The Rise of the Chinese Economy and Growing Concerns in the United States

By Kalim Siddiqui

I. Introduction

The article discusses recent global economic changes and will largely focus on two of the worlds’ largest economies, namely China and the United States. The present superpower i.e. the United States has failed to come up with a solution to the challenges posed by the last four decades of rapid expansion of the Chinese economy. The Chinese population is 1.45 billion, more than four times larger than the US population, and any changes in its economy and the living conditions of its people are bound to have a global impact.

China is an ancient civilization. The Chinese selection process of the party leadership and government administration is based on a meritocracy, which is based on their very long experience and heavily influenced by their Confucian philosophy. The Qing Empire accounted for a third of the world’s wealth in 1810. For more than two thousand years China dominated the world economy; however, it is only for the last two hundred years the West has dominated the world economy, especially after the first Opium war in 1942, which was led by Britain against China. (Siddiqui, 2009) Understanding history is very important regarding why some countries are poor and some are rich. Respect for sovereignty is crucial for a country’s economic development. In order to achieve socio-economic development and cooperation among countries is very important. To achieve global economic prosperity and to improve the environment, cooperation among countries is crucial, which means multilateral cooperation. But how can multilateralism be strengthened?

In Donald Trump’s trade war with China, it appears that the US has made a mistake by opposing China on all major fronts. For instance, the US opposes China’s ‘One Belt and One Road’, including the China and Pakistan Economic Corridor CPEC project, which it sees as a threat to its interests in South Asia and in the rest of the world. (Siddiqui, 2019a) It seems that the US has no economic strategy to deal and engage with China.

We will discuss here the historic conflict between nations in ancient Greece and try to examine them in light of the present context between the US and China. Tensions have grown enormously in the last few years in the South China Sea, where the US (along with Australia and other neighbouring countries) is trying to create a war-like situation. The US is trying to humiliate China, however, rather than initiating a military show down and encircling China, it should compete in technological development.

Let us look more broadly, for instance, when a rising power (China) threatens to displace an existing power (the US), how can things potentially develop in terms of their relationship? For example, when Germany’s economy grew faster than Britain’s in the 1900s, it rapidly rose as an economic power in first decade of the 20th century. Germany’s potential of emerging as an economic superpower created fear in Britain and France, which led to World War I in 1914 and again World War II in 1939. Thucydides’ Trap explains why conflict can happen and how it can be defused. According to Thucydides in ancient Greece, why countries go to war is because of three factors: fear, honour and interest. Thucydides’ Trap refers to the theory that “when one great power threatens to displace another, war is almost always the result“. Thucydides was an ancient Greek historian who was born in Alimosin 460 B.C. and died in 411 B.C. He is known for his book The History of the Peloponnesian War which analyses in detail the key reasons behind the war between Sparta and Athens in the 5th Century B.C. He described that the primary cause of the Peloponnesian War was the “growth in power of Athens, and the alarm which this inspired in Sparta”. Thucydides traces the development of Athenian power through the growth of the Athenian empire in the years 479 B.C. to 432 B.C. This is known as Thucydides’ Trap. The question is how to avoid such possibilities for war between two global economic powers.

Source: IMF, World Economic Outlook, October 2018.

 

During the post-war period, the GDP’s of West Germany and Japan grew faster than the US, and similar trends were observed in labour productivity as well. Both these countries’ economies expanded and began to challenge the US in many consumer and manufacturing goods. Since the 1980s the Chinese economy has grown even faster than ever experienced in the past and its contribution to global output has risen dramatically. (Siddiqui, 2020a) For instance, we can measure in terms of the Purchasing Power Parity (PPP), which is one popular macroeconomic analysis metric to compare economic productivity and standards of living between countries. The PPP compares different countries’ currencies through a “basket of goods“. In 2004, the Chinese GDP was a quarter of the US’s, its economy rose to become equal to the US in 2014. In PPP terms and it is expected that the China’s GDP will be 40% larger that the US by 2024. Figure 1 shows China and US GDP growth rates measured in PPP from 1980 to 2020. (IMF, 2018)

During the post-war period, the GDP’s of West Germany and Japan grew faster than the U.S.

