Democrats & Liberals Archives

When China Grows Up

The problem with our interdependence with China is how it will change when China grows up. Right now we have a benefit from China’s cheap labor that is hard to beat. On two sides of the equation we benefit by being China’s most important external market. On the buyers side we benefit by having cheaper goods to buy. On the sellers side we benefit from their necessary support of the dollar as an international currency. That will change and the change might not come at the best time for the good old USA.

The strategic geniuses who plan our national course must have taken that possible problem into consideration." That is the only answer I get when I bring this issue to the attention of some supporters of this blind man's approach to our economic future. I am a little more skeptical about the intent of those same, "Godless Chinese Communists," that we were threatened by thirty years ago when they were far less dangerous. We are able to sustain this remarkable economy that we have based on a lot of tiny little details. Details like a great Middle Class of people who work more hours and produce more per capita than in any other nation in the world make this nation's economy work. Details like an international currency that is the chosen reserve currency of the world because of it's stability.

China pegs its currency to the dollar because that connection between those two currencies benefits the growing economy of China. What will happen when China's economy matures and most of their production is dedicated to serving their own market? With 1.4 billion people that market is a huge potential sink for goods and services. It is nearly four times as large as this nation's economy in population. At 9% annual growth in GDP it will surpass our economy's level sooner than most of us suspect, and it will keep growing. When will competition for some basic good determine both nations' limits to growth? Will it be when China is bigger economically than the USA?

Oil is the most likely culprit, with the general consensus that oil production is going to be reaching its limits of growth within this century. Another possible limiting factor is global warming or environmental degradation caused by use of coal. There are several others including limits imposed on electricity production by certain physical constraints of the electricity markets, like waste heat disposal. Let's take oil as our example because there are serious indications that the interests of the USA and China are already growing increasingly opposed in that market.

If oil grows scarcer and less available over the next several years that scarcity will change the economic world. At some point it will culminate, as most observers of that market expect, in our reaching the half-way point of oil production possible on this planet. We will at some time in the future have produced half of the oil available on earth from the reservoirs that exist. When that event occurs the cost of oil will rise and keep rising until it becomes uneconomic to use it as a fuel. Whether it will happen in five years as some expect or fifty years as more optimistic souls predict matters little, the day of oil as fuel will be coming to an end. What will happen to the economic relationship of China and the USA then?

It is always instructive to examine history wherever possible to determine the course of the future. The nature of how past empires interacted with their vassal states that grew beyond them in size and economic power might help. That would be helpful if we could find one case where that was allowed to happen. Unfortunately only the British Empire has ever left the field of empire voluntarily. The USA assumed the role of protector of trade and commerce and Britain stands under its shield. Thus far that change has not resulted in any irreconcilable conflict but the cultural values shared by those two nations are not mirrored in Communist China today.

When Empire's collide, worlds are changed. If anyone doubts that China is a rising Empire let them speak now. China will dominate global trade with its production capacity within forty years. In specific areas it is already becoming dominant. With the prosperity that dominance brings, come concerns related to uninterrupted access to raw materials. Oil and natural gas are two of those commodities that could limit the rate of growth possible to China at some point. They have neither in sufficient quantities to provide for their future growth.

Currently we consume nearly one quarter of the world's production of oil each year. China is creeping up on us but it will be a long time before they exceed our thirst for oil. Right now China is growing slower than it might based on the limited availability of electricity there. The recent spike in oil prices above fifty dollars is an example in how unexpected growth in demand for oil can affect the market. If suddenly, because of terrorist attacks on Saudi Arabia for example, oil production were to decline temporarily what would happen to the relationship between China and the USA? It would certainly be strained. Might they then not consider decoupling their currency from the dollar as a strategic move?

Not probably this year but at some point that card will hit the table. It is possible within the next five years. It is more likely as time goes on without that disruption in the oil market occurring. We are drawing ever closer to the inevitable end of stability in the oil market. If it happens not as a consequence of action by our opponents in the world but our own inaction on the energy front it will still be devastating to us.

If I were running China at that point I would press the USA by doing any damage to it's currency that I could. That would make it more possible for me to maintain my internal economic growth and possibly take away the USA's role as the printer of the world's reserve currency. That role is much to be desired as it makes the leverage we have in the world's debt markets very powerful indeed. If it were taken away it would be impossible to finance our deficits that extend into the future as far as the eye can see. At least they do according to our new prophets of eternal prosperity based on debt unlimited.

Is that an unlikely scenario? Find one more to your own liking there are plenty of them that could have the same result. Or put whatever you choose to believe about the future aside. Still, don't bet on the Chinese leaders maintaining their current posture toward our debt and our currency for one second longer than it is to their benefit. That will happen when the Godless Chinese Communists are singing in your own local church choir, not any time soon. God bless and preserve the skeptics among you, the rest of you may have to fend for yourselves in a more difficult world than the one we live in today. Henri Reynard/GoldenBrush Interactive

Posted by Henri Reynard at December 14, 2004 10:38 AM