Friday, September 9, 2011

Is China's Economic Dominance in the Long Run a Sure Thing?

Arvind Subramanian writes "The Inevitable Superpower: Why China's Dominance is a Sure Thing" in the September/October 2011 issue of Foreign Affairs. The article is available at the Peterson Institute website here or (free registration may be needed ) from the Foreign Affairs website here. It is adapted from his book Eclipse: Living in the Shadow of China's Economic Dominance.

The United States used its economic power against the United Kingdom in the 1956 Suez crisis
"During the 1956 Suez crisis, the United States threatened to withhold financing that the United Kingdom desperately needed unless British forces withdrew from the Suez Canal. Harold Macmillan, who, as the British chancellor of the exchequer, presided over the last, humiliating stages of the crisis, would later recall that it was "the last gasp of a declining power." He added, "perhaps in 200 years the United States would know how we felt." Is that time already fast approaching, with China poised to take over from the United States?"

Measuring China's forthcoming dominance

"My forthcoming book develops an index of dominance combining just three key factors: a country's GDP, its trade (measured as the sum of its exports and imports of goods), and the extent to which it is a net creditor to the rest of the world. ...No other gauge of dominance is as instructive as these three: the others are largely derivative (military strength, for example, depends on the overall health and size of an economy in the long run), marginal (currency dominance), or difficult to measure consistently across countries (fiscal strength).     I computed this index going back to 1870 (focusing on the United Kingdom's and the United States' economic positions then) and projected it to 2030 (focusing on the United States' and China's positions then). The projections are based on fairly conservative assumptions about China's future growth ...  To take account of these costs, I project that China's growth will slow down considerably: it will average seven percent a year over the next 20 years, compared with the approximately 11 percent it has registered over the last decade. ... Meanwhile, I assume that the U.S. economy will grow at about 2.5 percent per year, as it has over the last 30 years....
     The upshot of my analysis is that by 2030, relative U.S. decline will have yielded not a multipolar world but a near-unipolar one dominated by China. China will account for close to 20 percent of global GDP (measured half in dollars and half in terms of real purchasing power), compared with just under 15 percent for the United States. At that point, China's per capita GDP will be about $33,000, or about half of U.S. GDP. In other words, China will not be dirt poor, as is commonly believed. Moreover, it will generate 15 percent of world trade -- twice as much as will the United States. By 2030, China will be dominant whether one thinks GDP is more important than trade or the other way around; it will be ahead on both counts.
     According to this index and these projections, China's ascendancy is imminent. Although the United States' GDP is greater than China's today and the two countries' respective trade levels are close, the United States is a very large and vulnerable debtor -- it hogs about 50 percent of the world's net capital flows -- whereas China is a substantial net creditor to the world. In 2010, the United States' lead over China was marginal: there was less than one percentage point difference between their respective indices of dominance. In fact, if one weighed these factors slightly differently, giving slightly less weight to the size of the economy relative to trade, China was already ahead of the United States in 2010.
     China's ascendancy in the future will also apply to many more issues than is recognized today. The Chinese economy will be larger than the economy of the United States and larger than that of any other country, and so will its trade and supplies of capital. The yuan will be a credible rival to the dollar as the world's premier reserve currency. ...
     My projections suggest that the gap between China and the United States in 2030 will be similar to that between the United States and its rivals in the mid-1970s, the heyday of U.S. hegemony, and greater than that between the United Kingdom and its rivals during the halcyon days of the British Empire, in 1870. In short, China's future economic dominance is more imminent and will be both greater and more varied than is currently supposed.
China is already exercising its economic power

"In fact, despite China's relatively low per capita GDP today, it is already dominant in several ways. China convinced the African countries in which it invests heavily to close down the Taiwanese embassies they were hosting. With $3 trillion in foreign reserves, it has offered to buy Greek, Irish, Portuguese, and Spanish debt to forestall or mitigate financial chaos in Europe. ... China has also used its size to strengthen its trade and financial relationships in Asia and Latin America: for example, trade transactions among several countries in both regions can now be settled in yuan. ...
     Beijing is already exercising other forms of dominance. For example, it can require that U.S. and European firms share their technology with Chinese firms before granting them access to its market. And it can pursue policies that have systemic effects, despite opposition from much of the world. Its policy of undervaluing its exchange rate is a classic beggar-thy-neighbor strategy that undermines the openness of the world's trading and financial systems while also creating the conditions for easy liquidity, which contributed to the recent global economic crisis. Chinese dominance is not looming. In some ways, it is already here."
How vulnerable will the U.S. be to Chinese economic pressure in the future?
"Now, imagine a not-so-distant future in which the United States has recovered from the crisis of 2008-10 but remains saddled with structural problems: widening income gaps, a squeezed middle class, and reduced economic and social mobility. Its financial system is still as fragile as before the crisis, and the government has yet to come to grips with the rising costs of entitlements and the buildup of bad assets in the financial system, which the government might have to take over. ... China has an economy and a trade flow twice as large as the United States'. The dollar has lost its sheen; demand for the yuan as a reserve currency is growing.
    Much as in 1956, when Washington was suspected of orchestrating massive sales of sterling in New York to force the British government to withdraw its troops from the Suez Canal, rumors are swirling that China is planning to wield its financial power; it has had enough of the United States' naval presence in the Pacific Ocean. ... A repeat of the Suez crisis may seem improbable today. But the United States' current economic situation does leave the country fundamentally vulnerable in the face of China's inescapable dominance."