Additionally, the Chinese economy contributed just 2.8% of the global GDP in 1980, but rose to 18% by 2018, which was one of the most phenomenal increases ever witnessed in history. China’s share in global GDP as percentage of world GDP has risen sharply since 1980s as indicated in Figure 2.

Source: The World Bank, 2019.

 

II. Changes in the Living Conditions

Since 1989, the living conditions of half of the US population have declined and the average real incomes of the bottom 50% of the US population have deteriorated in real income terms. By contrast, during the same period, the majority of China’s population has seen sharp improvements in their real incomes and living conditions. They have greater access now to education, health, and housing than at any time in their past history. Under such circumstances, the US is asking Chinese people to stand up against their government in support of political pluralism and democracy; it seems that the US ruling elites are very naïve. Of course, Chinese people are aware of the examples of failures of democracy and contraction of the economies in post-1990s Russia and Latin America.

Why was it that even the Chinese Communist Party’s bureaucratic apparatus was much quicker to change? It seems that once the party decided, it ordered its mass of organisations and party members to fully devote themselves to achieving its goals. Thus, the party was not simply a spectator, but rather was seen as a part of the system to achieve the government’s stated objectives (Siddiqui, 2015a; also see 2015b).

Since the adoption of the pro-market policy in 1978, China has gradually opened its economy to trade and foreign investment. China has also sustained the world’s fastest growing economies, with a real annual GDP growth of average 10% up to 2018, a growth described by the World Bank as “the fastest sustained expansion by a major economy in history”. Obviously, this growth of the Chinese economy has enabled the country to double its GDP every eight years and helped to raise about 800 million people out of poverty. As a result of consistently fast GDP growth over four decades, the country has become the world’s largest economy on the basis of purchasing power parity: a top manufacturer, trader and holder of foreign exchange reserves. Moreover, China is now a major commercial partner of the US, besides being the US’s largest trading partner; it is also the largest foreign holder of the US Treasury Securities, which funds US Federal debts and keeps interest rates low in the US.

China is launching a new growth model that relies less on exports and Western markets, and more on domestic consumption and markets in developing countries.

Despite the fact that the Chinese economy has slowed from GDP growth rates of 14.2% in 2007 to 6.5% in 2019, and during theCovid-19 set back of the 2020, the IMF predicts that it will continue to grow to 5.5% by 2024. China is launching a new growth model that relies less on exports and Western markets, and more on domestic consumption and markets in developing countries. The government has recently increased huge investments in R&D and efforts are being made to make innovation a top priority in economic planning through various government initiatives such as “Made in China 2025”, where it intends to modernise the manufacturing sector and become a major global player in this sector and high tech.

Since Deng Xiaoping launched economic reforms in China in 1978, the people have seen rising incomes, an expansion of employment and improvement in their living conditions. The Chinese key goal seems to be to bring back past glory. Moreover, the Chinese are aware of their national humiliation following two armed conflicts in the mid-19th century. The first Opium War (1839-42) between Britain and Chinese armed forces, and the second Opium War (1856-60) when Britain and France jointly attacked China, and finally in 1860, the plundering and burning of the Chinese Imperial Summer Palace. The Chinese defeat marked the signing of unequal treaties that facilitated the weakening of the Chinese sovereignty and the collapse of the Qing Empire.

