued dollar has contributed to the US trade deficit, the weighted-average dollar exchange rate has been falling since March 1985, without preventing new records in the US trade deficit. It is now widely recognized that the fall of the dollar has in the short-term little effect on the US deficit, due to macroeconomic mechanisms (OECD 1986a: 62) and to the specific nature of some industries and markets where the US is heavily importing, including now also high technology products (Finan et al. 1986).
This trend in international trade marks a radical change in the degree of openness of the US economy. The share of exports plus imports in GNP was 24 per cent in 1986, and only 16 per cent in 1970 (Business Week, 20 April 1987, p.46). The share of imports in the US GNP has grown from 6 per cent in 1970 to 12.5 per cent in 1981. In the same year Japanese exports accounted for 16.5 per cent of Japan's GNP and a similar share can also be found in Europe, if we exclude the trade within European countries (Thurow 1985a: 52).
It has been estimated that by 1984, '70 per cent of US production of goods was exposed to international competition. Forty per cent of American farmland was devoted to exports. One-sixth of all jobs in the manufacturing sector depended on sales abroad. Half of the after-tax profits of US corporations came from overseas subsidiaries' (Garter 1985: 543).
Figure 33:Rates of growth of US imports and exports and US trade balance
The impact of imports on the more open US economy has been serious. Between 1981 and 1984, 42 per cent of the growth of US domestic spending went to imports (Thurow 1985a: 333). US imports in 1985 represented 21 per cent of total purchases of manufacturing products, more than twice the share of 1970 (Business Week, 3 March 1986). The consequence for US industrial employment has been estimated at 3 million jobs lost in 1984 due to the trade deficit (Thurow 1985b).
The growing openness of the US economy did not increase, however, the importance of the US in world trade. Between 1975 and 1982 the US share has remained about 17.5 per cent, while the share of Japan has increased from 12.8 per cent to 16.1 per cent and that of the EEC fell from 56.7 per cent to 53.2 per cent (including trade within Europe) (Messine 1984: 165). Even if in 1983 the growth of the US imports accounted for half the total growth of international trade (Garter 1985: 540), in 1984 the value of US manufacturing exports, $144 billion, was lower than that of Japan ($165 billion) and West Germany $148 billion) (Parboni 1986: 11).
While the international trade of manufacturing goods is a remarkable indicator of the US decline, many economists have tried to present this as a 'natural' evolution of US exports towards high-technology products and services. Even these two areas were not spared by the US decline. In 1986 the US had a deficit, estimated around $2.5 billion, in the international trade of high-technology products (Finan et al. 1986). The US imports of these products from Japan are four times greater than the US exports to Japan; in the trade with the four new industrial countries of the Pacific, South Korea, Hong Kong, Taiwan and Singapore, the US had in 1986 a $2-billion deficit in the trade of high-technology goods (ibid.: 14, 32).
As to the services, between 1983 and 1984 the US official statistics reported a fall in the surplus from $6.4 billion to $2.3 billion, although data on trade in services are considered inadequate (Office of Technology Assessment 1986: 4). Furthermore, 'the US share of global trade in special business services, such as engineering, consulting, brokerage and deals for licensing rights, has fallen from 15% in 1973 to 8% in 1983, putting it behind France, West Germany and Britain' (Business Week, 3 March 1986, p.80).
The size of the imports of high-technology products from the Pacific is a key indicator of the fundamental reorientation of US international trade that has taken place since 1980, when trade across the Pacific became for the first time greater than transatlantic trade (Yochelson 1985: p.21). This is also a shift away from trade among the most advanced countries: in 1983, 54 per cent of US imports came from Asian and Latin American countries. For the US, Taiwan is now a more important trade partner than Britain (Davis 1985: 62). The US economic interests, however, are still very large in the Atlantic area. Half of all US direct investment overseas is concentrated in Europe, while the Pacific rim accounts for less than 15 per cent. But the rate of growth of US investment in the Pacific has nearly doubled that in Europe since the mid-1970s (Yochelson 1985: 22).
