Why the US has no chance against China on its own.

The US political establishment is now firmly of the belief that the US is still the world’s dominant superpower, and that they could easily win a cold-war confrontation with China, just like it overwhelmed the Soviet Union with economic firepower. I think the Americans are basically wrong about this. It is far too late to stop China becoming the single most important country. American pride blinds them to the reality of their situation. To hold their own against China, they will need their European allies.

Let’s consider the arguments you hear some Americans make for why they think they’d easily win against China.

The Americans point out that in nominal GDP terms (just counting the dollars), the US economy is about 40% bigger than the Chinese economy. The US economy also has a strong position in international finance, with its stranglehold on Dollar transactions and interbank transactions (SWIFT). Furthermore, the dominant internet firms are all American (Google, Amazon, Microsoft, Apple, Facebook, etc.), giving the US a huge informational and coordination advantage. It furthermore dominates the international media and its universities draw talent from a base population of over 2 billion, including the Indian middle classes and Latin America.

The US undoubtedly has a more modern army that is easily 10 years ahead of China’s armed forces, and it has a network of bases around the world, including very close to China, ie in the Philippines, South Korea, Central Asia, and Japan.

Furthermore, the Americans are used to conflict, with its army in continuous operations since the start of the second world war. It is practiced in intelligence, war on various fronts, and cyber warfare. They are used to winning as well, with a great depth of knowledge in how to co-opt reluctant foreign leaders.

The Americans can also point to glaring weaknesses on the side of the Chinese. They can point to an ageing population, a much lower level of average efficiency of the Chinese economy, and a history of unfortunate friends on the part of the Chinese, where the Chinese have invested hundreds of billions in the Pakistanis, North Koreans, and the Central Asian Silk Road with very little to show for it.

All these elements have grains of truth in them, but I still think the Americans have no chance against the Chinese on their own. So consider how the story unravels if you look a bit closer.

First, one should look at basic population numbers and demographics. The Chinese are with 1.4 billion whereas the Americans are with 340 million. That’s a 4:1 advantage to the Chinese. The Chinese further have a diaspora of 50 million in the rest of the world, which gives them a lot of leverage and means that there are many countries that will not want to take sides. This includes Australia that has close to a million Chinese on its shores, whilst the number of Americans is negligible.

The Chinese ageing problem has been exaggerated. It is true that the percentage of Chinese above 65 is increasing, but it is basically increasing because the health of the Chinese is improving. Many of these old Chinese are furthermore quite productive. The fertility rates seem to be picking up too, though there the statistics are dodgy.

Importantly, the one-child policy was not as effective or ubiquitous as some Western commentators seem to think: the one-child policy only held in the cities where less than 20% lived at the time of the policy. The countryside essentially had a 3-child policy, meaning that the Chinese population kept growing during the whole of the one-child policy era. The measured fertility rate was lower than the actual one because millions of children were hidden from the system, which is why the population doubled since the 60s despite supposedly extremely low measured fertility rates. So on a grand level, the Chinese do not have a noticeable demographic or ageing issue and the American commentators who base their hopes on it should look at the actual numbers.

The key input in an economy and an army remains the level of learning and cohesion of the population, which means the main question is that of education and internal harmony. Here too, China is blowing the US away, with huge recent expansions in the education system that dwarf the US system. The number of university graduates per year is now double that of the Americans and the quality at the top universities is at least as high. Indeed, given the low level of many US colleges, it is arguable that the average quality of Chinese universities is higher than those of the US. Similarly, the average number of years of education has really increased spectacularly the last 30 years in China, from under 6 years per pupil to over 12 for the most recent cohorts, even in the countryside.

This education revolution in China will fuel its economic growth for decades to come, essentially because it still has around 20 years of catch-up left till the glut of highly educated Chinese has flushed out the previous generations of low-educated.

In terms of sheer trade volumes, China is already twice the size of the US, which also means that in terms of direct importance to the trade and production of other countries, it is twice as important as the US.

The key reason for why the Chinese economy looks smaller is the price difference in housing between China and the US: property is insanely expensive in the major US cities whereas it is much cheaper in China. That makes the economy look smaller, but since it is just a price difference between things you cant trade (ie buildings), a more proper accounting of the size of the economy already shows that China is bigger in ‘Purchasing Power Parity’ terms. It is thus a mere accounting convention that makes the US look bigger, hiding structural US weaknesses.