Source: https://thenextrecession.wordpress.com./

 

In 1980, China invited foreign capital, but kept them under controlled capital outflows. As a result, the Chinese economy grew rapidly, along with a rise in employment, productivity and investment, and trade ratio to GDP. Figure 3 indicates investment to GDP in percentage from 1980 to 2018 for advanced economies and Chinese economies. China has more than doubled its total investment to GDP in its economy compare to advanced economies. It also successfully diversified its economy by moving the people from agriculture to expanding the manufacturing sector. China witnessed enormous growth in the last four decades and the country has successfully moved towards industrialisation and urbanisation and at present most of its export consists of manufactured goods. (Siddiqui, 2015c and also see 2015d)

In contrast to rapid China’s economic expansion during the post-reform period, Russia launched pro-market economic reforms, including capital liberalisation, deregulation and privatisation of state enterprises a decade later. But unlike China, Russia did not follow capital control, which resulted in a lot of capital outflows from the country, also known as capital flight, and boosted corruption and money laundering. As a result of the adoption of neoliberal economic reforms also known as ‘shock therapy’ in Russia in the early 1990s, the GDP shrank by 25%, living conditions and life expectancy also reduced sharply. The country suffered de-industrialisation and began to rely on exports of natural resources such as oil and gas.

 

III. China’s GDP Growth Since 1980s

Prior to the initiation of economic reforms and trade liberalization nearly 40 years ago, China maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly inefficient, and relatively isolated from the global economy. Since opening up to foreign trade and investment and implementing free-market reforms in 1978, China has been among the world’s fastest-growing economies (Siddiqui, 2015a).

With the maturing of the Chinese economy, GDP growth has slowed significantly, from 14.2% in 2007 to 6.6% in 2018, and that growth is projected by the International Monetary Fund (IMF) to fall to 5.5% by 2024.

The Chinese government has slowed down its growth, which is seen as normal during this phase of its economic development. This recent growth model of China relies on scaling down fixed investment and exports, whilst placing more emphasis on boosting domestic consumption and innovation as new factors to promote economic growth. It can be surmised that such policy reforms are required in order to avoid hitting the “middle-income trap” when countries achieve a certain economic level however, afterwards begin to see a decline in their GDP growth rates because of the failure to adopt new sources of economic growth via innovation.

However, currently the Chinese government has made innovation a top priority in its economic planning through a number of policy initiatives, such as “Made in China 2025,” a plan announced in 2015 to upgrade and modernize China’s manufacturing in 10 key sectors through extensive government assistance in order to make China a major global player in these sectors. However, such measures have raised concerns in the US that China intends to use industrial policies to decrease the country’s reliance on foreign technology and to dominate global markets. (Siddiqui, 2020b)

 

IV. Growing Concerns in the US

In 2017, the Trump Administration launched a Section 301 investigation of China’s innovation and intellectual property policies and found that China’s rapid growth of economy was harmful to U.S. economic interests. It subsequently raised tariffs by 25% on US$250 billion worth of imports from China, while China increased tariffs, ranging from 5% to 25% on US$110 billion worth of US imports. Such measures have adversely affected and reduced bilateral trade since 2019. By mid-2019, Donald Trump announced a further rise in tariffs on many more products from China. Obviously, the escalating trade conflict between the US and China could have adverse consequences for the Chinese economy.

China is currently the United States’ largest merchandise trading partner, its third-largest export market, and its largest source of imports.

Moreover, the high rate of growth in China for the last four decades has resulted in a substantial increase in bilateral commercial ties with the US. According to the US trade statistics, total trade between the two countries grew from US$5 billion in 1980 to US$670 billion in 2019. China is currently the United States’ largest merchandise trading partner, its third-largest export market, and its largest source of imports. Many U.S. companies have extensive operations in China in order to sell their products in Chinese and overseas markets by taking advantage of low wages. Their operations in China have helped many US corporations to take advantage of low wages, remain internationally competitive and earn higher profits. Figure 4 shows a sharp rise in China’s trade and the important element was that exports were larger than imports.

Source: World Trade Organisation (WTO) and China’s Customs Department.

