December 14, 2004
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
Henri -
I’m glad I’m not the only one who sees China for the great power that it is. While we can’t see the future, we can certainly detect trends, including the prodigious growth of the world’s most populous country.
Assuming that China continues to slowly liberalize and quickly grow, I think we will see a revolution in world markets occur before our eyes. Far from becoming a liability to the US, China will become our biggest market, something Europeans have dreamt of since Marco Polo. If the Chinese develop to a degree similar to Japan, they will drive development all over the world, much as we have, and we will develop a mutually beneficial relationship based on specialization.
It’s true that this could cause problems with the scarcest resources, such as oil, but in general the US will benefit immensely from the rest of the world catching up with us. The basic premise is that if the world in general produces more, then it can consume more. America may get a smaller share of the pie, but as long as the pie is growing, I think it’s a good thing.
Henri - I fear my new post will receive about as much commenting attention as yours! It seems people aren’t moved to speech by nonpartisan discussions of complex foreign policy issues. Unfortunately, that seems to apply on Capitol Hill as much as it does on WatchBlog.
Posted by: Chops at December 14, 2004 05:32 PMHenri and Chops, When I think of China today, I can’t help but view it through that historical period of our own from the 1890’s through the 1960’s when our nation established itself as the premier place in the world to invest capital. With our innovation, entrepreneurial and academic freedom, and tremendous productive potential, there simply wasn’t a better place to invest one’s capital for growth and return on investment.
That is how I see China from about 10 years ago through the rest of this century and likely beyond. Chops, I question whether China will become our dumping ground manufacturing and services benfitting our economy. I think current trends indicate quite the opposite is becoming true.
Posted by: David R. Remer at December 14, 2004 09:00 PMHenri, good article. I think you’re right that China’s stranglehold on our currency is a danger. I think about that everytime the Bush administration tells Taiwan to shut up about independence and democracy.
China is already moving towards economic hegemony in Asia. They’re emerging as the dominant player on this side of the Pacific (I’m in Singapore right now). In fact, they’re quietly encouraging Asia to cut economic ties with the US.
I just blogged on this subject recently, here’s a good analysis,
At the summit of the Association of Southeast Asian Nations here, rather incongruously held in the poorest of the region’s capitals, [Chinese Prime Minister] Wen [Jaibao] did not explicitly say that the United States was not welcome in the East Asian community.But that was the implicit message. His vision treats Washington as an outside power, not excluded but not part of the intrinsic Asian structures…
[T]he Chinese are securing their own backyard in the way the United States secured Latin and Central America in the early 19th century under the Monroe Doctrine…
…They are behaving like a great power and ensuring they control the neighborhood. In this case, China is also intent on making sure that the region’s commodities - oil and minerals - are locked in for China’s urgent energy needs.
China is only a threat if we’re opposed to them establishing an Asia-Pacific (they’re making quite a few economic inroads on the Pacific coast of South America, too) hegemony.
This is the liberal side, so won’t say much. Besides, am an extremely Smart Moderate (with a great deal of knowledge.) The univs and the funny money boys have screwed over this country and put this country in several difficult positions. China is one more trouble for the U.S.
You don’t think our meda boys and girls know anything do you?
Posted by: Alex at December 14, 2004 11:44 PMThe difference is, David, we had a democratic republic where the people’s frustration during this period of economic growth was able to chanel itself through the Progressive movement following the era that you just talked about. China has no such outlet, which means that China’s growth will be limited. As the people gain more and more economic freedom- they will either demand control of their own government and get it (like Chile) or the leaders will crack down on freedom and stiffle their economy (like Cuba). There are exactly 0 examples in world history of a long-sustain free market economy combined with a dictatorial regime. Since China’s economic growth is based on its move toward a more free market model, they will have to go against all of history to try to accomplish what you predict they will (which is the leaders will remain dictators but their economic growth will continue to sky rocket).
Posted by: Misha Tseytlin at December 15, 2004 04:45 PMMisha, that is black and white thinking. Must be this or that. That kind of thinking fails to recognize the emergence of a new paradigm. Centralized national government working hand in hand with relatively autonomous decentralized regional governments who are free to promote growth, free markets and capitalist ventures provided they efforts do not destablize the nation.
Sounds similar to the U.S. doesn’t it? Except for the limits on capitalism and free enterprise placed to insure national integrity and welfare which do not effectively exist here. Here capitalism controls government, not the other way around as in China. Remains to be seen if China’s new paradigm will successfully survive the test of time, but, theoretically, it appears to be a sound approach in a real world that is less than perfect.
Posted by: David R. Remer at December 15, 2004 05:37 PMDavid, you missed my point i think. My point wasnt about the set up of the government’s structure (centralized or not), but rather that it gave no avenue to the PEOPLE to voice their opinions. Freedom in economic affairs leads to freedom in general, and this leads to people demanding to have their voice heard.
Intelligent people who are succeeding by their own efforts will not forever sit by as a bunch of thugs who have no accountability live off of their hard work. They will demand to be represented in their government. Perhaps the Chinese dictators have found a way to squash the human spirit to avoid such a result- but i have more faith in the chinese people than to believe that.
Posted by: Misha Tseytlin at December 15, 2004 07:39 PMMisha, I think you need to do a little research on the Chinese legal system. They have a Congress far larger than our own, and the people do indeed have access to their representatives to speak their mind.
Now, I grant you, China makes it clear that certain topics or positions are not tolerated and will be considered seditious or treasonous, and they do not have near the freedom of speech with their government that we do, but we are working hard under Bush to catch up to the Chinese. What with all of the spying on American citizens against the Iraq war, or in the Democratic Party, etc. :-)
The Patriot Act is having a chilling effect on American speech by many citizens opposed to the current administration and its policies, myself included. I have actually checked myself a couple times in my public writings and in conversations with a friends on the phone, knowing certain phrases or ideas could result in loss of my privacy from Bush and Ashcroft’s thought police.
Posted by: David R. Remer at December 15, 2004 08:24 PMAn interesting article in today’s WSJ re why China matters also in the enviroment. It is called the Hidden Cost of Chinese Growth and is available online at
http://online.wsj.com/article/0,,SB110325317062703084,00.html?mod=home%5Fpage%5Fone%5Fus
Not everyone can access the (premium) article, so I include one part below.
China is already believed to be the world’s largest source of nonnatural emissions of mercury. Jozef Pacyna, director of the Center for Ecological Economics at the Norwegian Institute for Air Research, calculates that China, largely because of its coal combustion, spews 600 tons of mercury into the air each year, accounting for nearly a quarter of the world’s nonnatural emissions. And the volume is rising at a time when North American and European mercury pollution is dropping. The U.S. emitted about 120 tons of mercury into the air in 1999 from manmade sources. Chinese power plants currently under construction — the majority fueled by coal — will alone have more than twice the entire electricity-generating capacity of the U.K.
Sometimes it looks like what we are doing in our own country is like rearraranging the deck chairs on the Titanic.
Posted by: Jack at December 17, 2004 02:41 PMPerhaps tidying up the deck chairs will set a good example. The Titanic may go down, but we can all board the lifeboats in a safe, orderly manner. :)
That was a little glib. At the last summit, the talk was all about mandatory emissions limits for China, India, and other developing nations. The Kyoto protocol isn’t the be-all-end-all of international climate treaties.
