Thursday, March 1, 2012

Why China will never overtake the US

China is a popular subject today. The country has been mentioned in most GOP debates, and one of the candidates – Mitt Romney – has made a point out of promising that with him as President, the 21st century will be “an american century” – ie, not a chinese one.

China certainly looks threatening. With an economy that barely slowed down during the global recession, a population of 1.3 billion and a huge military, it certainly looks like a potential challenger to the US.

It’s not.

In this post, I’m going to explain why China will never overtake the US, neither as an economic, militaristic or any other type of superpower. As a matter of fact, I’m going to argue that China is a nation in decline – it just doesn’t show yet. Here’s why:

1) Convergence.

Economic theory tells us that poor countries converge, meaning they grow faster than the rich countries until they themselves become rich. We’ve seen that happen to many countries, particularly after World War II when countries like Germany and France grew faster than the US, until they had become (approximately) as rich as the US – then the growth slowed down. If China ends up following their example, they’ll grow fast until they reach the US, but they won’t actually pass and overtake the US. As a matter of fact, if they follow Japan’s example, they might grow really fast (check), get lots of clueless analysts talk about them being the next superpower (check), get an unsustainable propery bubble (check) and then stall and go through a 10-year recession (not check yet – but probably not far away).

Now technically, how fast a country grows depends on how far away they are from their “steady state”, but we won’t get that complicated in this post. Just in general, poor countries are further away from their “steady state” than rich countries. And so, they grow faster. However, despite the media hype that these countries get from their fast growth, they never end up overtaking the US. Ever.

One thing that is driving China’s growth (apart from baseless speculation, which also contributed to Japan’s growth in the 1980′s) is the high savings rate. However, as Chinese consumer’s get richer, and as they start getting credit cards and similar things that western consumers have had access to for decades, I’m quite confident that savings rate will decrease. That’s sad of course – debt is and will always be a curse – but it is none the less a very likely development.

2) The one child policy

Another big weakness of China is demographic: If you think the US population is aging, imagine what it’s like in China, where the One Child policy has been in effect for 30 years and ensured a birth rate of only slightly above 1 child per women. This means that in one generation, China’s population will be roughly half what it is today. Try become a superpower under those conditions!

But, can’t China just reverse this policy? Not really. They’ve already lost so many young people that the lack is becoming very apparent, and China is now more or less bound to have their own version of the US “social security crisis”. Even if they do reverse it, this will be very expensive as Chinese universities and schools are used to the current number of children; if parents suddenly start having 3 kids instead of 1, there will be a massive shortage of housing, schools etc. and public investment will be needed – ie, an end to China’s low-tax policies.

It also wouldn’t be hard to imagine Chinese people not really changing their lifestyles very much because the one child policy is lifted; they’ve become sort of used to only having one child, and the society is built around that assumption. Then, change will be slow and birth rates won’t rise fast enough.

3) Salaries are rising – fast

Salaries in China are rising fast, and are predicted to rise with approximately 12 % per year over the next five years. This means that outsourcing becomes less attractive, and while Chinese salaries are not set to catch up with their US equivalents any time soon, there are plenty of negatives with investing in China, and the main incentive has always been the super-low salaries. If they go away, so will the foreign direct investment. And they are going away, and going away fast. Already now, many companies express disappointment with their outsourcing project, saying in surveys that outsourcing hasn’t saved them nearly as much money as they thought it would.

4) Culture of innovation vs culture of obedience

The US has, to put it mildly, a cultural advantage over the Chinese.

Economics teaches us that long-term growth comes from technology – ie, innovation. The ability to do more with less, to get more productive. If you want to learn more about this, you can google “solow-swan growth model”.

While an increase in the labour force, or an increase of capital can lead to a temporary boost of growth, it is only technological growth that is sustainable in the long run.

However, what the traditional growth model doesn’t tell us is where technology comes from – it is, to use the fancy academical term, “exogenous”. Technology just “appears” from somewhere, and we don’t really know what causes it to happen. Why do people innovate, really? The traditional growth model gives us no clue about that.

Even then, it probably isn’t very farfetched to think that countries who’s cultures encourage innovation and free thinking will have more innovation than countries who’s cultures encourage strict obedience.

And the Chinese culture is a perfect example of the second type of culture. A culture where obedience truly is everything and you shut up and do as you’re told – if you don’t, you’ll soon find yourself standing in front a firing squad. That’s not a good environment for innovation, and that’s why China’s long-term growth prospect remains dismal. At the end of the day, they can’t live off capital ackumulation; economics proved that over 50 years ago. You need to innovate if you want to grow in the long run, and while China is great at copying US innovations and not respecting patents and copyright, if they want to overtake the US they will have to innovate more than the US does – ie, more than Apple, Microsoft, and all the other American companies does. Am I the only one who thinks that’s not going to happen any time soon?

5) No natural resources

China is a country with almost no natural resources, and if you look at superpowers from the present and past, you’ll notice they all had huge amounts of natural resources. The US, Russia, the UK (with all its colonies included) – they all had or have natural resources and lots of it. While the US does have a dependancy on foreign oil, that is nothing compared to China. China’s natural resource problem becomes particularly troubling when you take into account that China’s population is four times the size of the US.

Having no natural resources means you always depend on other countries and are at the mercy of their willingness to sell you their resources – for most countries, that’s not a big problem, but it does kind of stop you from doing whatever you want and actually being, you know, a superpower. It also means you are more sensitive to changes in exchange rates and commodity prices.


This post can be summarized in a short sentence: China will not overtake the US. There are plenty of other reasons than the ones I’ve outlined in this post.

This does not mean that the US will forever be a superpower – although that’s what we should all hope for, americans and non-americans alike. The real threat, and I’ve been saying this for a long time, does not from the Chinese paper tiger but rather from the Russian bear. Russia is a million times more aggressive than China – China is a relatively isolationistic country (whether that will last forever there is no way of knowing), while Russia has shown time and time again that they miss their “glory days” back when they were the Soviet Union. As recent as 2008, they more or less out of nowhere decided to attack their neighbour country, Georgia. I can’t imagine China doing such a thing; the chinese leadership is very committed to not rocking the boat (“don’t mess with success”). Yes, they oppress the internal opposition and they occupy Tibet, but Russia does all that stuff and much more. Also, Russia is overflowing with oil and other natural resources.

If the US wants to preserve its status as the world’s only superpower, it has to understand who its real enemy is. And it’s not Hu Jintao.

John Gustavsson


Anonymous said...

It remains to be seen whether China can overtake the U.S. The one scenario in which this could happen is if the US were to turn fully to socialism (which is where the Democrats are trying hard to take us). The prosperity of a nation is proportional to the amount of economic freedom available to the people. As is stands now, the US is embarrassingly only 10th in the world (, but yet far superior to China.

I must vigorously disagree with your fifth point. China has vast natural resources. To quote Wikipedia "China has substantial mineral reserves and is the world’s largest producer of antimony, natural graphite, tungsten, and zinc. Other major minerals are aluminum, bauxite, coal, crude petroleum, diamonds, gold, iron ore, lead, magnetite, manganese, mercury, molybdenum, natural gas, phosphate rock, tin, uranium, and vanadium. With its vast mountain ranges, China’s hydropower potential is the largest in the world."
Additionally, the hunt for oil reserves is only just beginning. It's hard to imagine that China would have zero.

nabil Sharaf said...

Not a very impressive analysis, sorry. Convergence is precisely the problem. China has a long way to go before convergence. So by the time that happens, the aggregate Chinese GDP will be way beyond the US. Gdp is what matters for global power, not GDP per capita. Simple stuff, really.