US-China rivalry will shape the 21st century

Beijing’s rising economic and political power poses great challenges to the west

Martin Wolf

China is an emerging superpower. The US is the incumbent. The potential for destructive clashes between the two giants seems potentially unbounded. Yet the two are also intimately intertwined. If they fail to maintain reasonably co-operative relationships they have the capacity to wreak havoc not only upon each other, but upon the entire world.

China is a rival of the US on two dimensions: power and ideology. This combination of attributes might remind one of the clash with the Axis powers during the second world war or the cold war against the Soviet Union. China is of course very different. But it is also potentially far more potent.

China’s rising power, economic and political, is evident. According to the IMF, its gross domestic product per head in 2017 was 14 per cent of US levels at market prices and 28 per cent at purchasing power parity, up from 3 per cent and 8 per cent, respectively, in 2000.

Yet, since China’s population is more than four times as big as that of the US, its GDP in 2017 was 62 per cent of US levels at market prices and 119 per cent at PPP.

Assume that by 2040, China achieves a relative GDP per head of 34 per cent at market prices and 50 per cent at PPP. This would imply a dramatic slowdown of the rate it is catching up (a fall of around 70 per cent from the rate since 2000, starting in 2023). China’s economy would then be almost twice as big as that of the US at PPP and almost 30 per cent larger at market prices. (See charts.)

The 34 per cent benchmark I have chosen is that of today’s Portugal. It is hard to imagine that China, with its vast savings, motivated population, huge markets and sheer determination could not achieve the relative prosperity of Portugal. This would still leave it far poorer, relative to the US, than Japan or South Korea — the fast-growing east Asian economies of the past.

Size matters. It is quite unlikely that China’s overall economy will not end up far bigger than that of the US, even if, on average, individual Americans remain far more prosperous than individual Chinese. China is also already a more important export market than the US for many significant countries, particularly in east Asia.

Moreover, China is spending almost as big a share of GDP on research and development as leading high-income countries. This is a driver of Chinese innovation, which I recently saw at a visit to Alibaba’s headquarters in Hangzhou. Moreover, the combination of economic size with improving technology is making China an increasingly formidable military power. The US may complain about this. But it has no moral right to do so. Self-defence is a universally accepted right of nations.

So is the right to develop. The US can huff and puff about Chinese theft of intellectual property. But every catch-up nation, very much including the US in the 19th century, seized the ideas of others and built upon them.

The idea that intellectual property is sacrosanct is also wrong. It is innovation that is sacrosanct. Intellectual property rights both help and hurt that effort. A balance has to be struck between rights that are too tight and too loose. The US can try to protect its intellectual property. But any idea that it is entitled (or indeed able) to prevent China from innovating its way to prosperity is mad.

China is also an ideological challenger of the US, on two dimensions. It has what might be called a planned market economy. It also has an undemocratic political system. Unfortunately, recent failures of free market high-income economies have increased the lustre of the former.

The election of Donald Trump, an admirer of despotism, has strengthened the appeal of the latter.

The US, one would once have said, also has the benefit of powerful and committed allies.

Unfortunately, Mr Trump is waging economic war upon them. If a decision to attack North Korea led to the devastation of Seoul and Tokyo, US military alliances would be over. An alliance cannot also be a suicide pact.

Managing the competition between these two superpowers is going to be difficult. Graham Allison of Harvard is fatalistic in his Destined For War: conflict between the incumbent and rising power is almost inevitable. A hot war among nuclear powers might seem relatively unlikely.

But large-scale friction and so an end to necessary co-operation over economic relations seems probable. It is unclear how to resolve today’s conflicts over trade. Co-operation over managing the global commons has already collapsed, given the Trump administration’s rejection of the very idea of climate change.

China’s future is up to China. But the west’s relations with China are up to it. The US is right to insist that China abide by its commitments. But then so must the US and the rest of the west. China is not going to feel compelled to abide by agreed rules when pressed by any country that treats these rules with contempt. China is, in any case, not the real threat. That relationship can surely be managed.

