Ideas

The China Challenge: Beijing Faces Long Odds in Quest to Overtake the U.S.

Authoritarian rule, interference in key industries and the legacy of the one-child policy limit the mainland’s potential

Image Credit: Dan Matutina/Agent Pekka

China as No. 1. That’s what most people assume is the future. The U.S. is in inexorable decline, its empire sagging under the weight of its imperial ambitions, like Britain or Rome. China, on the other hand, is the brash, energetic newcomer, more focused, more determined. China’s rise is inevitable. Or so the narrative goes.

Easy assumptions about China’s ascent are, well, too easy. The more sober reality is that catching up is hard to do. The U.S. maintains tremendous advantages over China—in wealth, technology and financial heft—that the Chinese may not overcome. Sure, China has been narrowing the gap, but past performance tells us little about the future. China is facing serious roadblocks to its economic progress, and surmounting them is certainly not assured. On top of that, China’s government—often praised for its competency and foresight—is embracing policies that can hold the country back.

To many that might come as a surprise. We read in the news every day about China’s industrial juggernaut, its technological advances and its cutthroat business practices. While Chinese zip about on high-speed railways, Americans lumber around on Amtrak. All true. But surpassing the U.S. will require much more than building airports and installing 5G networks. It will demand fundamental changes to the Chinese economy and its role in the world.

We know this from the modern history of emerging economies. Lifting a country out of destitution, while by no means simple, is at least straightforward. China and other hyper-growth developing societies, such as South Korea, Taiwan and Singapore, achieved their success by integrating into the world economy, and its networks of trade and finance, and connecting their poor workforces to global supply chains. The resulting burst of productivity sent growth rates and incomes soaring.

Then comes the really hard part. Once developing economies reach middle-income status—where China sits today—the low-hanging fruit of economic gains are mostly picked, and the only way to propel the country into the ranks of the most advanced is to become more innovative and efficient. Here many countries get stuck. Hardly any escape.

China is at this critical point, and we can’t say with any certainty whether the economy can make that great leap forward into the rich countries’ club. The policies that worked so well in the past—mobilizing labor and capital—no longer achieve the same gains. To get to the next level, policymakers must clear away old bad practices that stymie productivity and discourage innovation.

Many economists believe Beijing’s leaders are taking the wrong approach to this difficult but crucial transformation. China has succeeded so far because it embraced the free market. The entrepreneurial energy of the Chinese people was unleashed as reforms lifted the heavy hand of the Communist state from the economy. However, that process has to a great degree stopped. President Xi Jinping is reasserting the power of the state and the Communist Party over private enterprise.

America’s Demographic Edge

His administration is striving to foster new, high-tech industries with large amounts of state subsidies and other aid, which provide the resources companies need to invest but can’t necessarily spark the exciting ideas that give birth to competitive companies and products. The continued interference of the state in financial and other markets sends capital to the wrong places, such as bloated state-owned enterprises, instead of more nimble and efficient small, private outfits.

China is also paying the price for another massive state intrusion—its draconian “one-child” population control policy. The populace is aging—the number of working-age Chinese will be shrinking by 0.5% a year by 2030—and this will act as a drag on growth for decades. (By contrast, the American workforce will steadily expand, adding to the U.S. economy’s growth potential, thanks in part to the country’s openness to immigration.)

Facing such headwinds, China’s future economic performance may not be as rosy as many assume. Research firm Capital Economics, in a February study, projected that China will still be the world’s second-largest economy in 2050, behind the U.S. (in terms of market rates for currencies). Though the firm’s research forecast that Chinese individuals will continue to get richer, their average income in 30 years will still be only a fifth of Americans’, roughly equivalent to where Poland is today.

That’s just one projection, of course. But even if China does become the world’s biggest economy, that doesn’t mean it will be the world’s dominant economy. Size ensures a certain amount of clout, but not ascendancy. In terms of size, the U.S. has been in decline relative to other countries for decades—in 1960 it accounted for 40% of world output; in 2019, only 24%. But the U.S. remains unquestionably the world’s most influential economy.