US industries in retreat
The dynamics of US productivity and that of international trade point to a fundamental loss of competitiveness of the US industry. This is shown also by the progressive loss of market share both in the US domestic economy and in the world market. In the US automobile market, where the trade deficit was $31 billion in 1986 (Business Week, 20 April 1987, p.58), the share of US production has fallen from 95.9 per cent in 1960 to 82.8 per cent in 1970, to 72.9 per cent in 1980. In the world market for motor vehicles the US share went in the same years from 22.6 per cent to 17.5 per cent, and to 11.4 per cent (The Business Week Team 1982: 14). The US Commerce Department predicts that in 1990 foreign cars will control 37 per cent of the US domestic market (Business Week, 20 April 1987, p.58).
In consumer electronics the US market has seen the share of its domestic production slashed from 94.4 per cent in 1960 to 53 per cent in 1980 and to 38 per cent in 1986 (ibid.: 57; The Business Week Team 1982: 14). In metal-cutting machine tools the share of US products in the US market has fallen, over the same period, from 96.7 per cent to 71 per cent, and in the world market the share of US-made metal-working machinery has fallen from 32.5 per cent to 24 per cent (ibid.).
In the 1980s the import penetration in the US market has accelerated and by 1984, 25 per cent of steel, 30 per cent of apparel and 42 per cent of machine tools were imported (Davis 1985: 51).
From automobiles to machinery, the growing imports are not anymore in low-technology, labour-intensive productions. They are booming in the areas of mass standardized industrial production and are making significant inroads in high technology sectors. As Business Week has noted, 'autos, steel, machine tools, video-recorders, industrial robots, fibre optics, semiconductor chips - these are some of the markets in which the US is losing dominance or has been driven out' (Business Week, 3 March 1986, p.57).
A few cases of US industries can provide further detail on the decline of US competitiveness. The consumer electronics industry, that had an $11 billion trade deficit in 1986 (Business Week, 20 April 1987, p.57), offers an example of unconditional surrender by US industry. General Electric, the largest US producer, now makes in Asia most of its goods and planned to close in 1986 its last domestic colour-TV plant. In the same year only 10 per cent of its employees in this sector were engaged in manufacturing, while in 1984 the share was still 60 per cent (ibid.: 60, 66). Video-recorders are an even more striking example, as in 1986, 90 per cent of the world market was controlled by Japan (Business Week, 20 April 1987, p.57).
While the case of consumer electronics involves traditional mass productions, that are now spread in many industrial countries, evidence of the US decline can be found also in high-technology areas where not long ago the US had a near-monopoly position. In civilian aircrafts, for example, the emergence of Airbus, produced by a European consortium, in 1982 and 1983 captured more than half the world's sales of wide- bodied aircrafts (Thurow, 1985a: 56).
A similar case is that of semiconductors, where the challenge to the near-monopoly position enjoyed by the US producers at the beginning of the 1980s has come from Japan. In 1986 Japan controlled 40 per cent of the world market for chips (Business Week, 20 April 1987, p.62). Even a trade agreement between the US and Japanese governments, signed in July 1986 to limit the growth of Japanese exports, did not stop the flood of imports in the US. In retaliation for the failure of Japan to comply to the agreement, the US government introduced in March 1987 unprecedented restrictions on Japanese exports, opening a 'trade war' (see also section 4.5).
Political considerations and government actions are increasingly important in the control of new high-technology markets. The usual economic and technological criteria are often overridden by 'strategic' considerations, leading to more protectionist attitudes. An example is offered by the case of fibre optics. In 1982 Fujitsu offered the lowest bid for installing a fibre optic cable between New York and Washington. Pressures from the Defense Department and the Federal Communications Commission led AT&T to prefer the more expensive offer by an American firm on the grounds of 'national security' implications (Reich 1984: 41).
On the other hand, the US strategy of deregulation that led to the dismemberment of the AT&T telephone monopoly, opened the domestic market to new imports of telecommunications equipment that in 1983 were 48 per cent greater than US exports (Thurow 1985a: 55; see section 4.6).
