For some time I have believed that our biggest concern about China should be not a possible trade war or military conflict, but the threat posed to the economic leadership of the United States by the rapid progress the country is making in technology. The prevailing view is that China is an enormously effective manufacturer through a combination of the creative use of robotics and low labor costs. The country has been able to produce a wide range of products at compelling prices and become a leading exporter to the world. Many believe that China’s government prevents the untrammeled expression of ideas and thereby stifles innovation. As a result, the theory goes that China has to obtain technology from others because it cannot develop creative ideas on its own. While that might have had some truth to it for much of its recent economic history, it is no longer true today.
We all know that on a Gross Domestic Product basis, China is the second largest economy in the world and, if it continues on its present trajectory, it will become the largest economy sometime in the 2030s. This is inevitable to the extent China grows at a real rate of better than 5% while the United States grows at only 2%–3%. On a Purchasing Power Parity basis, China is probably the largest economy in the world now. When China joined the World Trade Organization in 2001, its GDP was only 13% of the U.S. GDP, according to Niall Ferguson. By 2016, it was 60% and by 2023 the International Monetary Fund projects it will be 88%. Those who believe China is vulnerable to a “hard landing” or something similar to the deflationary recession that afflicted Japan at the end of the 20th century are not studying the differences between the two countries carefully. Japan invested abroad irresponsibly in real estate and its stock prices domestically became wildly overvalued. China may have over-invested in industrial capacity and infrastructure and it may have too many non-performing loans on the books of its banks and shadow banks, but it weathered the financial crisis of 2008-9 better than most developed countries. Indeed, the hard landing that many investors feared two years ago never took place.
A look back in history may be useful. In a blog written by Steven Nagourney, he points out that in the years after 1000 A.D. China had been the most progressive and innovative civilization in the world. It had developed strains of rice that could be wet-planted and produced three crops a year. The British observer Francis Bacon noted that three innovations that had transformed Europe — gunpowder, printing and the compass — had all been developed in China before 1000. In the twelfth century, China was thriving, with 100 million people, and in the fifteenth century its navy explored the world. By the end of the nineteenth century, however, Malthus’s predictions for China were proven right, and there wasn’t enough food to feed its 300 million people. To a certain extent, the country was in a crisis because of its insularity. The farmers had no mechanized equipment or fertilizers. Economic and technological leadership had moved to Europe and the United States.
The country went through 100 years of upheaval prior to Mao’s takeover in 1949. It was underdeveloped and its economy was basically feudal until 1976 when Mao died. He is credited with being the founder of modern China, but his reign was marked by the Great Leap Forward, which created a famine during which 30 million people died, and the Cultural Revolution, which was a significant step backward in the country’s overall intellectual and economic progress. Following Mao’s death, Deng Xiaoping set the country in a new direction that built the foundation for today’s success. In a controversial book written by China expert Michael Pillsbury and published in 2015, the author lays out a case that Xi Jinping, the current leader, has been advancing a hundred-year plan to make China the dominant country in the world economically, politically, technologically and militarily by 2049 – the hundredth anniversary of Mao’s takeover of the government. Critics of the book argue that it is weak on documentation, but when you examine what is happening there in technology, it would appear that China is well on its way. Graham Allison’s book, Destined for War, outlines a similar warning.