Saturday, April 23, 2016

Why China Won't Overtake the United States

Stephen Brooks and William Wohlforth have a great new scholarly article out at International Security, "The Rise and Fall of the Great Powers in the Twenty-First Century: China’s Rise and the Fate of America’s Global Position."

And the authors have a shorter version for policymakers and general readers, at Foreign Affairs, "The Once and Future Superpower":
In forecasts of China’s future power position, much has been made of the country’s pressing domestic challenges: its slowing economy, polluted environment, widespread corruption, perilous financial markets, nonexistent social safety net, rapidly aging population, and restive middle class. But as harmful as these problems are, China’s true Achilles’ heel on the world stage is something else: its low level of technological expertise compared with the United States’. Relative to past rising powers, China has a much wider technological gap to close with the leading power. China may export container after container of high-tech goods, but in a world of globalized production, that doesn’t reveal much. Half of all Chinese exports consist of what economists call “processing trade,” meaning that parts are imported into China for assembly and then exported afterward. And the vast majority of these Chinese exports are directed not by Chinese firms but by corporations from more developed countries.

When looking at measures of technological prowess that better reflect the national origin of the expertise, China’s true position becomes clear. World Bank data on payments for the use of intellectual property, for example, indicate that the United States is far and away the leading source of innovative technologies, boasting $128 billion in receipts in 2013—more than four times as much as the country in second place, Japan. China, by contrast, imports technologies on a massive scale yet received less than $1 billion in receipts in 2013 for the use of its intellectual property. Another good indicator of the technological gap is the number of so-called triadic patents, those registered in the United States, Europe, and Japan. In 2012, nearly 14,000 such patents originated in the United States, compared with just under 2,000 in China. The distribution of highly influential articles in science and engineering—those in the top one percent of citations, as measured by the National Science Foundation—tells the same story, with the United States accounting for almost half of these articles, more than eight times China’s share. So does the breakdown of Nobel Prizes in Physics, Chemistry, and Physiology or Medicine. Since 1990, 114 have gone to U.S.-based researchers. China-based researchers have received two.

Precisely because the Chinese economy is so unlike the U.S. economy, the measure fueling expectations of a power shift, GDP, greatly underestimates the true economic gap between the two countries. For one thing, the immense destruction that China is now wreaking on its environment counts favorably toward its GDP, even though it will reduce economic capacity over time by shortening life spans and raising cleanup and health-care costs. For another thing, GDP was originally designed to measure mid-twentieth-century manufacturing economies, and so the more knowledge-based and global­ized a country’s production is, the more its GDP underestimates its economy’s true size.

A new statistic developed by the UN suggests the degree to which GDP inflates China’s relative power. Called “inclusive wealth,” this measure represents economists’ most systematic effort to date to calculate a state’s wealth. As a UN report explained, it counts a country’s stock of assets in three areas: “(i) manufactured capital (roads, buildings, machines, and equipment), (ii) human capital (skills, education, health), and (iii) natural capital (sub-soil resources, ecosystems, the atmosphere).” Added up, the United States’ inclusive wealth comes to almost $144 trillion—4.5 times China’s $32 trillion.

The true size of China’s economy relative to the United States’ may lie somewhere in between the numbers provided by GDP and inclusive wealth, and admittedly, the latter measure has yet to receive the same level of scrutiny as GDP. The problem with GDP, however, is that it measures a flow (typically, the value of goods and services produced in a year), whereas inclusive wealth measures a stock. As The Economist put it, “Gauging an economy by its GDP is like judging a company by its quarterly profits, without ever peeking at its balance-sheet.” Because inclusive wealth measures the pool of resources a government can conceivably draw on to achieve its strategic objectives, it is the more useful metric when thinking about geopolitical competition.

But no matter how one compares the size of the U.S. and Chinese economies, it is clear that the United States is far more capable of converting its resources into military might. In the past, rising states had levels of technological prowess similar to those of leading ones. During the late nineteenth and early twentieth centuries, for example, the United States didn’t lag far behind the United Kingdom in terms of technology, nor did Germany lag far behind the erstwhile Allies during the interwar years, nor was the Soviet Union backward technologically compared with the United States during the early Cold War. This meant that when these challengers rose economically, they could soon mount a serious military challenge to the dominant power. China’s relative technological backwardness today, however, means that even if its economy continues to gain ground, it will not be easy for it to catch up militarily and become a true global strategic peer, as opposed to a merely a major player in its own neighborhood...