The threat is the decadence of the west, very much including the US — the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth, and the sacrifice of long-term investment to private and public consumption.

It is indeed a tragedy that the best way we could find to escape from a financial crisis was via monetary policies that risked promoting new bubbles. We could be better than this.

The west can and must live with a rising China. But it should do so by being true to the better angels of its own nature. If it is to manage this turn of the wheel of history, it has to look within.

What’s Been Stopping the Left?

Dani Rodrik

People walk along Wall Street in the financial district in New York City

CAMBRIDGE – Why were democratic political systems not responsive early enough to the grievances that autocratic populists have successfully exploited – inequality and economic anxiety, decline of perceived social status, the chasm between elites and ordinary citizens? Had political parties, particularly of the center left, pursued a bolder agenda, perhaps the rise of right-wing, nativist political movements might have been averted.

In principle, greater inequality produces a demand for more redistribution. Democratic politicians should respond by imposing higher taxes on the wealthy and spending the proceeds on the less well off. This intuition is formalized in a well-known paper in political economy by Allan Meltzer and Scott Richard: the wider the income gap between the median and average voter, the higher the taxes and the greater the redistribution.

Yet in practice, democracies have moved in the opposite direction. The progressivity of income taxes has decreased, reliance on regressive consumption taxes has increased, and the taxation of capital has followed a global race to the bottom. Instead of boosting infrastructure investment, governments have pursued austerity policies that are particularly harmful to low-skill workers. Big banks and corporations have been bailed out, but households have not. In the United States, the minimum wage has not been adjusted sufficiently, allowing it to erode in real terms.

Part of the reason for this, at least in the US, is that the Democratic Party’s embrace of identity politics (highlighting inclusiveness along lines of gender, race, and sexual orientation) and other socially liberal causes came at the expense of the bread-and-butter issues of incomes and jobs. As Robert Kuttner writes in a new book, the only thing missing from Hillary Clinton’s platform during the 2016 presidential election was social class.

One explanation is that the Democrats (and center-left parties in Western Europe) became too cozy with big finance and large corporations. Kuttner describes how Democratic Party leaders made an explicit decision to reach out to the financial sector following President Ronald Reagan’s electoral victories in the 1980s. Big banks became particularly influential not just through their financial clout, but also through their control of key policymaking positions in Democratic administrations. The economic policies of the 1990s might have taken a different path if Bill Clinton had listened more to his labor secretary, Robert Reich, an academic and progressive policy advocate, and less to his Treasury secretary, Robert Rubin, a former Goldman Sachs executive.

But vested interests go only so far in explaining the failure of the left. Ideas have played at least as important a role. After the supply-side shocks of the 1970s dissolved the Keynesian consensus of the postwar era, and progressive taxation and the European welfare state had gone out of fashion, the vacuum was filled by market fundamentalism (also called neoliberalism) of the type championed by Reagan and Margaret Thatcher. The new wave also appeared to have caught the electorate’s imagination.

Instead of developing a credible alternative, politicians of the center left bought wholesale into the new disposition. Clinton’s New Democrats and Tony Blair’s New Labour acted as cheerleaders for globalization. The French socialists inexplicably became advocates of freeing up controls on international capital movements. Their only difference from the right was the sweeteners they promised in the form of more spending on social programs and education – which rarely became a reality.

The French economist Thomas Piketty has recently documented an interesting transformation in the social base of left-wing parties. Until the late 1960s, the poor generally voted for parties of the left, while the wealthy voted for the right. Since then, left-wing parties have been increasingly captured by the well-educated elite, whom Piketty calls the “Brahmin Left,” to distinguish them from the “Merchant” class whose members still vote for right-wing parties.

Piketty argues that this bifurcation of the elite has insulated the political system from redistributive demands. The Brahmin Left is not friendly to redistribution, because it believes in meritocracy – a world in which effort gets rewarded and low incomes are more likely to be the result of insufficient effort than poor luck.