Overall output is only one way to compare economies. Measured in wealth—the value of assets such as property and stocks—the U.S. is far more affluent than China. A comparison of 2019 data by the American Enterprise Institute estimated that the U.S. was at least $40 trillion richer than China.

Similarly, the U.S. is far and away the world’s financial heavyweight. The continued primacy of the dollar gives the U.S. powerful leverage in the global economy that China cannot come close to matching. In 2019, the greenback featured in 88% of the world’s foreign exchange transactions; China’s yuan in only 4%.

Beijing’s efforts to promote the use of its own currency in international business have fallen short because the government continues to control flows of capital in and out of the country and restrict foreign access to Chinese assets, which limits the appeal of the yuan around the world.

America’s Technology Advantage

China also lags behind in technology. While it is making great strides in 5G telecommunications, artificial intelligence and other areas, many of China’s most important industries still rely on the U.S. and other advanced countries for technology. In semiconductors, the vital organs of everything from cars to computers, American companies control nearly half of the world’s market while China has so far failed to reduce its reliance on imported chips, even though the government has poured resources into the sector. The state-owned company trying to compete with Boeing and Airbus simply couldn’t get its planes off the ground without American and European know-how.

This makes China’s progress vulnerable to Washington policy. China has been stockpiling chips and the equipment to manufacture them, fearing the Biden administration will further curtail supply as tensions between the two powers escalate. Xi and his top cadres are on a mission to eliminate the risk by making China’s economy self-sufficient in key technologies, backed by large dollops of state support.

But taxpayer cash can’t necessarily create innovation. Though the state lavished subsidies on Chinese electric-vehicle manufacturers, for example, the best-selling battery-powered car in the Chinese market last year was the Tesla Model 3. Chinese newcomers across tech fields are often competing with international companies that have honed their tech-inventing skills for decades. By the time the Chinese catch up, their more experienced foreign rivals may be moving on to something new.

And even if China manages to match U.S. technology, there is no guarantee the rest of the world will use it. Major U.S. technology companies are truly global—from Apple to Zoom—and set the world’s standards. Computers run on Microsoft’s Windows and mobile phones on Alphabet’s Android (even Chinese models). China’s giants, though immensely powerful at home, have generally struggled to capture an audience outside of China. There are exceptions—telecom manufacturer Huawei and video swapping app TikTok. But these have endured bans in other countries due to worries about security and data privacy—a fear, fostered by China’s authoritarian state, that will haunt Chinese tech. If that trend continues, China could become something of its own technological universe, with homegrown technology popular at home but few other places.

The same can be said of Chinese business overall. While the country, as the world’s largest manufacturer, does have many important exporters, what it lacks are products that capture the imagination (and wallets) of the world’s consumers. U.S. companies boast some of the globe’s most beloved brands—from Coca-Cola to Nike to McDonald’s; the Chinese, arguably have none (with the possible exception of TikTok).

This may not sound that important, but the fact that the world searches on Google, posts baby pictures on Facebook, watches Hollywood blockbusters and sips Starbucks coffee gives the U.S. a “soft” power that China can’t beat. Getting there may require changes in China that are simply impossible in the country’s authoritarian political system.

The lack of academic freedom; the inability to discuss political, social and in some cases even economic issues openly; and, for most Chinese, the restricted access to information from abroad weigh on China’s chances of creating world-beating products and thinking up the Next Big Thing. Clearly, Chinese companies have shown they can be innovative, but in fierce global competition, the controls that the government places on information and education could leave China at a disadvantage versus more open societies.

None of this means China is eternally condemned to second place. Nor does it mean the U.S. can afford to be complacent. China is without doubt the most dangerous geopolitical threat to the U.S., and democracy itself. But it does mean there are enough ifs, maybes and perhapses surrounding China’s rise to assume anything about its future, or the world’s.

This is the first article in a series on “The China Challenge.” The second  article takes the opposite position, arguing that freer trade and faster communication encouraged more bad behavior from China, and that’s helping it overtake the U.S.

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