If you then look at the composition of the Chinese economy, you see that it is 40-50% manufacturing, as opposed to 20% manufacturing in the US. So in terms of productive capacity, China is at this moment already several times larger than the US. They need only direct a small proportion of that capacity to armament to blow the US military away in terms of volumes of equipment.

Chinese manufacturing is increasingly sophisticated and knowledge-intensive. The Chinese are thus already dominating many high-tech industries, including solar power, mobile phone manufacturing, steel production, and supercomputers (half of the world’s most powerful computers are in China). Patents by Chinese firms are starting to overtake those from the US, and Chinese firms are also starting to challenge in the markets for cars, ships, social media, and the Internet in general.

The Americans are hence somewhat displaying their ignorance of the tremendous technological achievements of the Chinese over the last 2,000 years when they claim that China will lag behind them technologically. For most of the last 2,000 years, China was the dominant technological power and it is basically on its way to resume that mantle after a brief intermezzo in the period 1700-2000 where Western powers overtook it.

Not merely was China the place where gunpowder, administrative systems, and ice-cream originated. Its fleet of 1421 that navigated the world was hundreds of years ahead of anything European floating around at the time, using double-hull ships that were only re-discovered in Europe 400 years later! The Chinese culture and bureaucracy hence are quite accustomed to being technically advanced and oriented towards discovery. Now that they have the bit between the teeth again, the Americans will find themselves technologically outgunned very soon in many areas.

The high degree of manufacturing also makes it easy to see where Chinese growth is going to come from in the next 20 years: an expansion of its service industry, which comprises 80% of the Western economies. To reach the same ratio, the Chinese economy can treble just via a service boom alone. This is mainly an internal economic development which is not much influenced by sanctions or US trade policy. Short of a physical war, the Chinese economy will follow this path.

So if you look at the Chinese economy more closely, you will in fact find it is already considerably bigger and stronger than that of the US, with another 3-fold increase expected in the coming 20 years. This is reflected in financial clout as well, so the old American strategy of cheque-book diplomacy will no longer work because the Chinese can and will outspend the Americans. They already do so in many countries, though they can become smarter at how they play it. Much of their trade is furthermore with close neighbours, so if they play their cards right, they will manage a peaceful détente with Japan, South Korea, and other neighbours, nullifying the current American containment strategy.

The Chinese are also more cohesive than the Americans, with the Han-Chinese forming the vast majority of the population and a very strong sense of cultural unity. By contrast, the faultlines in American society, along ethnic, religious, partisan, and geographic lines make the Americans a much more divided people. You see that in the inability of the Americans to get the most out of their population, such as via poor education for large parts of its population, relatively low levels of health, and a very high level of crime and other forms of social unrest. As a key indicator of this, murder levels in China are close to that of Western Europe, 1/5th of the levels in the US. The Chinese health system is improving leaps and bounds and Chinese life expectancy will soon overtake that of the US.

So the Chinese dominate the Americans in terms of their cohesion as a population and their knowledge of how to get the most of out their talents. If China feels threatened it will unleash the remaining internal restraints to optimal growth (such as its barriers to internal migration).

If we then look at the international context more closely, one should see the large problems coming for the Americans whilst the Chinese have little to fear.

As noted above, growth in China will mainly be internal in the form of a service industry explosion and deepening of the technological base. They have another 15 years or so of surplus labour from the countryside to absorb, such that their urbanisation levels equal those of the West (85% versus about 60% now). The Chinese need little outside help to achieve this. One should basically note that the number of high-tech Chinese will be 4 times that of the Americans in 20 years times. Its military potential will be directly linked to that.

In the case of the US though, recent growth has mainly come from its dominance of the Internet boom. Yet, that boom is extremely vulnerable to the actions of other countries and action is coming for a simple reason: the internet giants are tax evaders that are free-riding on the economies of other countries (as I explained here). The erosion of the tax base of other countries that is facilitated by the American Internet giants will not be allowed to continue indefinitely by other countries. Hence at some point, Europe and other regions are going to challenge American supremacy of the Internet. They will either do this by means of nationalising parts of the internet, or minimally getting enough national control to force tax out of Amazon, Google, Microsoft, etc. And that will be to the detriment of American power. It will hurt. China has already shown how it can be done, via technology it can strategically offer to current American allies!