The loss of market shares and the US companies' decision to produce offshore have led also to a serious decline in the area of the means of production, machine tools and industrial robots. From a balance between import and export of machine tools in 1977, the US moved to a $1.7 billion trade deficit in 1986, when imports accounted for 47 per cent of the US domestic market, against the 4 per cent of 1964. A five-year 'voluntary restraint agreement' negotiated in 1986 with the exporting countries of Europe and Asia has been the last attempt to stop the decline of the domestic industry (Business Week, 20 April 1987, p.58).
Industrial robots are a rapidly changing area where differing estimates are made. Their total number in 1984 has been estimated in 35,000: 20,000 in Japan, 9,000 in the US and 6,000 in West Germany (Schneider 1984: 159). According to another estimate, the number of robots per 10,000 workers in 1982 was thirty in Sweden; thirteen in Japan; five in Germany and only four in the US. Furthermore, in 1983 all but one of the US robot-makers were producing at a loss, and for the industry as a whole, losses reached 49 per cent of sales (Thurow 1985a: 55).
The competitive position in these high-technology sectors is crucially important for defining the new emerging division of labour. Here the conclusions of a report of the Commission on Industrial Competitiveness, appointed by the US president amount to admitting the US defeat: 'the United States had lost the race for international competition in manufacturing and risks losing it in high technology as well' (quoted in Thurow 1985a: 94). But a strikingly similar conclusion has been drawn also from a study of the European position: 'to a large extent, Europe has missed out the electronic revolution and also looks likely to miss out on the robotics/automation revolution' (Messine 1984: 166).
In fact, Europe seems to have failed to take the opportunity of the US decline. Furthermore, in many of the sectors previously reviewed, the share of European exports in world trade has been falling. Europe has less than 6 per cent of the world market for telecommunications and 8.5 per cent in semiconductors (The Washington Post, 19 January 1986).
As Europe did not improve its position, Japan has emerged as the leader both in traditional manufacturing and in many high-technology sectors. The key process in the current realignment among advanced capitalist countries remains, however, the decline of the US economy. This overview has provided substantial evidence of the slowdown of US growth, the fall in the US competitive position in a wide range of industrial productions. This is not a temporary phenomenon, due to the overvalued dollar, as record trade deficits have continued after two years of fall in the dollar exchange rates. Rather, the US decline is the result of structural changes in the world economy, and the responses of American industry. The next step for the analysis is then to investigate the strategies of the corporations.
3.3 International corporate strategies
In the analysis of the performance of the US economy, many signs indicate a growing divergence between the positions of the US-based multinational corporations and the US domestic economy. The strategies of US corporations have focused on the internationalization of their scale of operation, on the automation of production in the US, and on growing financial activities.
While the US share in world trade declined, according to US Commerce Department data, in 1982 US transnational corporations accounted for 77 per cent of US exports and 50 per cent of imports, an increase over previous years (The Economist, 1 March 1986, p.61). Between 1966 and 1977 the share of US exports in world trade fell from 16 per cent to 14 per cent, while US multinationals increased their share from 17 per cent to 20 per cent (ibid.). In a study of the 800 largest world companies, that account for 90 per cent of world trade, it has been found that 34 per cent of their total trade is 'in-house'. This share goes up to 43 per cent for the companies that spend more on research (ibid.).
The internationalization of the US economy has been growing for a long time. Between 1950 and 1980 foreign direct investments of US corporations increased sixteen times, from $12 billion to $192 billion, twice the rate of US domestic private investments, that went from $54 billion to $400 billion (Bluestone and Harrison 1982: 42). With investment, jobs were moved abroad. As Bluestone and Harrison reported, in the 1970s General Electric increased its total employment by 5,000 units, the net result of an increase of 30,000 jobs abroad and the loss of 25,000 jobs in the US. RCA did the same, increasing its employment abroad by 19,000 and cutting 14,000 jobs in the US (ibid.: 6). The result is that the foreign production of US multinational corporations is now greater than the GDP of all countries, except the US and the USSR (ibid.: 42).
