China’s Century?
After watching the unbelievably beautiful, complicated and artistic Olympic opening ceremony in China, people are starting to realize that this country of 1.3 billion people, after decades of misrule by Mao and the Communists, could be on a path to becoming the dominant world power. They have had record growth rates of around 10% a year for almost thirty years, and while they remain Communist in name, there is nothing communist about how the country’s economy operates. So, after the American century, are we about to experience the century of China?
Since the end of the Cold War China has seen its world position skyrocket. Not only has their economy continued to boom, but the American trade deficit has grown by five times, as Americans buy more and more Chinese goods. This deficit is financed in large part by China’s investment in American markets, helping China build a large current account surplus, as well as a large saving rate. All of this suggests that despite the pressures of poverty and population, China’s economy is far from spent; in fact, it is reaching a position where it could allow its currency to appreciate, shift from foreign markets to its internal market, and balance export led growth with domestic economic improvement. The US, with a large current accounts deficit (though declining a bit thanks to the dollar’s recent weakness), would be further pressured by less Chinese investment in the US economy, perhaps sparking inflation along with recessionary pressures (i.e., stagflation — made even more likely with high oil prices). Even now the Asian economies appear to keep booming even as the US drifts into a crisis of unknown proportions.
Geopolitically, China’s position is as good as ever. American errors in Iraq have not only bogged the US down, but have increased anti-Americanism world wide. This has broadened China’s appeal in the EU, as well as wtih Russia and Iran. Russia and China have always been rivals, but they both have interests in the stability of Central Asia, minimizing American power in the Mideast, and building a strategic partnership with Iran. In Asia, China is the dominant economy, and its influence is even working to improve relations with Taiwan, and the two economies are increasingly linked (suggesting a ‘unification’ may not be out of the question down the line — but one of choice, not force). China’s political leaders now have a strong argument against the military concern for the US: the US experience in Iraq shows the limited usefulness of military power in the 21st century, and the US is so over-stretched that it is in no position to challenge China in Asia or really anywhere. China can undercut US policy directed to Iran without worry over any American retaliation — both politically and militarily, the US cannot afford to confront China.
China’s military is not especially large, given the size of the country, nor is it likely to engage in the kind of interventionism world wide that has weakened the US. They not only put respect for sovereignty as a primary principle, but they recognize that military adventurism is not worth the price. Better to make deals and leverage economic clout. That’s actually how the US achieved so much in the 20th century, military actions have in general hurt the US, including Korea, Vietnam, and of course recently Iraq.
To be sure, China faces hurdles. Some are external: China needs oil, wood and other raw materials. This has lead to a proliferation of agreements between China and various African states, as well as aggressive Chinese deals in the Mideast. As oil prices rise, however, it will stress and even threaten all fossil fuel based economies. China, also harmed by alarming rates of pollution growth, is starting to look at alternate sources of energy (and has for awhile) but they rely on the outside world for raw materials.
Others barriers are internal: hundreds of millions Chinese are still living in poverty, and this could threaten stability. One reason democracy is unlikely to work in China is that these millions could skew elections, and create destabilization or even chaos. But as the middle class grows in wealth and number, they will demand a say on political matters. The Chinese Communist Party will have to manage political reform as adeptly as economic reform to assure that the 21st century will be the “Century of China.” Ultimately, the Communist Party, who despite ditching communism has remained in power because of fear of national fragmentation, will need to give up its grip on authority. It’s unlikely that they will embrace democracy of a western style, but they will need to find a way to share authority and open up the country’s political system. They don’t have to meet our standards, but they have to make sure the Chinese people are satisfied.
Also, if the economic growth continues to poison the earth and water in China (as well as contributing to things like global warming), they could find themselves with ecological disasters that undercut the progress they make. Finally, they need to balance their own love of sovereignty with the globalized political economy they benefit so greatly from.
Finally, corruption has thrived as the economy has expanded. This hasn’t led to the problems corruption often causes, since economic growth has been so intense that there is money to spare. But to really become a stable, long term world power, they need to have rule of law that limits corruption.
In all, though, the Chinese should be thrilled by the attention they are receiving, and are justified to take it as an omen that their Olympics began at 8-8-08, at 8:08 PM — eight being a lucky number in China. Things could go wrong, challenges exist (as they do for every country), but right now China’s future looks bright.
August 10, 2008 at 12:50 pm
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today’s recession may be just a preview of what’s to come.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?
At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China’s. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world’s population.
Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)
Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Pete Murphy
Author, “Five Short Blasts”
August 11, 2008 at 3:57 am
I’ll visit your cite, but I’m having trouble figuring out the causal link here. After all, China and India have middle class populations bigger than ours — thus access to that market would be beneficial to us. It seems that in someways China and India are microcosms of the planet, having a first and third world within them. Also, we have densely populated cities — are our rural areas hurt by trade with urban areas? I guess I’ll have to go to your website and see more.