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A friend writes:
A few notes on the implications of China displacing the United States as the world’s number one country over the course of the 21st Century:
1. The Chinese business cycle will become the world’s business cycle (replacing the U.S.). It will be a huge shock the first time a recession hits the U.S. because China goes into a downturn. How might this work? A recession in China slashes Chinese demand for imports. Some of those imports are from the U.S. Others are from other countries, that in turn buy less from the U.S.
However, all of this is a bit indirect. The more likely (and powerful) mechanism is that a financial panic starts in China and spreads. There is plenty of history showing that financial panics typically don’t stop at national borders. The East Asian crash of 1997 was one example. The Great Recession was/is another. By contrast, the Argentine Great Depression of 2001-2003 was mostly limited to Argentina (Argentina is not a global economic power). Note that even in the 19th century, economic crises swiftly spread around the world.
2. China’s incessant demand for commodities drives global commodity prices up, and China’s exports drive the prices for manufactured goods down. Of course, this is already happening. Given that the U.S. is a net importer of commodities (by far) and an exporter of manufactured goods this is bad for U.S. terms of trade. Basically, China is a direct competitor to the U.S. in world trade and China’s growth tends to impoverish the U.S. Note that many economists already believe that the gains from cheap imports from China, have been more than offset by China’s impact on commodity prices (food and fuel).
Tangentially, does it seem like restaurant prices are going through the roof? A Cobb or chef salad at a diner now seems to start at $13.95. And how much am I supposed to be tipping these days?
3. At some point, China may become a political model for countries around the world. Given that China is a one-party state with a mixed economy, this will pain all sorts of folks on the left (and the right). Basically, the western political and economic model will lose credibility in favor of China’s. Of course, this is already happening. Notably, the ability of the West to influence the third-world, has substantially declined because of the willingness of China to provide political and economic support without the strings demanded by Europe and the U.S.A.
An NYT op-ed writer is already denouncing India’s new prime minister Modi for showing an interest in how things are done in China.
4. China may emerge as a dominant military power. History says that military power cannot be separated from real economic power. The dominant military power of each modern period has been the dominant manufacturing power. That meant the UK until around 1900 and the U.S. until around 2000. China is the leading manufacturing power of the world today. The gap separating China and the U.S. will only grow (much) larger over time. Manufacturing is crucial for war for two reasons. First, manufacturing provides the national wealth required to pay for war. Second, manufacturing (the manufacturing infrastructure) provides the means for actually producing the weapons needed for war. Note that services are not a substitute for manufacturing in this context. Services are not (typically) tradable and don’t provide the convertible currency income needed to fight international wars.
More specifically, the U.S. may end up fighting an aircraft carrier war with China at some point in the future. History suggests that the U.S. Navy could lose just quickly as Britain did in WWII. On December 10th, 1941 the Japanese sunk the Prince of Wales and Repulse in just a few hours ending British naval power in the Pacific. Conversely, the U.S. ended Japanese naval power with the destruction of Kito Budai (the main Japanese fleet) in the Battle of Midway. Like it or not, America’s carrier fleet could be destroyed just as quickly and just as decisively [and without nuclear weapons]. In one day (less), both the reality and perception of American global power could essentially evaporate.
5. China may become a dominant setter of technology standards. After all, if China is the dominant producer and consumer of some technology, why wouldn’t China’s standard(s) become the world standard(s). Of course, the dissemination of technology standards is never that simple. The rest of the world is metric, but that hasn’t driven metrification in the U.S. Conversely, the U.S. uses 120 volts, 60 cycle power. Most of the rest of the world does not. Even when the U.S. electric utility business dwarfed any other country, the ROW (Rest Of World) didn’t rush to embrace U.S. standards (120 volts is too low, 60 cycle is correct). All that having been said, China may become influential with respect to new technology standards even if the old ones don’t change much.
6. China may become a dominant source of technology innovations. That hasn’t happened so far. Only a handful of new technologies can be said to have been “invented in China”. However, this is to be expected. The early years of U.S. economic growth were mostly imitative. Indeed, the U.S. was notorious for violating foreign copyrights and patents and refusing to pay for the privilege (Dickens hated the U.S. for years). Japan was widely derided for years (decades) as a producer of cheap copies of American goods. When that stopped being the most profitable model for Japanese firms, they (Japanese manufacturers) invested heavily and successfully in innovative products and moved upscale. The same process can be observed in South Korea and Taiwan now. China will inevitably follow.
The notion that America has some inevitable advantage in “creativity” is popular, but I have a hard time even defining “creativity,” so I don’t put all that much faith in this theory of American dominance.
7. China will almost certainly become the dominant financial power in the world. China is already the world’s largest creditor and holder of foreign exchange reserves ($3.95 trillion). The U.S. is the world’s largest debtor. It’s obvious that creditors gain power and debtors decline. Sadly, the “supply-side” right is so obsessed with tax cuts for the rich and “free trade” (unlimited outsourcing) that they deny what’s self-evident to everyone else. Of course, the welfare-state left is just as unwilling to admit that debt and deficits aren’t free and hobble a nation over time.
8. More subtly, the Chinese language and culture may gain influence worldwide. At some point, Chinese authors, playwrights, movie producers, musicians, and artists may become highly influential globally. Chinese may become the mandatory second language for everyone (as English is now). In my view, the Chinese language is likely to gain global market share (for economic reasons) considerably faster than Chinese artists and musicians.
“Mandarin immersion” grade schools are popular among SWPLs since they act as NAM Repellents, but I haven’t seen much evidence that white people are actually learning to speak Chinese. For example, in 2013, only 520 high school students in America who say they didn’t grow up speaking Chinese got a 5 on the Chinese Language and Culture Advanced Placement test, which is higher than I would have thought, but still not much.
It remains to be seen if China can produce books, movies, songs, etc. that the rest of the world yearns for. Conversely, their no doubt at all about China’s ability to produce globally competitive goods.
A decade ago it looked like the Chinese would become competitive in movies. Zhang Yimou’s film “Hero” was spectacular, but the Chinese film industry hasn’t made much of an impression since.
Lately, Hollywood blockbusters have routinely included a segment filmed in China (with perhaps a shout-out to Russia in the plot), because China and Russia are developing American-style movie-going cultures where youths go to opening weekend movies. For example, Transformers: Age of Extinction opened this weekend with $100 million in America and $92 million in China (with $22 million in Russia). (Here’s my 2011 review of the previous Transformers movie.)
So, Hollywood’s strategy is simply to assimilate China into the Blockbuster Borg. So far, it seems like it’s working to head off the Chinese threat.
The American college admissions system is an important leverage point. The Chinese crave the status of American university degrees, which allows Americans to encourage the Chinese to learn to jump through the various SWPLifying hoops they choose to erect. Or they can just accept the Chinese money and test scores, no questions asked.