In the first half of the 1980s, stagnation and recession in most foreign markets limited the increase of US direct foreign investment, in spite of the incentive coming from an overvalued dollar (Finan et al. 1986: 29). On the other hand, foreign investment in the US increased sharply, as the foreign corporations looked for access in the largest and fastest growing market of the 1980s. In 1985, with the dollar at its peak, there was a 17 per cent increase over the previous year (Davis 1985: 50).
A fundamental factor in this process has been the higher profit rate on foreign investments. Since 1966 the US rate of profit has been declining, while the return of foreign investment has increased from 10 per cent in 1966, to 16 per cent in 1973, to 21 per cent in 1979, falling to 14 per cent in 1981 (Andreff 1984: 156). At the end of the 1970s the foreign profits accounted for one-third of the total profits of the US largest corporations and banks (Bluestone and Harrison 1982: 42).
However, in the strategy of internationalization, the growth of foreign affiliates is no longer the dominant pattern. A new network of agreements among firms for co-productions, technology transfer, joint ventures, research efforts, is resulting in an increasingly complex web of bilateral alliances (see sections 4.4 to 4.6).
In this process the labour-intensive operations are no longer the only ones that are transferred abroad. As Business Week reported, 'in the 1960s and 1970s many companies exported blue collar jobs to low-wage countries. That trend continues. Only now US companies are also shifting far more valuable things overseas: fundamental technology, management functions and even the design and engineering skills that are crucial to innovation' (Business Week, 3 March 1986, p.61). The result has been the growth of a foreign production capacity in high-technology sectors, controlled by US multinationals and concentrated in the new industrial countries of the Pacific. Much of the deterioration in the US trade of high-technology goods (see section 4.2), according to a report to the US Congress, 'is accounted for by American firms making greater use of their subsidiaries or independent contractors located in these countries where labor costs remain low by American standards. Through such arrangements, American-owned corporations remain competitive, while America as a place of production does not' (Finan et al. 1986: 4). This shows how important in this process are the technological strategies of US corporations; these will be analysed in the next chapter.
The second major process in the economic strategies of US corporations is the automation of production in the US. This has an even greater focus on technology, as automation is often presented as a possibility for returning large portions of production in the US, regaining competitive margins through the productivity gains and the reduction in the labour force made possible by Flexible Manufacturing Systems (FMS) and by Computer-Integrated Manufacturing (CIM) (Business Week, 3 March 1986, 20 April 1987; Castells 1986).
Many industrial managers have emphasized the promise of automation; Business Week reported that, according to Patrick Zilvitis of Martin Marietta, with CIM the US can 'compete favourably with any offshore manufacturer'. Joel Schnur, of Hughes Aircrafts, argued that 'we are not trying just to catch up with the Japanese, we are trying to leapfrog them' (Business Week, 3 March 1986, p.72). Both these companies, however, are mainly involved in production for the domestic, and strongly protected, US military 'market'.
In fact, military involvement is the rule in the major industrial automation projects. Beside the US Air Force-sponsored ICAM (Integrated Computer-Assisted Manufacturing) project launched in the early 1980s, the Navy has started the RAMP (Rapid Acquisition of Manufactured Parts) programme that by 1990 is supposed to make possible the delivery of replacement parts for the Navy in thirty days, against the present 300 days (Business Week, 20 April 1987, p.60). All three US armed services are involved, together with thirty industrial companies and the eight major accounting firms, in a co-operative venture for research in automation, Computer-Aided Manufacturing International, based in Texas (ibid.).
Increased automation and more centralized management control are trends that the US military have long favoured in the military-serving industries (Melman 1983; Noble 1984). But the high costs of such a strategy have resulted in a limited diffusion of industrial automation in the US: 'only about two dozen US companies have factories that even come close to the goal of total automation' (Business Week, 3 March 1986, p.74). According to estimates of International Data, significant investments in CIM can be found in 250 companies. The more limited FMS, a combination of robots and computer-controlled machine tools, can be found in between thirty and thirty-five US companies and thirty each in Europe and Japan, according to Kearney & Trecker. The US Commerce Department estimates report forty-seven FMSs in the US, fifty in Japan and eighty-four in Europe (ibid.).