Ideas about how the world works have played a role among the non-elite as well, by dampening the demand for redistribution. Contrary to the implications of the Meltzer-Richard framework, ordinary American voters do not seem to be very interested in raising top marginal tax rates or in greater social transfers. This seems to be true even when they are aware of – and concerned by – the sharp rise in inequality.

What explains this apparent paradox is these voters’ very low levels of trust in government’s ability to address inequality. One team of economists has found that respondents “primed” by references to lobbyists or the Wall Street bailout display significantly lower levels of support for anti-poverty policies.

Trust in government has generally been declining in the US since the 1960s, with some ups and downs. There are similar trends in many European countries as well, especially in southern Europe. This suggests that progressive politicians who envisage an active government role in reshaping economic opportunities face an uphill battle in winning over the electorate. The fear of losing that battle may explain the timidity of the left’s response.

Yet the lesson of recent studies is that beliefs about what the government can and should do are not immutable. They are susceptible to persuasion, experience, and changing circumstances.

This is as true for elites as it is for non-elites. But a progressive left that is able to stand up to nativist politics will have to deliver a good story, in addition to good policies.

Dani Rodrik is Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy, Economics Rules: The Rights and Wrongs of the Dismal Science, and, most recently, Straight Talk on Trade: Ideas for a Sane World Economy.

Why the U.S.-China ‘Trade War’ Is Really About the Future of Innovation

US China trade war

Recent trade skirmishes between China and the United States are less about steel and soybeans and more about which country will be the leader in global innovation in the 21st century, writes Wharton dean Geoffrey Garrett in this opinion piece.

The escalation of tariffs between China and the United States is haunting the financial markets. “Manageable, orchestrated trade skirmishes” is probably the right description. But “trade war” is so much better a headline.

Either way, what is really going on is not about trade; it is about who will lead global innovation in the 21st century. Think less steel, soybeans and solar panels, and more electric vehicles, self-driving cars and artificial intelligence.

The electoral incentives are clear for the Trump administration to talk up links between wages and jobs and the mushrooming of America’s trade deficit with China over the past 15 years.
But the administration’s much bigger concern is China’s very real challenge to American global dominance in the innovation economy. Rising power vs. incumbent power normally refers to the growing military competition between China and the U.S. But it also describes rising Sino-American competition over the future of innovation.

Consider some facts. China has laid down more high-speed rail lines than the rest of the world combined (see the breathtaking new Chongqing-Guiyan line below). Mobile payments in China are 50 times as large as in the U.S. Last year, more electric vehicles were sold in China than in the rest of the world, and more than twice as many industrial robots were in use in China than in the U.S.

Garrett 1

Apple, Amazon, Facebook, Google, and Microsoft are firmly entrenched in the top 10 companies in the world by market capitalization. They were joined a couple of years ago by two Chinese companies—Alibaba and Tencent—that continued to climb up the standings.

Over the period 2012-2016, Goldman Sachs estimates that total AI investment in the U.S. were about $18 billion, compared with only $2 billion in China—big advantage to America. But by 2020 China intends to invest about $150 billion in AI—looming enormous advantage to China.

Garrett 2

But the ability of China to adopt and adapt American technology, and to do so at warp speed and massive scale, is extraordinary. If the definition of innovation is turning ideas into outcomes, China is already an innovation economy.

This is what the Trump administration is really worried about. Dig just below the surface of “trade war” tweets, and the administration’s focus on China and the future of innovation is apparent.

The U.S. Trade Representative report on which the new tariffs are based is entitled, “China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation.” Nothing about steel or manufacturing Jobs.

This report then justifies actions against China based on a powerful but controversial provision of Section 301 of the 1974 U.S. Trade Act, which allows the President to take essentially any actions he sees fit against “acts, policies or practices that are unreasonable or discriminatory and that burden or restrict U.S. Commerce.”

