China's Economic Dominance (3) - Arvind Subramanian

Economist Arvind Subramanian has a new book Eclipse Living in the Shadow of China’s Economic Dominance

Next Big Futre, AUGUST 26, 2011 

Peterson Institute for International Economics scholar Arvind Subramanian has recently put out analysis that China's economy has already surpassed the economy of the United States on a purchasing power parity GDP basis. Arvind has a new book “Eclipse: Living in the Shadow of China’s Economic Dominance”. 

1. He sees the probability of U.S. needing an IMF loan as a 10% or 20% possibility by say 2021.

PPP is an important concept, but it has a small weight in my overall formula of economic power. Arvind believe that the resources a country brings to the power table includes resources that are internationally traded and resources that involve people. If the U.S. were to fight against China and 100 Chinese soldiers faced 100 US soldiers, would you say that because the 100 Chinese soldiers earn one 20th of what an American soldier earns that the value of a Chinese soldier is 1/20th the value of American?

2. The way economic convergence between the U.S. and China is evolving, the fact that China will catch up is inevitable. At end of 20 years, China will have a GDP per capita of only 40-50% of the U.S. But China has four times the population of the U.S., so the Chinese economy will be much larger overall. The arithmetic is undeniable.

China will have an economic crisis over the next 20 years, no doubt. But it will recover and return to some decent level of growth.

If China has a big economic shock, it has the policy space [including the ability to broadly stimulate the economy] to prevent one or two years of negative growth from translating into many years of slow growth.

3. China has the ability to exercise its power in slightly unbenign ways. Look at what’s happening today on exchange rate. [By keeping its currency undervalued] China is pursuing a beggar–they- neighbor policy and nobody can stop them. That’s sign of dominance.

The U.S. is totally powerless to stop China because U.S. companies have so much at stake in China that China can call the shots. Asia won’t do it because Asian economies are part of a value-added chain with China. Africa won’t do it because China has made so much investment there..

Imagine what happens when the numbers [denoting the size of the economy] diverge even more between China and the U.S.

4. There are different kinds of dominance. There is dominance of the U.S. – a leader that’s democratic and pursues international values and which inspires followship. Maybe China won’t have that. But it could exercise a negative form of dominance, either through its exchange rate policy or by buying up commodities [to corner markets].

5. What’s the biggest threat to China’s rise to economic dominance? A political shock to system. Then all bets are off.

6. All countries must work together to negotiate and bind China to a multilateral system. If every country tries to make its own deal with China, no one will have any leverage.

There is an eight page paper - Foreign Affairs - The Inevitable Superpower - Why China’s Dominance Is a Sure Thing (also by Arvind Subramanian)

http://www.iie.com/publications/papers/FA-subramanian201108.pdf

Broadly speaking, economic dominance is the ability of a state to use economic means to get other countries to do what it wants or to prevent them from forcing it to do what it does not want. Such means include the size of a country's economy, its trade, the health of its external and internal finances, its military prowess, its technological dynamism, and the international status that its currency enjoys. My forthcoming book develops an index of dominance combining just three key factors: a country's GDP, its trade (measured as the sum of its exports and imports of goods), and the extent to which it is a net creditor to the rest of the world. GDP matters because it determines the overall resources that a country can muster to project power against potential rivals or otherwise have its way. Trade, and especially imports, determines how much leverage a country can get from offering or denying other countries access to its markets. And being a leading financier confers extraordinary influence over other countries that need funds, especially in times of crisis. No other gauge of dominance is as instructive as these three: the others are largely derivative (military strength, for example, depends on the overall health and size of an economy in the long run), marginal (currency dominance), or difficult to measure consistently across countries (fiscal strength). 

I computed this index going back to 1870 (focusing on the United Kingdom's and the United States' economic positions then) and projected it to 2030 (focusing on the United States' and China's positions then).The projections are based on fairly conservative assumptions about China's future growth, acknowledging that China faces several major challenges going forward. History suggests that plenty of economies -- Germany, Japan, Singapore, South Korea, and Taiwan -- grew at the pace I project for China after they reached China's current level of development. Meanwhile, I assume that the U.S. economy will grow at about 2.5 percent per year, as it has over the last 30 years.

The upshot of my analysis is that by 2030, relative U.S. decline will have yielded not a multipolar world but a nearunipolar one dominated by China. China will account for close to 20 percent of global GDP (measured half in dollars and half in terms of real purchasing power), compared with just under 15 percent for the United States. At that point, China's per capita GDP will be about $33,000, or about half of U.S. GDP. In other words, China will not be dirt poor, as is commonly believed. Moreover, it will generate 15 percent of world trade -- twice as much as will the United States. By 2030, China will be dominant whether one thinks GDP is more important than trade or the other way around; it will be ahead on both counts.

What is more, the gap between China and the United States will be far greater than expected. In 2010, the U.S. National Intelligence Council assessed that in 2025, "the U.S. will remain the preeminent power, but that American dominance will be much diminished." This is unduly optimistic. My projections suggest that the gap between China and the United States in 2030 will be similar to that between the United States and its rivals in the mid-1970s, the heyday of U.S. hegemony, and greater than that between the United Kingdom and its rivals during the halcyon days of the British Empire, in 1870. In short, China's future economic dominance is more imminent and will be both greater and more varied than is currently supposed.

A resurgent United States might be able to slow down that process, but it will not be able to prevent it. Growing by 3.5 percent, rather than 2.5 percent, over the next 20 years might boost the United States' economic performance, social stability, and national mood. But it would not make a significant difference in its position relative to China in the face of, say, a seven percent growth rate there.

China's incentives might be very different in the future. Ten years on, China might be less wedded to keeping the yuan weak. If it continues to slowly internationalize its currency, both its ability to maintain a weak yuan and its interest in doing so may soon disappear. And when they do, China's power over the United States will become considerable. In 1956, the United Kingdom's financiers were dispersed across the public and private sectors. But the Chinese government is the largest net supplier of capital to the United States: it holds many U.S Treasury bonds and finances the U.S. deficit. Leverage over the United States is concentrated in Beijing's hands.