As we can see, on the road to industrial automation, US industry has in no way a leadership among the advanced capitalist countries. In fact, European and Japanese companies have decentralized their production abroad on a much more limited scale and their moves towards automation have been favoured by domestic conditions. They have also followed different criteria from the military-inspired model of American automation, whose main objective is the centralization of control over the production process, regardless of the cost and the consequences for the workers (Melman 1983; Noble 1984).
Besides internationalization and automation, the third major process in the strategies of US firms has been the growth of financial activities and the sharp increase in takeovers, mergers and acquisitions. In the past ten years eighty-two of the 'Fortune 500' companies have been acquired, at a cost equal to the GNP of a country such as Italy (Davis 1985 56). Devoting such large resources to purely speculative operations, rearranging assets in the hope of big short-term profits, has seriously damaged the growth of productive investment, reducing even more the ability of US firms to compete. With less investment in plants and equipment, the average age of US manufacturing plants has increased from 13.8 years in 1980 to 15 years in 1986 (Business Week, 20 April 1987, p.54).
The short-term, profit-making strategies of US corporations have often resulted, in this way, in a worsening of the position of the US economy. Even a report of Business Week on the moves of US corporations concluded that
To the extent that such strategies have relied on reducing real US wages, eliminating or downgrading jobs, and simply propping up short-term profits, they defeat the major purpose of competitiveness: to be able to sell a country's wares at prices that give its investors a fair return and its population a rising standard of living.
(Business Week, 20 April 1987, p.47).
The strategies of US corporations have largely failed in this regard, and have in fact contributed to the decline of the American economy.
3.4 The debate on the American decline
The decline of the US economy has been documented so far with a surprising convergence of views, from neo-conservatives close to the Reagan administration, such as John Yochelson, to neo-liberal Democrats, such as Lester Thurow; from journals close to US industry, such as Business Week, to left critics, such as Bluestone and Harrison and Davis, not to mention international agencies such as OECD. All agree in documenting the decline of the US economy, the loss of competitiveness of its industry, the slowdown of productivy.
There is also a broad agreement on the structural nature of the problem, that was made more serious, but was not created, by the rise of the dollar exchange rates in the first half of the 1980s. The views differ, obviously, on the key factors that are responsible for the US decline and on the policy prescriptions, that will be discussed later in section 3.6.
An interesting starting point in this debate is the conclusion of a major study undertaken by Data Resources, Inc., under the direction of Otto Eckstein, on behalf of a group of large US companies, including AT&T, Exxon, IBM and others. The study argued that 'the principal explanation of our industrial problem lies in objective historical economic forces that made some retardation of our manufacturing growth inevitable, and in generally ineffective policy responses to the internal and external challenges' (Eckstein et al. 1984: 3).
After mentioning the over valuation of the dollar, the adverse effect of policies to aid US allies, the lack of investment due to instability and to the corporations' financial strategies, the DRI study noted that 'the loss of market share by American industries to foreign competitors was so all-pervasive, affecting every industry, that much of the explanation must lie in more general phenomena than in individual mistakes and systematic biases in the corporate culture' (ibid: 4). But then no attempt is made to find such all-pervasive causes, and the report turns to a policy prescription that includes lower exchange rates and interest rates, trade measures and expansionary monetary and fiscal policies (ibid.). It may be noted, by the way, that since 1984 US economic policy has indeed followed much of this course, but no help has come to the ailing US industry.
A broad consensus among American economists exists in identifying the dynamics of productivity as the root of the problem of US industry. Traditional analyses have tried to explain the productivity slowdown with the effects of investment, expenditure for research and development, energy prices, labour force composition and regulation, in an effort to remain within the models of neoclassical economics (Kendrick 1984, 1986; Baily and Chakrabarti 1985; Baily 1986).