This raises three big questions:
  1. Is China behaving “unreasonably” to restrict U.S. commerce with respect to the innovation economy?
There is no doubt that the Chinese government has an active “industrial policy” to transform its economy from a low cost assembler and manufacturer into a global leader in the cutting edge industries of the 21st century. This is the core of Xi Jinping’s ambition for China.

In the past, the U.S. government has complained that government investment creates “unfair competition” in global markets—for example, the muscle European governments have used to help Airbus take on Boeing. But that is not the U.S.’s main beef with China.

Instead, the U.S. is arguing that China unfairly regulates the conditions under which American firms can operate in China — with good reason. There is no doubt that the Chinese government regulates what American firms do in China, with a view both to protecting domestic firms and to ensuring that Chinese companies get access to leading-edge American intellectual property.

Consider, for example, the 15-year-old joint venture between General Motors and Shanghai Automotive Industrial Corporation that has resulted in GM’s selling more vehicles today in China than it does in America. This has been great for GM’s bottom line. But it has also increased the probability that China will soon have its own global auto company (not necessarily SAIC) that will compete head-to-head with GM inside and outside China. All the more likely given China’s enormous investments in electric and self-driving vehicles.

Would American firms like to have unfettered access to the Chinese market? Would they prefer not to have to enter joint ventures with Chinese firms? Are they worried that “tech transfer” in China sometimes takes the form of intellectual property theft?

Yes, to all three questions. This is just not the way the free market is supposed to operate. But the Chinese government says it has the right to regulate its own market, and it is improving intellectual property protections all the time. That is why China says what the U.S. is doing is unfair, and why its own retaliation is justified, focusing on industries like farming that might hurt Trump’s Republicans at the ballot box in November.
  1. Is the U.S. justified in retaliating with trade sanctions against China?
The Chinese government says “no.” So, too, might the World Trade Organization, which has repeatedly questioned the legality of Section 301 because it makes the U.S. judge and jury in its disputes with other countries—when this is exactly the job the WTO was created to do.

Even though the U.S. was the prime mover behind the creation of the WTO, it has always wanted to insist that it is above the international law, at least with respect to the powers it gave itself in the 1974 Trade Act, two decades before the creation of the WTO. All the more so in Trump’s America.

This rules out at least two pathways to resolving the current dispute between China and the U.S. The U.S. will defend its right to act under Section 301. China will not appeal to the WTO to rule against the U.S. Instead, both countries will take matters into their own hands — that is exactly what has happened this year.
  1. Where will it end?
In the past, I have argued that it is best to view things like trade spats between China and the U.S. as well-choreographed theater designed to appease domestic political audiences without threatening the underlying big economic win-wins between the two countries. It is easy to fit “steel for soybeans” tit-for-tat tariffs into that frame.

But the stakes are much higher where the future of innovation is concerned. My economics training tells me it does not matter “who wins” in innovation, because the whole world will benefit from more innovation no matter where it comes from. Moreover, it is clear that the U.S. and China are complementary where innovation is concerned — the U.S. has a comparative advantage in incubating innovation; China’s comparative advantage is scaling it. This makes cooperation so much better than conflicto.

The problem with this thinking in the current situation is that the economic competition bleeds quickly over into concerns about military/security competition — and the rising power (China) versus incumbent power (U.S.) dynamic more generally. Cyber security is an obvious example.

The same technologies that make industrial espionage possible and increase worries about personal data security are also increasingly the backbone of the 21st century military. In fact, most modern technology falls under the “dual use” rubric — important both to commerce and to security.

Put it all together, and China-U.S. competition over innovation is here to stay. I do not expect the current trade tensions to spiral out of control — the potential for major damage to the economies of both countries, and to the global economy, is just too great. But even if Trump and Xi continue to emulate their predecessors in managing down their tensions, the underlying struggle over who will win the battle for global pre-eminence in innovation will only intensify. Calling it a trade war is not only misleading. It is also an understatement of what is really going on between the two most powerful countries in the world.

