Don’t Believe the China Hype

The coronavirus pandemic seems to cement the notion that China is replacing the United States as the world’s premier economic superpower.

Should we have expected anything else? After all, as the conventional wisdom goes, the Chinese make everything; Americans just pack the stuff into Amazon boxes. Beijing plays the long game; we can’t think beyond the next election or quarterly earnings report. China cracked down hard to grapple with the coronavirus and now appears to be on the mend; the U.S. is still languishing, as the death toll mounts and anti-racism protests grip the country.

Well, maybe not: With China, things aren’t always what they seem. Many apparent Chinese strengths—including education, manufacturing, and technology—aren’t quite as strong as many Americans believe. And neither are China’s chances of surpassing the U.S., something policy makers and pundits in Washington should keep in mind as they fret over Beijing’s ostensibly growing might.

China’s rise has often been presented as a historical inevitability: A decadent America, stretched to the breaking point by its global commitments, and weary of its superpower burdens, will give way to the more focused, organized, and motivated up-and-comer. Pax Americana will join Pax Britannica and Pax Romana in the dustbin of history. Ray Dalio, the founder of the hedge fund Bridgewater Associates, has placed China’s emergence within a long-established cycle of global power, comparing its ascent today to the rise of Britain after the Industrial Revolution, and the Dutch Republic, which created a seaborne empire in the 17th century.

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The Chinese propaganda machine enjoys reinforcing this perception of American decline. Amid the pandemic and protests, Chinese media have contrasted Beijing’s (supposedly) superior virus-fighting techniques with the enfeebled response of the Trump administration, claiming that Chinese governance is superior to American democracy. Adding in the tumult caused by the death of George Floyd, the Global Times, a Communist Party–run newspaper, wrote that“Chinese analysts” were warning that “the U.S. has become a ‘failed state.’”

Historians, journalists, and experts have been predicting the United States’ demise for decades. In the 1980s, Japan seemed destined to overtake the U.S. as the world’s top economy, propelled, much like China today, by state-led economic policies deemed superior to America’s laissez-faire capitalism. But Japan didn’t have the mojo many believed: Its economy never fully recovered from a catastrophic financial crisis in the early ’90s, and the business practices once considered world-beaters are today derided.

Can China do better? Sure, it will almost certainly continue to gain wealth and influence. But to become No. 1, Beijing must overcome hurdles even higher than Japan’s, while the U.S. has retained a host of advantages that are often overlooked or underappreciated.

Forgotten is the gargantuan lead the U.S. still holds by just about every measure, even after China’s four decades of hypersonic economic growth. The total output of the U.S. economy was $20.5 trillion in 2018, significantly larger than China’s $13.6 trillion. Calculated on a per-person basis, the gap is even more glaring.

But these indicators don’t capture the true extent of the American edge. Derek Scissors, a scholar at the American Enterprise Institute (AEI), argues that a much better comparison is of national wealth—the value of real estate, stocks, and other assets—because it accumulates over time. By this metric, Americans remain significantly richer than the Chinese. In one estimate, U.S. household wealth was $106 trillion in mid-2019, Scissors noted in a recent report, compared with an estimated $64 trillion for China.

Nor is China challenging the American position at the core of global finance. Even though the size of Chinese stock markets continues to swell, controls on foreign share ownership and cross-border capital flows have relegated them to the international sidelines. In times of stress, such as the coronavirus pandemic, global investors don’t flee to Chinese bonds as a safe haven, but to U.S. treasuries. And despite the persistent worries about China’s currency contesting the primacy of the dollar, the tightly managed renminbi remains a bit player: According to data from the financial services network Swift, the renminbi was used in a measly 1 percent of international payments in April, compared with the greenback’s 48 percent share.

Even where China does have an edge, it’s not as dominant as it first appears. We assume Americans don’t make anything because the “Made in China” label is so ubiquitous. China did account for 28 percent of global manufacturing in 2018, according to United Nations data. But the U.S. is no industrial slouch, with nearly a 17 percent share—almost triple that of Germany’s vaunted factories. The U.S. also tends to produce highly engineered products, such as airplanes and chips, that are difficult for China to replicate. Beijing has invested heavily in developing a commercial jet to compete with Boeing and Airbus, but the project has sufferedfrom lengthy delays and embarrassing technical glitches. Nor is China a more competitive economy for manufacturing: The costs of operating a factory in the U.S. and China are roughly equivalent, because American workers are far more productive than their Chinese counterparts.

The U.S. holds the upper hand in something even more crucial: technology. There is talk of a “tech war” between the U.S. and China, as Beijing’s policy makers rush to create global competitors in everything from electric vehicles to 5G telecom systems. But at the moment, that “war” is barely a skirmish: Despite a quarter century of effort and huge state financial support, China’s semiconductor firms lag badly behind their American rivals in design and know-how. “China is still far from achieving anything close to overall independence or even leadership in any specific segment of the sector,” a study by the Center for Strategic & International Studies concluded. U.S. tech giants such as Facebook, Alphabet, and Twitter are truly global enterprises, attracting users from every corner of the planet; their Chinese counterparts—firms such as Tencent, Baidu, and Sina Weibo—have struggled to expand beyond the Chinese border. Even in areas where the Chinese are making huge strides, they’re not leaving the U.S. in the dust. While China is excelling at putting artificial intelligence into commercial use, the U.S. is still better at developing the tools, theories, and chips that power AI and the computers to make it work.

China may find that catching up is hard to do. Its students have been flooding into U.S. colleges for a reason: China’s higher education system compares poorly with its U.S. counterpart. In one ranking of the world’s best universities, the first Chinese entry, Peking University, doesn’t appear until number 92—after 50 American ones. Professors and students at Chinese colleges aren’t allowed to speak, write, or study freely, either. A new index of academic freedom, released in March, ranked China behind such paragons of intellectual openness as Cuba and Iran.

All of this means China is vulnerable to falling into the “middle-income trap.”That’s where many high-growth, emerging economies tend to end up: After reaching a comfortable level of income, they stall and struggle to leap into the ranks of the world’s most advanced economies, held back by their inability to become more productive and innovative. Only a small handful of developing nations, including South Korea and Singapore, have managed that jump in recent times.

There are indications that China could get stuck in this snare. The heavy hand of the state in China’s economy—a source of envy for many U.S. policy makers—may be dragging it down. Bureaucrats direct bank loans, subsidies, and other resources to notoriously bloated and inefficient state-owned enterprises, loss-making “zombie” companies, and useless infrastructure projects, amassing a potentially destabilizing mountain of debt and killing off much-needed productivity gains. Add in a shrinking workforce—fallout from the one-child policy—an inadequate welfare system, and a waste-ridden property sector, and China may be primed for economic turmoil as much as triumph.

Of course, none of this means that China is not a threat to the United States—economically, strategically, and ideologically. Beijing will continue to expand its political clout and beef up its military capabilities. But its grand ambitions could be hamstrung if its economic miracle falters.

The economic challenges facing China have possible implications for U.S. policy. Rather than worrying so much about what Beijing is up to, Washington might be better off focusing on the home front and enhancing American advantages over China, by, for instance, strengthening the education system and investing in research and development.

“Is China going to displace the U.S. as the dominant economic power? No,” AEI’s Scissors told me. “If we handle our own policies correctly, the Chinese can’t catch us.”

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