American power in the area of finance is vulnerable too, as it is easy to see how Europe and China have a mutual interest in breaking that financial monopoly since it is basically an economic rent waiting to be raided. You already see Chinese moves to set up their own international banking system, and Europe has a strong incentive to join in that effort, just as Europe in fact has a strong interest in joining the Chinese in challenging American Internet supremacy.

So whilst it is true that the Chinese have so far spent a lot of money on bad allies whilst the Americans have more competent allies, the current fault lines in international economics and politics actually favour China, not the US. The US needs to go through the pain of its European allies breaking the US monopoly of the internet profit streams, as well as its monopoly of the financial markets. The EU and China are completely aware of this and the Trump administration is in essence pushing them closer together.

The brain drain that the US has enjoyed has been a key historic strength of the Americans, with its universities attracting top talent from all over the world. That brain drain is not only threatened by the emerging xenophobia of the Americans, but more fundamentally was always derivative of American strength: it is the bonus a superpower gets. Oxford and Cambridge used to get it when the UK was dominant, and France had quite a bit of it when they were at their peak. In the last 60 years it has been the Americans.

As their actual strength wanes, the attractiveness of the US as a place to go for international talent will reduce and other places will look more appealing. You already see this in the international student market, with large flows now going to Europe, Australia, and other places outside of the US. China is not a very hospitable place for foreigners to study and stay, which will be a remaining weakness of the Chinese that they will find hard to overcome, but the Americans will not be able to dominate the international market for talent like they used to.

So if you look carefully, America has no chance of really ‘winning’ a cold war against China. If the US teams up with Europe, which is still the likely longer-run scenario, it can hold its own against China. If it furthermore teams up with large parts of Latin America and India, it will for another 20 years or so be the largest player in the block facing China.

So, the US is no longer the biggest single economic or political player on the planet. That mantle already belongs to the Chinese whose only competitor this century will be India. The Americans just have to get over it, and the current phase of denial was probably inevitable in their grieving process. We should help the Americans get over it. Part of our task as allies.

In many ways, the relative weakness of the Americans is probably a good thing. It bodes for a relatively ‘warm’ cold war that makes it easier for the Europeans to push the US from its dominant Internet and financial positions, paving the way for a more multi-polar world where large blocks keep each other in check. If the Europeans can limit the damage that the Americans will inflict in their grieving process, there are good reasons to be optimistic about peace in the 21st century!

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23 Responses to Why the US has no chance against China on its own.

  1. Nicholas Gruen says:

    Thanks for this Paul,

    Sounds pretty convincing to me.

    My one objection is to talking about military confrontation in the same terms one might have about WWI and WWII.

    Viz: “They need only direct a small proportion of that capacity to armament to blow the US military away in terms of volumes of equipment” and a similar comment about tech.

    If they come to blows it’s basically hang on to your hats. Each will be able to so annihilate the other that this kind of comparison of kit, personnel or technology seems a bit speculative to me.

    • paul frijters says:

      of course its true that the basic mindset of WWII to physically destroy the other if you can is now no longer an option and hence the nature of warfare has changed.

      Yet, the basic point was, I hope, clear: if you have more capacity and more brains, you can produce more of whatever it is you need to threaten or fight a war. That’s true whether the inputs into the wars of the future are the quality of Artificial Intelligence, the capabilities of submarines, the detectability of airplanes, the speed and quality of desinformation, the engineering in the cyborgs, etc.

      We simply dont know what the technology of the future will look like, nor what the future of warfare will look like, but we can still safely predict China will have more of it than the US because they have more human and physical capacity than the US.

      Its an interesting question whether the WWII mentality of outproducing each other in hardware is totally irrelevant. Whilst hardware has its limits (how many times do you need to be able to totally destroy each other to have a credible threat?), it helps in proxy-wars and in bolstering the position of befriended foreign leaders. So I dont think we’re quite passed the sell-by date of hardware.

      • One area that might or may have already become the focus for ‘ lukewarm’ contesting is IT related involving what could be termed ‘gray market’ warfare.
        For example over the past few years there have been reports of a number of ‘inexplicable navigation mistake’ related incidents where it looks possible that the GPS system in that area of ocean (or on particular ships) may been hacked.
        And obviously all the IT systems that control things like national electricity grids are also obvious targets for gray market warfare.

        If China’s elite has a potential weak spot its all those billions of people need a awful lot of rice – if climate change was to result in more frequent, and more widespread, crop failures…

  2. Nicholas Gruen says:

    It sounds rather chiched, I know, but I think it might be worth suggesting that a hot war between super-powers might be too dangerous to contemplate. Can degenerate into an exchange of ICBMs with frightening speed.

