Denmark’s take: Don’t worry, China is going to get old before it gets rich

Yesterday I discussed the news that China had surpassed the United States as the world’s leading manufacturer, and wondered about the national security implications of this. I also mentioned that my CNAS colleague, the very smart Abe Denmark, counsels not to worry so much. Here he explains why he is cool with it.

By Abe Denmark
Best Defense Beijing bureau chief

China’s rising economic power continues to set records. A few weeks after overtaking Japan as the world’s second-largest economy, a report by a U.S. economics consultancy estimates that China recently overtook the United States as the world’s top manufacturing country by output, ending America’s 110- year dominance. Experts suggest this marks a "fundamental shift in the division of labor" that is unlikely to change soon.

This frankly comes as no surprise, and was a long time coming. The sheer size and economies of scale (not to mention low wages and lax protections for civil and environmental issues) make China a natural hub for heavy manufacturing. With roughly one-fifth of the entire world’s population, it is only natural that China continue to gain a leading economic position as it slowly embraces market-based economic policies.

Yet China’s rapid growth is far from assured over the long-term. Due to its one-child policy, China’s demographics over the long-term are not promising, and China may very well get old before it gets rich. China is also facing significant internal challenges, born from frustration over rampant corruption, vast economic inequalities, and environmental degradation. Moreover, China’s gargantuan population means that every year a new generation of college graduates hits the job market, and high levels of economic growth — roughly 8 percent annually — are needed simply to keep unemployment down.

No one is more aware of these challenges than China’s leadership. Earlier this week, China concluded a session of its National Congress, passing a new 5-year plan that guides government investments and priorities until 2016. The new plan calls for lower levels of growth and a concerted effort to address economic and social inequalities. China’s leaders recognize this will higher unemployment, meaning China may be facing challenges it has not confronted since its economy began to take off, over thirty years ago.

Yet these slower levels of economic growth, targeted to be at 7 percent, are still far beyond the levels of growth likely to come out of the United States and the West. American economists are now looking down the road at when China’s economy overtakes that of the United States. Goldman Sachs puts the date at 2027, while a more recent report from CitiGroup puts the date at 2020.

So what are the military implications of a rising Chinese economic power with a higher manufacturing output capacity than that of the United States? This is a bit of a macabre exercise, as a large-scale military confrontation between the United States and China would likely produce a horrific economic and human toll that all should seek to avoid if at all possible. Yet such considerations merit examination; as Tom Ricks pointed out in an email discussion about this report, "the British lost manufacturing dominance in about 1885, didn’t realize it, and found out the hard way during World War I." Is America slated to be the next UK, watching the world move on from our outdated economic system?

Only time will tell, but I do not think so. In World War II, the United States demonstrated an incredible ability to surge manufacturing capacity to defense industries should the need arise. Factories that made cars were converted to make tanks and planes, and the United States eventually out-produced its enemies. Personally, I would never bet against the ingenuity of American industry when the need arises.

Moreover, the nature of warfare has likely changed in the past 125 years. In 1885, the United Kingdom lost its manufacturing lead just when manufacturing output capacity was a key determinant of military power in a mass, mechanized age of warfare. Today, if my old boss Secretary Rumsfeld is correct, the key to military power is not only mass manufacturing capacity but rather a military that is quick, maneuverable, coordinated, and precise. These are tasks at which the U.S. military is exquisitely good, and our advantage in this sense is not likely to wane for the foreseeable future. China’s defense industry, while improving in quality and technology, seems to still be a few steps behind and is unlikely to catch up any time soon. The key for China’s military, therefore, is to use quantity to make up for lower quality.

Let’s hope we never have to test these hypotheses. To paraphrase Winston Churchill, it’s far better to trade trade than to war war.