U.S.-China Rivalry Will Shape the 21st Century

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U.S.-China Rivalry

This post was originally published on Real Clear Politics.

China is an emerging superpower. The US is the incumbent. The potential for destructive clashes between the two giants seems potentially unbounded. Yet the two are also intimately intertwined. If they fail to maintain reasonably co-operative relationships they have the capacity to wreak havoc not only upon each other, but upon the entire world.

China is a rival of the US on two dimensions: power and ideology. This combination of attributes might remind one of the clash with the Axis powers during the second world war or the cold war against the Soviet Union. China is of course very different. But it is also potentially far more potent.

China’s rising power, economic and political, is evident. According to the IMF, its gross domestic product per head in 2017 was 14 per cent of US levels at market prices and 28 per cent at purchasing power parity, up from 3 per cent and 8 per cent, respectively, in 2000.

Yet, since China’s population is more than four times as big as that of the US, its GDP in 2017 was 62 per cent of US levels at market prices and 119 per cent at PPP.

Assume that by 2040, China achieves a relative GDP per head of 34 per cent at market prices and 50 per cent at PPP. This would imply a dramatic slowdown of the rate it is catching up (a fall of around 70 per cent from the rate since 2000, starting in 2023). China’s economy would then be almost twice as big as that of the US at PPP and almost 30 per cent larger at market prices.

The 34 per cent benchmark I have chosen is that of today’s Portugal. It is hard to imagine that China, with its vast savings, motivated population, huge markets and sheer determination could not achieve the relative prosperity of Portugal. This would still leave it far poorer, relative to the US, than Japan or South Korea — the fast-growing east Asian economies of the past.

Size matters. It is quite unlikely that China’s overall economy will not end up far bigger than that of the US, even if, on average, individual Americans remain far more prosperous than individual Chinese. China is also already a more important export market than the US for many significant countries, particularly in east Asia.

Moreover, China is spending almost as big a share of GDP on research and development as leading high-income countries. This is a driver of Chinese innovation, which I recently saw at a visit to Alibaba’s headquarters in Hangzhou. Moreover, the combination of economic size with improving technology is making China an increasingly formidable military power. The US may complain about this. But it has no moral right to do so. Self-defence is a universally accepted right of nations.

So is the right to develop. The US can huff and puff about Chinese theft of intellectual property. But every catch-up nation, very much including the US in the 19th century, seized the ideas of others and built upon them.

The idea that intellectual property is sacrosanct is also wrong. It is innovation that is sacrosanct. Intellectual property rights both help and hurt that effort. A balance has to be struck between rights that are too tight and too loose. The US can try to protect its intellectual property. But any idea that it is entitled (or indeed able) to prevent China from innovating its way to prosperity is mad.

Share this graphic China is also an ideological challenger of the US, on two dimensions. It has what might be called a planned market economy. It also has an undemocratic political system. Unfortunately, recent failures of free market high-income economies have increased the lustre of the former. The election of Donald Trump, an admirer of despotism, has strengthened the appeal of the latter.

The US, one would once have said, also has the benefit of powerful and committed allies. Unfortunately, Mr Trump is waging economic war upon them. If a decision to attack North Korea led to the devastation of Seoul and Tokyo, US military alliances would be over. An alliance cannot also be a suicide pact.

Share this graphic Managing the competition between these two superpowers is going to be difficult. Graham Allison of Harvard is anxious in his Destined For War: conflict between the incumbent and rising power is almost inevitable. A hot war among nuclear powers might seem relatively unlikely.

But large-scale friction and so an end to necessary co-operation over economic relations seems probable. It is unclear how to resolve today’s conflicts over trade. Co-operation over managing the global commons has already collapsed, given the Trump administration’s rejection of the very idea of climate change.

China’s future is up to China. But the west’s relations with China are up to it. The US is right to insist that China abide by its commitments. But then so must the US and the rest of the west. China is not going to feel compelled to abide by agreed rules when pressed by any country that treats these rules with contempt. China is, in any case, not the real threat. That relationship can surely be managed.

The threat is the decadence of the west, very much including the US — the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth, and the sacrifice of long-term investment to private and public consumption.

It is indeed a tragedy that the best way we could find to escape from a financial crisis was via monetary policies that risked promoting new bubbles. We could be better than this.

The west can and must live with a rising China. But it should do so by being true to the better angels of its own nature. If it is to manage this turn of the wheel of history, it has to look within.

This post was originally published on Real Clear Politics.