    Indeed, given the advantage of first strikes, each side would be on a hair trigger, needing to be sure the other had not launched first and so the chances of a massive escalation would seem to me to rise with each passing minute.

    But I take your point about proxy wars.

    There will be a lot of robots running around, I expect that’s for sure.

    • John BENNETT says:

      Nick, I think the MAD (Mutually Assured Destruction) has passed for now. Both sides realize that a permanent Nuclear Winter will be the result. And both sides do not want that, nor see it as as strategic win.

      So its “a bit here and there”, always opportunistically.

      White ants do not destroy a timber framed house overnight – its a stud, bearer, joist “here and there”, until the whole place can be pushed over with a feather.

      • Nicholas Gruen says:

        John,

        Pardon me for my impatience, but in my mind annihilation doesn’t come out of a dominant discourse which can rise and then be “passed for now”. It comes out of fuckups. And, while it’s entirely the case that it’s not populating the chat of the chattering classes right now, that is of cold comfort to me.

        Despite the historiography of it being ‘inevitable’ and all that, WWI came (certainly in its unprecedented horror) pretty much out of no-where in the space of a month or two of botched – but entirely conventional and often thoughtful – diplomacy.

        That will be true of the next nuclear war. Much will be unprecedented. People will be doing their best according to the dim lights of their reason applied as best they can. And its escalation into annihilation? If it occurs, it won’t occur over a month or so, but over a matter of minutes. And while this is now ‘academic’, because a low chance of that would be horrifying enough – especially run as a low probability again and again over a century or two – it seems to me that the chances of this kind of escalation are high.

        I can’t see a lot of moderating forces as the generals peer at the dim evolving marks on their screens anxious not to leave retaliation too late.

        • paul frijters says:

          I agree: if it happens, it would happen quickly. You and I and everyone we love would be gone before we even were conscious of what set it off.

          In terms of the survival and development of the species though, I actually think it would be a relatively short blip. Too many of us live in all kinds of inhospitable places with plenty of supplies and possibilities of going to arable places afterwards to wipe us out. Technology would take a big knock as there wouldnt be the population base to sustain it, so we’d become more primitive again. Still, we’ve shown we’re pretty fast breeders given abundance of resources so we’d be facing the same problems pretty soon again.

          Tech geeks of course muse about these scenarios incessantly. Their basic point is that if we ever attain the technology that would have the capacity to wipe out all human life, then eventually that is what would happen (low probability rates sustained long enough becomes certainty). Then other species will evolve, etc.

          I am a bit more optimistic to be honest, but I do see the argument. Human systems do evolve, but not in a pleasant way, so the more optimistic trajectories I envisage have plenty of suffering in it.

  3. conrad says:

    I generally agree Paul — although I think you’ll find that in terms of apartment prices, the big rich cities in China (Beijing, Shanghai) are as expensive as expensive cities in most places bar only a few (e.g., Silicon valley) despite the smaller wages people have. The other reason the current American strategy won’t work is that the Chinese have a very recent history suffering, so to some extent the average baseline for what life should be like is very low. Alternatively, the American baseline is clearly much higher, and so going backwards really will be perceived as going backwards.

    I also don’t really see geopolitical things as panning out badly for the Chinese. The Americans can try and coerce countries into taking sides (like Canada and Mexico), but politically, the Chinese have been making friends even with old enemies. Things like border disputes with India, for example, are largely solved. In addition the soft money strategy they use is vastly cheaper and more effective than the military strategy the US pursues (a few hundred million to Pakistan — who cares? That’s just a few tridents).

  4. Chris Borthwick says:

    My father always used to say that every Australian schoolchild should learn enough Chinese to be able to say “I am anxious to collaborate”.

  5. John BENNETT says:

    Paul a brilliant exposition, and the best post this blog site has seen for a while. Well researched and insightful, and I thank you for it. It has got me thinking.

  6. Chris Lloyd says:

    Cold wars are not about winning or losing. This is a mistake people make because the last cold-war was completely won by the US (though even there temporarily). It is about the skewing the medium term outcome in your direction.

    So the issue is whether the US an get a better outcome by confronting China than not. This depends on what you mean by better. Trade-wars will cost both countries heaps. But in China there is the issue of political instability. If the US can upset the Chinese middle class through a trade war, then the US get a lot of leverage and perhaps some Chinese concessions.

