The US has 5 Years to Deal With China

by Benjamin Studebaker

There continues to be much talk of a “rising China”. While I have written in the past that China is not presently a serious military or economic threat to the United States, many still argue, both in the United States and around the world, that China will at some point come to surpass the United States in economic and eventually even military might. How should the United States, or any leading great power for that matter, defend a lead from a country that, while not yet a threat, is a threat to become a threat? That’s the subject of today’s post.

Quite a few people even in the United States believe that China is a threat to become a threat. 28% of Americans presently believe that China is already economically superior to the United States, while 36% believe that China will become the preeminent economic power in 5-7 years (compared to 43% who believe that power will remain the United States):

A Pew poll even shows a majority of Americans already believing that China has the lead:

However, at of 2013, the United States still has a substantial lead over China economically:

US China GDP

And even moreso militarily:

US China Military

The reason for anxiety is the rate at which China has been catching up in relative terms, via Trading Economics:

The solid black line (and the annual growth percentages on the left-hand side) correspond to China. The dotted blue line (and the annual growth percentages on the right-hand side) correspond to the US. China worst growth rate since 2000 has been better than America’s top figure. It must be acknowledged that this is not a level playing field–there is a lot of advanced technology already existent that has yet to be fully implemented in China, so the Chinese economy can grow just by adding things the US economy already possess. By contrast, the US is out at the raw edge of current human capacity. It grows by adding entirely new industries and technologies, not by merely integrating or copying what already exists elsewhere. During the 80’s, Japan was in a similar situation to China–it was gaining very quickly on the United States economically as it integrated already existent technology. However, once Japan caught up with the United States on a productivity basis, it found it increasingly difficult to maintain those high growth rates. Innovating new technologies is much harder than implementing existing ones–Japan’s growth rate has been comparable to America’s since the early 90’s:

Japan’s population is much smaller than the United States’ (about 127 million to the US’ 317 million), which means that in order for Japan to be a larger economic and military power, it would need to develop technologies rapidly and far outpace America in modernization. China, however, is much larger (about 1.3 billion), which means that if China reached a level of economic modernization equivalent to America’s on a per capita basis, it would have a GDP of over $64 trillion. Many consequently see Chinese domination as unavoidable–in order for the United States to maintain its present economic and military edge, it must develop new technologies and policies faster than China copies existing examples. For the same reason Japan cannot match the United States, the United States looks unable to maintain its lead.

And yet, up to this point in modern world history, smaller population countries have routinely held and maintained for extended periods of time considerable advantages in relative economic and military power. Britain, a country which at present controls 0.88% of the world’s population, once ruled 25% of its territory for the better part of a century. The United States, by contrast, currently rules over 4.4% of the world’s people. By contrast, countries like China and India have always been high in population, but it has been some time since either were world-beaters. The industrial revolution distributed its bounty unequally–in 1840, a British population of a mere 26 million citizens defeated a Qing Empire with 412 million, 15.8 times larger, in the First Opium War.

There are two potential strategies the United States might pursue if it wishes to maintain its relative economic and military advantage over China:

  1. Tech Up–the original industrial revolution was made possible by persistent scientific and technological efforts throughout the renaissance and enlightenment by European citizens, institutions, and states. As an innovating state, the United States remains the world power with the greatest potential to alter the paradigm.
  2. Disruption–when one state has much more power than all other states, it has the capacity to pre-emptively curb the economic growth and development of potential future rivals.

The US currently controls 21.8%, more than one-fifth, of total world economic output. $324 billion of China’s exports (4% of Chinese GDP) goes to the United States, and a vastly greater portion of China’s output is controlled by foreign corporations (mostly American and European) who happen to be manufacturing there due to its low wages and convenient economic geography. Unlike Japan, China has not yet developed successful multinational corporations of its own. The United States remains in a position to dramatically influence, through entirely economic means, the rate at which the Chinese economy grows. An American tariff on Chinese imports, a ban on American nationals and corporations from operating in China, subsidies or tax incentives for companies that leave China, any and all of these policies would drive businesses out of China into other low wage markets or back into the United States. The effect on the Chinese economy would be catastrophic.

Some believe that the United States is dependent on China to finance its debt, and that this makes any effort by the United States to retard China’s development dangerous to US fiscal security. This belief is mistaken–China is a relatively minor player in the US bond market:

Indeed, US borrowing costs remain quite low:

If the United States does not act to gain control over the Chinese growth rate, we can expect it to steadily become increasingly insecure and more erratic as its primacy fades and it endures relative decline. Already, the United States spends a much larger portion of its GDP on defense than China (4.2% to 2.0%). As the US economic advantage wanes, we will likely see the United States spending larger and larger portions of its GDP on defense in order to make up in military advantage for what it will increasingly lack economically. This diversion of huge sums of US output into defense will rob the US economy of the investment it will need in order to achieve the kind of technological breakthrough necessary for it to pursue the “Tech Up” strategy. At present, America’s approach to China remains committed to the neoliberal approach of trade and institutional international engagement. American corporations are looking to maximize the profit they can make from a rising China. This strategy pays well now, but down the line, the price is America’s superpower status. If Americans want to defend this status, they need to use their considerable economic advantage to disrupt China’s trajectory while it is still possible for them to do so.

What’s the window for the United States to change policy on China before it’s too late? Every day, disruption becomes slightly less effective than it was the day before. The Economist has a fun little tool for trying different trajectories and permutations. Under most reasonable metrics, China looks likely to equal the US economy in size somewhere between 2019 and 2021, which means that if the United States is going to defend its preeminence while it still has an economic advantage, it needs to do so in the next 5 years, the sooner the better. That is not a very large window, and considering the US government’s recent dysfunction and inability to pass much in the way of legislation, I doubt action is taken in time. Clock’s ticking.