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.

Summary

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.

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  • Davidake

    You have nailed on the head. A great article.

    • gustavsson_john

      Thank you very much! 

  • Pleongv1

    just continue to hide in your confort zone of thought

  • Prev229

    Some of your arguments are just plainly wrong.  (1) If China reaches the same per capita GDP as U.S. its economy will be four times the size as the U.S.’s.  FOUR TIMES!  I do think that China will flat out when its per capita GDP reaches about half the size of the U.S., but that would still make its economy TWICE as big as ours.  It is pretty much a given that China’s GDP will surpass the U.S.’s.  It’s just a matter of when.  (2) China’s population will never be half of what it is today.  In absolute numbers China still add more people to the population each year than evey other country in the world except India.  Yes the population growth rate is very low but it is not negative.  China’s population will always be a few times bigger than the U.S.’s  (3) Culture of obedience?  You see the stereotype of Asian culture in the west and you think that’s the norm.  I used to believe the same until I spent a year in Beijing.  This culture is very competitive — too competitive may I say.  The younger Chinese people today are extremely hungry — they’d do anything and eveything to win.  (4) China has no natural resources?  Heard of rare earth?

    • gustavsson_john

      1) Yes, technically correct – but the chinese consumer won’t be as “powerful” as the US consumer as long as GDP/capita is lower. Plus, and I didn’t go into this in the post (maybe I should have), China’s growth will fall much sooner than that. We’re talking about a China that is peaking in just a few years, maybe 2015 or so, and then the future is very uncertain. 2) You ignore that the reason the population keeps growing is because people live longer than they used to. It works kind of like this: If you step on the gas pedal and then let go of it, the car will keep running for a few metres before it finally stops. Do you seriously believe that a birth rate of 1 child per woman is sustainable and won’t cut the population in half in the long run? 3) I know that chinese people are competitive, but that’s not the same as innovative. Ask a chinese student to learn a musical piece, and they’ll be able to do it. Ask them to compose a new piece, and they won’t have a clue. As long as you can do something according to rules and instructions, they’re OK, but the culture of obedience means they don’t do very well when the task isn’t clearly defined and requires independent thinking. This could change of course, but it’s unlikely to change overnight. 4) “No” natural resources may be too strong a statement – but far less than they need to ever be a superpower for sure. 

      • letsbereasonable31

        Sorry, John, but you are mistaken in many respects.  As noted above, China is a world leader in the production of many important minerals, including not only coal, but those critical to the manufacture of modern electronics (rare earths) and steel (tungsten).  It is also rich in uranium and a range of other natural resources, including petroleum.

        For centuries, some of the most innovative technologies in the world were created and refined in China.  For centuries, no European manufacturer could match the quality of Chinese porcelain, silk, or lacquer, for example.  Gunpowder, the compass, paper, and other major inventions were developed in China hundreds of years before the modern era.  One of the world’s first novels, the Dream of the Red Chamber, was written by a Chinese author.  Innovative agricultural practices from thousands of years ago alllowed China to feed millions and grow its population to an imperial scale and in defiance of the occurrence of droughts, earthquakes, and other natural disasters.  The Chinese imperial examination system preceded by a thousand years the civil service system in Britain and elsewhere that is so highly regarded in Europe.  Chinese naval technology allowed the construction of ships that were ten times the size of those available to Columbus — a century before Columbus allegedly discovered the “New World.”

        Despite the fact that millions of intellectuals were deprived of their livelihoods and forced to work as farm workers as recently as a half century ago by the destructive and misguided “Cultural Revolution” of the 1960′s, China has rapidly rebounded in a broad range of educational and industrial fields, from nuclear power generation to space and computer technology, and beyond.  It has advanced within twenty-five years from a Communist backwater to a modern industrial powerhouse.

        China’s road network, as well as its high-speed rail system, has exploded from virtually nil to world-class in fifteen years.  China has the largest network of high-speed trains in the entire world and has no plans to stop its rapid expansion, linking its entire expanse and allowing maximum mobility for its growing population.  The sheer scale of infrastructure construction boggles the mind: Entire cities are built from the ground up within the space of a year, allowing for population growth and fulfilling long-term plans for national development.

        Chinese residents of the countryside, contrary to popular misconception, are not necessarily limited to a one-child policy, and there is increasing pressure to revise that national policy in any event.

        Accordingly, given the foregoing, I think that the author’s conclusions are largely mistaken.

  • letsbereasonable31

    China has plenty of resources, and is one of the world’s largest producers of coal, for example.  Its proven coal reserves exceed that of Australia, often considered rich in natural resources.  China is a world leader in developing environmentally friendly sources of energy.  In addition, China has a robust nuclear industry.

    According to the 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.”

    Further, Chinese music has been one of the most innovative in the world throughout history.  In modern times, “Cantopop” and “Mandopop” entertains millions in East Asia, and is composed by — yes — the “uncreative, obedient” Chinese. 

    Chinese patents have rapidly increased over the years and now exceed even those filed in the United States.  The quality of those patents have also increased.  China has a thriving space program that builds and improves on technology initially developed in other countries.  Its rocket technology is substantially domestically developed and entirely manufactured within China.  Despite decades of international isolation, its Long March series of rockets is one of the most advanced and reliable family of space boosters in the world.  Its military shipbuilding industry represents design and manufacturing capabilities that increasingly approach and even excees those of top-rung builders in the West, despite decades of worldwide embargoes against transfers of knowhow.

    This article is replete with Western stereotypes about China and relegates an entire country to the “uncreative, dull, and robotic” description of the Chinese that is as wrong as it is prevalent.

  • letsbereasonable31

    By the way, China is already the largest market for new automobiles in the world, exceeding that of the United States.

    China’s domestically developed automobile industry is making rapid inroads in South America, where Chinese automobiles are increasingly seen as solid, reliable, and economical compared to American and Europeans makes.  China’s automobile industry is where Japan’s was thirty years ago.  Japanese automobiles are now seen as some of the most desireable (Lexus) and innovative in the world.  Given the extreme timescale compression typical of Chinese development, it is likely that what took Japan thirty years to accomplish will take only ten in the case of China.  Keep in mind that ten years ago, China automobile exports overall were virtually nil.

    Chinese brands are also common in Africa, where they outcompete both local and Western equivalents.

    Further, despite comparisons often made between China and India (which has traditionally benefited from Western influences and favoritism),  China has left India in the dust in scientific endeavors, innovation, and development, as acknowledged at the highest levels in India within the last several weeks.  Again, despite handicaps imposed by Western embargoes, China has achieved milestones in such things as spaceflight where other countries struggle to compete.  China is on the verge of constructing an independent space station and is developing a heavy booster in the 20 to 25-ton payload class — a capability currently possessed only by the United States, Russia (Proton), and Europe (Ariane V). The Aries booster abandoned by NASA would have been in the same category.

  • zyz123

    The statement about China’s natural resource limitations does
    not withstand scrutiny. Below are country rankings by production of steel,
    copper, zinc, aluminum, and coal. China is the top producer by far in all
    except for copper.

    http://en.wikipedia.org/wiki/List_of_countries_by_steel_production

    http://en.wikipedia.org/wiki/List_of_countries_by_copper_production

    http://en.wikipedia.org/wiki/List_of_countries_by_zinc_production

    http://en.wikipedia.org/wiki/List_of_countries_by_aluminium_production

    http://en.wikipedia.org/wiki/List_of_countries_by_coal_production

  • Patriot

     Poor Russia. Anglo-Saxons probably never leave her alone.