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

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

The second driver behind the new Pentagon strategy is the shift in global wealth and power from the Euro-Atlantic world to Asia. As new great powers such as China and, eventually, India emerge, important regional powers such as Russia, Japan, Turkey, Korea, South Africa and Brazil will assume more prominent roles in international politics. Thus, the post-Cold War “unipolar moment,” when the United States commanded the global stage as the “sole remaining superpower,” will be replaced by a multipolar international system. The Economist recently projected that China’s defense spending will equal that of the United States by 2025. By the middle or end of the next decade, China will be positioned to shape a new international order based on the rules and norms that it prefers—and, perhaps, to provide the international economy with a new reserve currency.

Two terms not found in the DSG are “decline” and “imperial overstretch” (the latter coined by the historian Paul Kennedy to describe the consequences when a great power’s economic resources can’t support its external ambitions). But, although President Obama and Defense Secretary Leon Panetta may not admit it, the DSG is the first move in what figures to be a dramatic strategic retrenchment by the United States over the next two decades.

This retrenchment will push to the fore a new U.S. grand strategy—offshore balancing. In a 1997 article in International Security, I argued that offshore balancing would displace America’s primacy strategy because it would prove difficult to sustain U.S. primacy in the face of emerging new powers and the erosion of U.S. economic dominance. Even in 1997, it was foreseeable that as U.S. advantages eroded, there would be strong pressures for the United States to bring its commitments into line with its shrinking economic base. This would require scaling back the U.S. military presence abroad; setting clear strategic priorities; devolving the primary responsibility for maintaining security in Europe and East Asia to regional actors; and significantly reducing the size of the U.S. military. Subsequent to that article, offshore balancing has been embraced by other leading American thinkers, including John Mearsheimer, Stephen Walt, Barry Posen, Christopher Preble and Robert Pape.

To be sure, the proponents of offshore balancing have differing ideas about its specifics. But they all agree that offshore balancing is based on a common set of core strategic principles.

● Fiscal and economic constraints require that the United States set strategic priorities. Accordingly, the country should withdraw or downsize its forces in Europe and the Middle East and concentrate is military power in East Asia.

● America’s comparative strategic advantages rest on naval and air power, not on sending land armies to fight ground wars in Eurasia. Thus the United States should opt for the strategic precepts of Alfred Thayer Mahan (the primacy of air and sea power) over those of Sir Halford Mackinder (the primacy of land power).

● Offshore balancing is a strategy of burden shifting, not burden sharing. It is based on getting other states to do more for their security so the United States can do less.

● By reducing its geopolitical and military footprint on the ground in the Middle East, the United States can reduce the incidence of Islamic fundamentalist terrorism directed against it. Islamic terrorism is a push back against U.S. dominance and policies in the region and against on-the-ground forces in the region. The one vital U.S. interest there—safeguarding the free flow of Persian Gult oil—can be ensured largely by naval and air power.

● The United States must avoid future large-scale nation-building exercises like those in Iraq and Afghanistan and refrain from fighting wars for the purpose of attaining regime change.

Several of these points are incorporated in the new DSG. For example, the new strategy document declares that the United States “will of necessity rebalance toward the Asia-Pacific region.” The document also states the United States will “rebalance [its] military investment in Europe” and that the American military posture on the Continent must “evolve.” (The Pentagon’s recent decision to cut U.S. ground forces in Europe from four brigades to two is an example of this “evolution.”) Finally, implicitly rejecting the post-9/11 American focus on counterinsurgency, the strategy document says that with the end of the Iraq war and the winding down of the conflict in Afghanistan, “U.S. forces will no longer be sized to conduct large-scale, prolonged stability operations.”

The DSG reflects the reality that offshore balancing has jumped from the cloistered walls of academe to the real world of Washington policy making. In recent years the U.S. Navy, the Joint Staff and the National Intelligence Council all have shown interest in offshore balancing as an alternative to primacy. Indeed, in his February 2011 West Point speech, then defense secretary Robert Gates made two key points that expressed a clear strategic preference for Mahan over Mackinder. First, he said that “the most plausible, high-end scenarios for the U.S. military are primarily naval and air engagements—whether in Asia, the Persian Gulf, or elsewhere.” Second—with an eye on the brewing debate about intervention in Libya—he declared that “any future defense secretary who advises the president to again send a big American land army into Asia or into the Middle East or Africa should ‘have his head examined,’ as General MacArthur so delicately put it.” In plain English, no more Eurasian land wars. The subsequent Libyan intervention bore the hallmarks of offshore balancing: The United States refused to commit ground forces and shifted the burden of military heavy lifting to the Europeans.

Still, within the DSG document there is an uneasy tension between the recognition that economic constraints increasingly will impinge on the U.S. strategic posture and the assertion that America’s global interests and military role must remain undiminished.

This reflects a deeper intellectual dissonance within the foreign-policy establishment, which is reluctant to accept the reality of American decline. In August 2010, Secretary of State Hillary Clinton proclaimed a “New American Moment;” reaffirmed the U.S. responsibility to lead the world; and laid out an ambitious U.S. global agenda. More recently, Mitt Romney, a leading contender for the Republican presidential nomination, declared that the twenty-first century “must be an American century” and that “America is not destined to be one of several equally balanced global powers.” These views are echoed by foreign-policy scholars who refuse to acknowledge the reality of decline or embrace a theory of “painless decline” whereby Pax Americana’s norms and institutions will survive any American retrenchment.

But, American “exceptionalism” notwithstanding, the United States is not exempt from the historical pattern of great-power decline. The country needs to adjust to the world of 2025 when China will be the number-one economy and spending more on defense than any other nation. Effective strategic retrenchment is about more than just cutting the defense budget; it also means redefining America’s interests and external ambitions. Hegemonic decline is never painless. As the twenty-first century’s second decade begins, history and multipolarity are staging a comeback. The central strategic preoccupation of the United States during the next two decades will be its own decline and China’s rise.