 

China has emerged as a major global economic power. For example, it ranks first in terms of economic size on the basis of PPP in value-added manufacturing, merchandise trade, and holding foreign exchange reserves. It is also important to highlight that value added manufacturing proportion has risen faster than other major manufacturers such as US and Japan (see Figure 5) (Siddiqui, 2015c). Figure 6 shows that China has maintained positive current account balance while US is in negative. China’s growing global economic influence and trade surplus will have significant implications for the US. While China is a large and growing market for U.S. multinational companies, the growth of Chinese businesses is seen by the US as against its economic interests.

Source: The World Bank, 2019
Source: IMF (2019)World Economic Outlook database. https://www.imf.org/en/News/Articles/2019/08/09 na080919-chinas-economic-outlook-in-six-charts

 

China has emerged as a major global economic power. For example, it ranks first in terms of economic size on the basis of PPP in value-added manufacturing, merchandise trade, and holding foreign exchange reserves. It is also important to highlight that value added manufacturing proportion has risen faster than other major manufacturers such as US and Japan (see Figure 5) (Siddiqui, 2015c). Figure 6 shows that China has maintained positive current account balance while US is in negative. China’s growing global economic influence and trade surplus will have significant implications for the US. While China is a large and growing market for U.S. multinational companies, the growth of Chinese businesses is seen by the US as against its economic interests.

However, the emergence of China as a major economic power has raised concerns among many US policymakers. (Siddiqui, 2018a) Some claim that China uses unfair trade practices, such as flooding US markets with cheap consumer goods by under valuing its currency and subsidising local producers. Such practices threaten jobs and incomes in the US. While others argue that China’s growing use of industrial policies to promote and protect certain domestic industries, and its refusal to take action against widespread infringement and theft of US intellectual property rights (IPR) in China, thus undermines free competition. (Siddiqui, 2018b) Moreover, while China has become a large and growing market for US exports, its trade and investment policy limits opportunities for US companies to sell in the Chinese market.

The Chinese government views a growing economy as vital to maintaining social stability. However, China faces a number of major economic challenges that could dampen future growth, including distortive economic policies that have resulted in overreliance on fixed investment and exports, rather than increasing domestic consumption, subsidies for state-owned firms, a weak banking system, widening income gaps, growing environmental problems and so on. The government has stressed that it will address these issues and increase the role of the market in the economy, boost innovation, encourage consumer spending and combat corruption.

In recent years China has become increasingly involved in outwards investments and building greater economic ties to establish a contract to access the supply of raw materials for its growing industries, especially in Africa and Latin America. It has also launched giant projects, especially in infrastructure development. China’s ‘One Belt and One Road’ initiative represents a grand strategy by China to finance infrastructure throughout Asia, Europe, Africa, and Latin America. If successful, China’s economic initiatives could significantly expand export and investment markets for China and increase its influence globally.

China has emerged as the world’s largest manufacturer according to the World Bank. The statistics show the gross value added of manufacturing in China, the US, and Japan expressed in US$ in 2006 and 2016. Gross value added data reflect the actual value of manufacturing that occurred in the country (i.e., they subtract the value of intermediate inputs and raw materials used in production). In 2016, the value of China’s manufacturing on a gross value added basis was 49.2% higher than the US level. In recent years, the manufacturing sector has played a considerably more important role in the Chinese economy than it does for the US. In 2016, China’s gross valued added manufacturing was equal to 28.7% of its GDP, compared to 11.6% for the US.

During 1980 for example, on crucial developmental indicators such as literacy rate, China had 65%, whereas the Indian literacy was still only 44% for the same period. China promoted industrialisation and the export of low-priced manufactured products during the Cold War. Then in the mid-1970s, the US was very keen to use the ‘Chinese Card’ against the Soviet Union. Additionally, to combat rising demands for wages in the West, and to raise profits of the over-accumulated petrodollar deposited in the Western Banks found globalisation and foreign investment a very attractive policy. Moreover, throughout the East Asian countries, foreign direct investment and export-led growth became the “success model of growth”, soon afterwards, China also these adopted these policies and negotiated good terms with foreign companies during the height of the Cold War.