    And I am afraid that I laughed out loud Paul when you said there are good chances for peace in the 21st century. There really will be no peace possible, now that the Chinese are empowered. Unless you have lived there, you simply have no idea what their mindset is.

    • Nicholas Gruen says:

      Chris, why do you suggest that the issue of political instability is more characteristic of China than the US.

      I’m no expert but it seems to me that the shoe is on the other foot. China has an entrenched, authoritarian and highly competent regime. If by their actions they depress US living standards (which would also require them to reduce their own), at least in my naiveté I’d expect a US government to blink because it’s democratic opposition would have come up with some story enabling them to blame the incumbent American Government with a view to beating it in future elections.

      • Food security, I. E. enough for all those billions of Chinese to eat, in the context of a increasingly unstable climate would surely be a concern to China’s leaders.

        Authority and technology are all very well, if you are not staving no?

      • Chris Lloyd says:

        I take your point Nick. The US is hardly a beacon of stability at the moment. I was referring to the fact that the Chinese being so much poorer and on a 20 year upward trend will be more sensitive to economic pain than the US who are mostly rich and have been on a 20 year flat line. There is also the point that the entire government apparatus in China is fearful of mass dissent. The one party state is an end in itself and will protect itself over and above the interests of the country. I can see China backing down if there were widespread riots. But you are right that it’s not a sure thing who would blink first.

        • Nicholas Gruen says:

          Yes, well all the things you suggest make China more vulnerable I think makes the US more vulnerable.

          When the west last enjoyed living standards like the Chinese have now was a few generations ago.

          Yet in WWII, they swallowed huge reductions in standards of living to fight the good fight. I think the Chinese would do that, but as we’ve seen with the unimpeachable case for emissions abatement, if it costs anything there are always merchants of doubt who can be funded and sent out into the media.

          But who knows who’s right between us?

          • Chris Lloyd says:

            I don’t think the Allies fought WW2 for nationalist reasons. There was some higher principles involved surely. Anyway, more generally you’re starting to persuade me Nikodemus. Maybe the US will back down first even though if this were two multi-nationals going head-to-head, the US would win (higher productivity, world currency, open to new ideas etc.). The dynamics of nationalism are hard to unpack though. I guess the “democracy makes us vulnerable” argument always makes me uncomfortable. It might just be an emotional reaction. Maybe it does. Certainly, east Asian cultural warriors claim this explicitly.

  7. Tumble says:

    The key reason for why the Chinese economy looks smaller is the price difference in housing between China and the US: property is insanely expensive in the major US cities whereas it is much cheaper in China. That makes the economy look smaller,

    Other than construction etc, where is housing stock counted in annual GDP?

    • paul frijters says:

      its mainly in the purchasing value of a dollar. So the conversion between nominal GDP and purchasing power PPP involves price comparisons, ie a deflator. That’s where you’ll find the cost of housing.

      Apart from construction you will also see it in investment, mortgage payments, and rents which show up at various places as consumption, investment, or income.

      Cameron explains it here:
      https://renegadeinc.com/know-housing-gets-counted-twice-gdp/

  8. Paul
    China is an autocracy, therefore it’s leadership and policy is intrinsically both predictable and (in the medium to longer term ) totally utterly unpredictable .

    As for the US , Trump confirms that the civil war has not ended.

  9. Mike Pepperday says:

    Thanks, Paul. Very interesting. The expansion in 1421 came to a sudden halt when there was a new emperor. The Belt and Road program is the current emperor’s project. Probably lots of other policies are, too. Chances are he’ll be there for a good while yet but still, the unpredictability / instability is potentially greater than the US’s, surely.

    Discussing China’s debt seems to go in and out of fashion. How does it affect things?

    • paul frijters says:

      yes, the inherent instability of the Chinese system is a key long-term problem, nor just for them, but the world. I talked about that in 2012 too and we’re bang on track with those predictions so no need for me to change anything about that:

      https://economics.com.au/2012/09/14/the-rise-of-china-part-ii-the-party/

      The short of it is that there wont be a serious problem the next 30 years or so because they’ll be too busy growing.

      As I understand it, China holds about 5% of the total national US debt. Thats not so much. They used to have more. In any case the US feds could always just print more money if they were truly determined to get rid of foreign debt, so the bargaining power of holding the debt of another country is often exaggerated. Its just not a big issue.

  10. Paul “on its own ” is a bit of a fudge.

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