Doug Casey on the Coming Comfortable Dystopia

by Doug Casey

Justin: Doug, I have a lot of questions I want to ask you today. But can you first tell me what a social credit system is?

Doug: Well, Americans are familiar with credit ratings that they get from companies like Experian.

These ratings judge one’s ability to get credit, pay bills and such.

China is rolling out something similar, but vastly more comprehensive, and on a national scale.

They’ll judge much more than your financial capabilities. It rates people based on where they live, what kind of car they drive, what they say or do on social media, their educational background, their political views, their friends. You name it. Social engineers are quite devious about these things.

And it’s fiendishly clever for the Chinese government to do this. A high social score gives a citizen lots of benefits and privileges. A low score penalizes you in many ways. People will start competing to be good little lambs. It gives them complete control over who can do what.

Justin: How can people defend themselves from this? Is there any way to opt out?

Doug: You could decide to not have an electronic presence, of course. You could disconnect, or go off the grid as they say. But that’s the equivalent of becoming a non-person. You’d be branded as antisocial, suspicious, and a possible enemy of the state. It might bring all sorts of disadvantages, like not being able to get a passport or even a driver’s license.

Justin: Yeah, not being able to board a plane or train due to a bad social credit rating is already terrifying. But I’m wondering how far China’s government will take this.

Doug: Well, I haven’t been to China in several years. So, I’m relying on press reports. But they’re saying that there are already millions of people involved in China’s social credit system, and it’s quite believable. This is happening already—it’s not science fiction.

And neither is it surprising. China’s very computerized; most people now use their smartphones, not credit cards or—god forbid, cash—to pay for things. Just as in the US, where many people Google others to find out about them, so do the Chinese.

This is a computer-driven phenomenon, and therefore advancing at the rate of Moore’s Law.

The phenomenon will get much bigger. And not just in China.

It will impact whether people get jobs or promotions. It will quickly find its way into online dating.

People with low social credit ratings will be looked upon as deadbeats. Others will disconnect from them, because having a link with someone of low rank will reduce your own rank.

In brief, this is a very big deal. I recommend the episode “Nosedive” on the series Black Mirror, where we see what happens to a woman who gets caught in a downward spiral for her social credit score.

Justin: Will other countries adopt their own social credit systems?

Doug: I have no doubt that the United States and most other countries will do this. It’s a fantastic tool for controlling the masses—they’ll control each other. Much more effective than having secret police, although every government either has, or will have them. And cheaper, too. If you’re the kind of person that fancies himself as a rugged individual it’s a scary prospect. Most people won’t care, though. They won’t mind living in a Dystopia, as long as it’s reasonably comfortable.

Justin: How could this happen in the States? Will the US government herd people into this system? Or will the average person check themselves into this digital prison?

Doug: Well, I must say that the US government doesn’t have the same control over its people as the Chinese government, although it’s moving in that direction. The TSA will likely subject you to more, or less, screening based on your score. The IRS more, or less, scrutiny of your finances. The same with the police, prosecutors, and what-have-you, right down to your local DMV.

It could take longer for them to roll out something like this. But the US government loves this idea.

It’s the best idea since everyone got a Social Security number—for them.

We’re already seeing indications of this. For example, if you have Global Entry, your hassle while traveling is reduced. But they interview you and look at your records before granting it, allowing you to come and go from the US with less aggravation than the average person.

I think Americans will jump into this for the same reason that they opt for frequent flyer programs. They love their smartphones; they practically live on the damn things. Having a high social credit rating will be a prestige thing. It will offer benefits in the way having a high credit rating with Experian helps you secure a lower interest rate on your mortgage—but much, much more so.

This is the wave of the future. Personally, I don’t like it at all. Not because I have something to hide.

I’m sympathetic to the Randite motto: “Judge, and prepare to be judged.” But I prefer to determine my own criteria—not have some bureaucrats do it for me. And enforce that on society.