This approach, however, has failed to explain productivity trends both in the crises of the 1970s and in the recovery of the 1980s. John Kendrick, a leading economist of this school, has noted that the 1.1 per cent average annual increase in productivity in the US private economy is only 'about half' the increase expected by the economists - including himself - 'who were impressed by the reversal in recent years of most of the negative forces that were credited with causing the 1983-1981 slowdown' (Kendrick 1986: 1). However, instead of looking elsewhere for the causes of the US productivity problem, Kendrick, and many others alike, continue to formulate hypotheses and complex interpretations that may push reality closer to their neoclassical models. It is not surprising that in this way, as the editors of the Brookings Papers on Economic Activity noted, 'despite numerous studies of the slow down, its causes have remained largely a mystery' (Brainard and Perry 1981: vii).
In an important review of the studies on productivity Richard Nelson has argued that the neoclassical model failed to explain the productivity problem because it
is superficial and to some degree even misleading regarding the following matters: the determinants of productivity at the level of the firm and of inter-firm differences; the processes that generate, screen and spread new technologies; the influence of macroeconomic conditions and economic institutions on productivity growth.
(Nelson 1981: 1029).
Nelson's suggestion is to orient the analysis on the institutional structures, on interaction among different factors and between short- and long-term processes, abandoning a view of economic growth as a sequence of equilibria (Nelson 1984b).
A different explanation of the US productivity slowdown has been offered by three economists of the left, Bowles, Gordon and Weisskopf, who share the criticism of the neoclassical model and have proposed a 'social model of productivity' that takes into account social relations and the changes in the post-war US economy (Weisskopf et al. 1983; Bowles et al. 1984). Declining work intensity and lagging innovation are 'social' factors that explain, more than traditional 'technical' variables, the productivity slowdown. They argue that 'attention to these social determinants appears to provide some crucial missing clues to the productivity puzzle' (Weisskopf et al. 1983).
Social relations and pressures for innovation are reflected in the relative dynamics of the prices of machinery and labour. Seymour Melman has noted that since 1965, according to studies that used different indicators, the cost of capital in the US has increased every year faster than the cost of labour (Melman 1983: 168). Investing in new machinery has become less attractive for US companies and this loss of incentive for labour-saving investments, according to Melman, 'is crucial to the collapse of US productivity growth' (ibid.).
This effect is highlighted by international comparisons. Between 1971 and 1978 machine-tool prices increased by 85 per cent in the US, by 59 per cent in West Germany and by 51 per cent in Japan. Over the same period, hourly earnings of workers increased by 72 per cent in the US and in West Germany and by 177 per cent in Japan. Such a trend is related to both the reduced innovative capacity of US firms and the growth of the share of machine-tools imports in the US. It also resulted in an increase of the average age of machinery, that in 1981 was 20 years in US industry, twice as much as in Japan (ibid.: 169).
The growing international and financial orientation of US corporations, examined in the previous section, are other key factors in the decline of the US economy. Within the US, however, the roots of economic decline have to be found in the dynamics of social relations and in the reduced ability to innovate. The former has been highlighted by the analyses of the crisis of the 1970s that have focused on growing social contradictions (Castells 1980: O'Connor 1984). The latter will be discussed in detail in Chapter 4. Economic and social processes have been combined, in a neo-Marxist analysis, by James O'Connor, who argued that
the 'solution' adopted by capital and the state in postwar USA to historical crises of overproduction of capital slowly but inexorably created a crisis of underproduction of capital defined in terms of insufficient amounts of surplus value produced and unproductive utilization of the surplus value which was produced. In sociological terms... the structures of modern US society, increasingly, albeit blindly, became social barriers to capitalist accumulation.
(O'Connor 1984: 55-6)
Prominent among the 'unproductive' uses of capital, and among the structures of American society, is the military system, which is another key factor in explaining the US economic decline. According to Bowles, Gordon and Weisskopf,
it seems likely that the decline in US competitive strength was attributable at least in part to the size and relative importance of the US military machine. The military role of the United States was indispensable in helping to police the postwar international system, but it also constituted an enormous drain on the productive capacity of the United States.
(Bowles et al. 1984: 81)
The diverse and contradictory effects of the military economy and its relation to the American decline are addressed in the next section.
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