The Optimist

Red Dawn

Red Dawn

Henry Kissinger’s 2001 book Does America Need a Foreign Policy? opens with the observation that "[a]t the dawn of the new millennium, the United States is enjoying a preeminence unrivaled by even the greatest empires of the past. From weaponry to entrepreneurship, from science to technology, from higher education to popular culture, America exercises an unparalleled ascendancy around the globe." One decade, two military quagmires, and an economic meltdown later, few authors would venture such a presumption — not least Kissinger, whose most recent tome reflects the obsession of those who have come to realize that the post-Cold War world is not so unipolar after all. It’s called On China.

But for all the urgent attention paid to China in recent years, we might actually be underestimating how fast the world has already changed. This is the argument that Arvind Subramanian advances in Eclipse, his new book on the Sino-American balance of power. "The economic dominance of China relative to the United States is more imminent (it may already have begun), will be more broad-based … and could be as large in magnitude in the next 20 years as that of the United Kingdom in the halcyon days of empire or the United States in the aftermath of World War II," he suggests. Subramanian, an economist at the Peterson Institute for International Economics (and also a part-time colleague of mine at the Center for Global Development), notes that by 2010 China had overtaken the United States as the world’s largest economy in terms of purchasing power parity (a measure that accounts for the fact that many goods are cheaper in the developing world).

Historically, there has been far more to global power than brute output statistics, of course. In 1870, when Britain was undoubtedly the world’s top dog, it accounted for 9 percent of global output. But the economy of the United States, still a geopolitical start-up and barely through its catastrophic Civil War at the time, was already almost the same size — and China’s share was nearly the size of Britain’s and America’s combined, amounting to 17 percent of global output. And remarkably, this was at the beginning of a period roundly considered to be China’s historical nadir: Twelve years earlier, China had signed the Treaty of Tientsin, a humiliating ending to a war with Britain that forced the Middle Kingdom to open its borders to foreign goods, accelerating a decline that eventually earned China the pitying epithet "the sick man of Asia." Indeed, China has been the world’s largest economy — though not its richest — for most of the last 500 years, according to data from late economist Angus Maddison, who collected historical statistics on the global economy for the OECD.

But the 21st century is not the 19th — China’s place in the world and the nature of its power are quite different. Not least, China’s growing prominence extends beyond simple measures of output. While the United States and the European Union each had shares of world trade more than four times larger than China’s as recently as 2000, by 2010, their shares were all within a percentage point of each other (and China had overtaken the European Union). In 2000, China accounted for only 4 percent of world net capital exports; by 2010, it had climbed to 18 percent.

And when it comes to the technological and educational underpinnings of modern growth, while the United States is still far ahead, China is fast gaining. The World Intellectual Property Organization reports that U.S. filings under the Patent Cooperation Treaty dropped from 51,000 to 45,000 between 2006 and 2010. Over the same period, China’s international patent filings tripled from under 4,000 to over 12,000. According to Subramanian, in 2006 China was producing twice as many science and engineering graduates as the United States, and by 2008 the United States’ lead in peer-reviewed scientific article publications had shrunk by more than half from the sixfold advantage it enjoyed in 2002.

By 2030, Subramanian predicts, China is likely to account for about a quarter of world GDP compared with America’s 12 percent, and 15 to 20 percent of world trade compared with 7 percent each for the United States and the European Union. China’s share of global trade and GDP will look similar to those for the United States in 1950, and its net capital exports share similar to America’s in 1973.

But if the world is underestimating the accelerating speed of China’s rise, Subramanian’s analysis also suggests that we’re overestimating the problems that an economically ascendant China will impose on the rest of us. The country’s rise, he points out, has been intimately connected with globalization, including the expansion of trade under the World Trade Organization (WTO) umbrella as well as growing cross-border flows of finance and technology. In 1820, during the last period in which China was the world’s economic heavyweight — and a fiercely isolationist one — exports accounted for 1 percent of global GDP and considerably less than 1 percent of China’s economy. In 2008, the same statistics were 29 percent for the world and 35 percent for China. China is already a far more globally integrated economy than either Britain or the United States was in their respective heydays. In 1870, exports accounted for only 12 percent of Britain’s output. In 1975, they accounted for a mere 7 percent of the U.S. economy. The same percentages for imports were 7 percent for the United States in 1975 and 25 percent for China in 2008. And the fact that much of today’s trade is part of multicountry production processes for goods makes China even more bound to an open global economic system than the raw numbers would suggest.

Furthermore, China will become the dominant economic power in a period where the international trading regime appears likely to have weathered the threat of a retreat behind tariff walls that doomed the last great period of globalization during the Great Depression. And it will do so as an economy still benefiting from "catch-up growth" — the low-hanging economic fruit that China, as a poorer country, can grab by adopting innovations already widely used in richer countries — which, because it involves exploiting technologies and processes developed in those rich countries, demands a level of openness to the world. Both of these points suggest that China will remain a fair-dealing member of the WTO out of self-interest. Certainly, it is an active one. In 2009, half of the WTO disputes filed involved China on one side or the other. Most are still working their way through the settlement process, so it is too early to say with certainty how law-abiding China will be; nonetheless, Subramanian notes that the WTO has been a powerful mechanism for controlling the bullying instincts of economic heavyweights in the past. The United States, for example, has been subject to complaints in 88 WTO disputes, leading to findings of 33 violations, and the United States has complied or is complying in 26 cases.

Meanwhile, China’s rise — and the United States’ concomitant decline — is likely to increase the likelihood of the renminbi becoming a global reserve currency, a prospect that economic prognosticators have begun to consider with some seriousness since the 2008 economic crisis. But if anything, this shift — if it happens — is likely to mitigate some aspects of China’s role in the global economy that the rest of the world finds most problematic. As Subramanian notes, China will have to develop financial markets that are deep, liquid, and open to foreigners. At the moment, the country’s capital market is closed, the renminbi is undervalued and not fully convertible, and domestic financial markets are rudimentary. At the same time, there are signs that the government is responding to some of these challenges, for example by issuing 6 billion renminbi-denominated sovereign bonds to offshore investors in Hong Kong in 2009. And further steps in that direction would increase the export competitiveness of the rest of the world’s goods as well as create an exciting investment opportunity for those few in the rich world still actually saving money.

In short, China will be a different kind of global power because the nature of global power has changed dramatically over the past two centuries. Geographical domination is no longer necessary; today a considerable part of power does not even involve physical goods, let alone land, but rather is tied up in finance, technologies, and services. Just as the United States demonstrated in its eclipse of Britain that a sovereign empire wasn’t needed to dominate the world economy, China may not need even the military strength that the United States exercised for the last 50 years to remain preeminent. And China’s reliance on global trade and financial links, underpinned neither by force of arms nor sovereign control, means the newly dominant power has considerable self-interest in maintaining multilateralism.

That suggests the more China embraces its role as economic heavyweight in an integrated world, the better for the rest of the world — and perhaps in particular the United States — in terms of national security and economic opportunity. Even for Americans who fear the rise of China, then, the best advice is to embrace the inevitable.