China adopted a pro-market policy, but still the state was always to provide a helping hand, wherever it was desired. A similar economic policy approach was followed in the 1950s in Japan and later on in the 1960s by South Korea. Moreover, carrying out land reforms in both countries ended land monopolies and broke the power of rural elites. Alongside this, mass availability of free primary education and basic healthcare promoted welfare and reduced gender inequality. The very early land reforms carried out in South Korea and Taiwan, and earlier in Japan, and of course in China in a very different way, boosted agriculture production, increased rural household incomes, land productivity and reduced rural inequality dramatically. The rapid industrialisation achieved in East Asia, and also more recently in China, successfully diversified the economy and thus lessened the burden on the agricultural sector.

China adopted a pro-market policy, but still the state was always to provide a helping hand, wherever it was desired.

It seems that Deng Xiaoping was confident enough to believe that China would not be overwhelmed or undermined by the West. Some researchers also stress that Deng Xiaoping believed in ‘free market’ capitalism. I think he was a pragmatist and nationalist, who was willing to try different techniques to achieve economic development in China. His main concern was to improve the performance of the Chinese economy and the living conditions of its people. Deng had a background as Communist Party leader, and experience in the military. His economic thinking was never explicitly expressed in a coherent way. In 1978 he set out an agenda for the country, which included prioritising domestic stability and modernising the economy through economic reforms. He initiated economic reforms which included inviting foreign capital and technology in a few regions of China to modernise the economy and businesses, and increase productivity and exports. Deng called it “Socialism with Chinese Characteristics”.

 

V. Conclusion

The phenomenal economic transformation of the Chinese economy which has unfolded over the last forty years or so was unseen before in human history. Understanding this turn in global economic history is particularly important since the country suffered two centuries of Western domination since the 1820s. The incredible downfall of China in the second-half of the 19th century until the mid-20th century is attributed essentially to the ravages of colonialism and imperialism that characterised that whole period. China suffered deindustrialisation and repeated famines particularly because of the colonial trade policies imposed by Britain and followed by long periods of war.

China’s rapid transformation from a poor developing country to a major economic power within four decades has been spectacular. From 1978, when China introduced pro-market economic reforms, until the end of 2018, its real GDP grew at an average annual rate of nearly 10%. China is no longer simply a regional economic power, but in recent years has emerged as a global economic power, especially after the 2008 global financial crisis, when China decided to increase investment at domestic front, and more recently, set itself up as a champion and supporter of globalisation against the protectionist policies of the US.

China also has launched and financed ‘One Belt and One Road’, which is a massive global investment project in infrastructure to boost trade and economic growth. (Siddiqui, 2019a) Recent Chinese overseas investment in infrastructure is a long-term investment, unlike the US whose investment is in the financial sector, both short-term and speculative. (Siddiqui, 2019c) Since the 1980s, in the US and the UK the role of industrial capital has shrunk, while the role of financial capital has increased. (Siddiqui, 2019b; also see 2020c) Recently, China has confronted Covid-19 and brought under control in a short period, whilst the US and UK are still struggling to bring under control. (Siddiqui, 2020d) In the middle of the pandemic racial tension and violence broke out in many major US cities against the police brutalities.

Finally, China has no history of attacking other countries and interfering in their internal matters. While the US since the 1950s had just done opposite, interfering in many of the developing countries and often being involved in invading Latin American and Middle Eastern countries in the recent past. I hope that growing tension between US and China will not escalate further and become like Thucydides’ Trap. We must learn from history, because unlike ancient Greece, both economic giants are nuclear powers and any war could endanger our whole planet.       

About the Author

Dr. Kalim Siddiqui is an economist, specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, U.K.. He has taught economics since 1989 at various universities in Norway and U.K.

 

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.