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Back in the 1980s, my industrial engineer father, who worked in the auto components industry in Indiana, became convinced that Japan would take over the world.
This is back when kaizen was the New New Thing, Mitsubishi had purchased Rock Center, and the movie Gung Ho — about the Japanese takeover of a US auto plant — came out. Gung Ho is, by the way, not even a Japanese word but rather a tacky Americanisation of a Chinese phrase. Could you even release a movie with a title like this today? I doubt it.
My dad wasn’t alone in his paranoia, of course, but he was more tenacious and vigilant about it than most. He made me take Japanese lessons with him for a year at a nearby college, which has in turn made it possible for me to (just about) be able to greet Nikkei colleagues in their native tongue. Meanwhile, the whole Japanese global takeover idea has become a retro meme.
Why do I mention all this? Because Americans have been paranoid for some time that China is going to eat their lunch, and this conventional wisdom is now coming under fire. Financial Times contributor Mohamed El-Erian put forward the counter-case quite well last week, arguing that nosebleed debt levels, decoupling with the US, and autocratic overhang draw into doubt the idea that China will eventually become the world’s largest economy.
So, is this a case of China turning Japanese, at least where the hype about its global dominance is concerned? Quite possibly. As Apollo’s Torsten Sløk laid out in a terrific PowerPoint to investors last week, slowing exports, housing deflation and demographic deterioration are seriously threatening China’s rise. Two of the most eye-popping stats: home price to income ratio is five times higher in Shanghai than in New York, and youth unemployment is more than 20 per cent.
In some ways, this validates the US economic model relative to China (in particular its decentralisation), and creates breathing room for American officials to drive hard bargains around things like tech transfer, tariffs or labour and environmental standards. China is by far the largest and most exceptional Asian nation to ever try to move beyond the middle-income trap. It’s not clear that this will be successful if the country stakes its future on an autocratic alliance with states like Russia, or emerging markets that are in economic trouble.
But if China can’t manage the transition, what does that mean for the US? China’s share of global growth is far higher now than two decades ago. It’s a top export destination for eight of the G20 countries, including the US. While decoupling across trade and financial markets will continue with (in my opinion) even greater speed in the future, it will take time to create the market redundancy that will help offset the input inflation that is part of paying the true cost (in terms of decent labour and carbon standards) for global goods.
Then there’s the Taiwan question. Will an economically floundering China result in a more aggressive Communist party? My best guess is that the cost of Russia’s war in Ukraine has deterred Beijing from starting any kind of hot war in the South China Sea anytime soon. And communication channels between Washington and Beijing are improving somewhat (though I hear that many under-secretary-level staff in the White House lack clear counterparties in Xi Jinping’s government).
So what will China’s slowdown mean for the rest of the world? Economically, it will be worse for emerging markets and, to a lesser extent, Europe than the US. Politically, I think it’s mildly net positive for the US, in terms of bargaining power and the continued ability to leverage the dollar as a reserve currency since a weaker China. Peter, what do you think?
This Economist report on World Values Survey research, which shows that the values of various countries and regions are not necessarily converging as they get richer, is yet more evidence that the neoliberal consensus on this score was wrong. As I argued in my book Homecoming, place matters.
Also, following on from my Note above, I’m not surprised to see that China is looking to undermine the dollar, as reported in this FT series. How quickly that happens is another matter. As I wrote back in 2020, we’ve been heading towards a post-dollar world for a while now, though the greenback will still keep its position as the pre-eminent global currency as long as America’s politics hang together and our economy remains the cleanest dirty shirt in the closet.
Also, I’m digging into Walter Isaacson’s new biography of Elon Musk, which I’ll be reviewing this week in the FT. So, so much to say. For now, take a look at the picture on the publisher’s homepage and tell me whether you think it’s a bit too fawning? Reminds me of the Jobs cover.
Peter Spiegel responds
Rana, I’ll be honest with you. I have found almost all recent analysis of China’s economic and geopolitical trajectory to be deeply infected by status quo bias: whatever is currently happening in the Middle Kingdom will inevitably happen forever.
At the start of the pandemic, there were widespread predictions that as a centrally controlled autocracy, China would be able to more effectively stamp out the spread of Covid-19 and therefore emerge from the crisis earlier and stronger. Then the collective wisdom shifted: centrally controlled autocracies are actually very bad at containing pandemics because they stifle the free flow of essential information and cannot move quickly enough to respond to a fast-moving crisis.
Before Russia’s invasion of Ukraine, the west was suffering from hyperinflation and an increasingly mercantilist approach to international affairs that meant Beijing could easily divide democratic alliances as they scrambled to access China’s fast-growing internal market. Now, Beijing is suffering from a burgeoning balance-sheet recession, with overweening debt levels that are killing growth, and America’s East Asian allies are increasingly united against Xi’s over-aggressive posture in the Pacific.
Not all of these futures can be true, which is why I’m reluctant to answer your question outright, Rana. It is true that China’s post-pandemic slump over the past year has shone an unwelcome light on some under-appreciated structural problems with its economic model. But many of those same problems that you cite have been there for years, including at times when China was undergoing real economic advancement.
If I needed to choose a side, I still like the hand the west has to play better than Beijing’s. American capitalism has, once again, shown it is malleable and resilient in the face of a pandemic, followed by an inflationary shock, followed by rapidly raising interest rates. Geopolitically, American treaty allies in Europe and Asia are rapidly rearming and sharing intelligence and military capabilities at levels almost unprecedented since the end of the cold war. Still, I’m not going to make a prediction as to whether China’s current slowdown is determinative in the ongoing Sino-American rivalry. As Zhou Enlai purportedly declaimed about the impact of the French Revolution: it’s too early to say.
Edward Luce is on book leave and will return in October.
And now a word from our Swampians . . .
In response to “Tokyo, Seoul and an unheralded diplomatic victory”:
“More must be done to temper expectations for US diplomacy in the region by distinguishing the context for East Asian security as distinct from the north Atlantic and Nato. There is a supposition among westerners that allies in east Asia should look after their interests through an institution of collective security (á la Nato). This overlooks the deep social and cultural integration in the north Atlantic that preceded Nato while ignoring the relatively looser texture of East Asian relations. There has been a European Court of Justice since 1952, there won’t be an East Asian equivalent any time soon nor will there be an regional institution for collective security. Let’s be realistic, trilateral co-operation is superb diplomacy by the US.” — Fergal O’Shea