Peak China?

JOSEPH S. NYE, JR.

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CAMBRIDGE – The failure of China’s zero-COVID policy is leading to a reassessment of Chinese power. Until recently, many expected China’s GDP to surpass that of the United States by 2030 or soon thereafter. But now, some analysts argue that even if China achieves that goal, the US will surge ahead again. So, have we already witnessed “peak China”?

With inflation on the rise and the era of ultra-low interest rates over, financial markets will face a huge stress test in 2023. While banking systems are more robust than they were in 2008, a real-estate slump could severely affect heavily leveraged private-equity firms, producing a systemic crisis.

It is just as dangerous to overestimate Chinese power as it is to underestimate it. Underestimation breeds complacency, whereas overestimation stokes fear; but either can lead to miscalculations. A good strategy requires a careful net assessment.

Contrary to the current conventional wisdom, China is not the world’s largest economy. Measured in terms of purchasing power parity, it became larger than the US economy in 2014. But PPP is an economist’s device for comparing estimates of welfare; even if China someday surpasses the US in total economic size, GDP is not the only measure of geopolitical power. China remains well behind the US on military and soft-power indices, and its relative economic power is smaller still when one also considers US allies such as Europe, Japan, and Australia.

To be sure, China has been expanding its military capabilities in recent years. But as long as the US maintains its alliance and bases in Japan, China will not be able to exclude it from the Western Pacific – and the US-Japan alliance is stronger today than it was at the end of the Cold War. Yes, analysts sometimes draw more pessimistic conclusions from war games designed to simulate a Chinese invasion of Taiwan. But with China’s energy supply exposed to US naval domination in the Persian Gulf and the Indian Ocean, it would be a mistake for Chinese leaders to assume that a naval conflict near Taiwan (or in the South China Sea) would stay confined to that region.

China has also invested heavily in its soft power (the ability to get preferred outcomes through attraction rather than coercion or payment). But while cultural exchanges and aid projects could indeed enhance China’s attractiveness, two major hurdles remain. First, by indulging in ongoing territorial conflicts with neighbors such as Japan, India, and Vietnam, China has made itself less attractive to potential partners around the world. Second, the Communist Party of China’s domestic iron grip has deprived China of the benefits of the vibrant civil society that one finds in the West.

That said, the scale of China’s economic reach will remain important. The US was once the world’s largest trading power and bilateral lender. But now, nearly 100 countries count China as their largest trading partner, while only 57 have such a relationship with the US. China has lent $1 trillion for infrastructure projects through its Belt and Road Initiative over the past decade, while the US has cut back aid.

Moreover, China’s economic success story undoubtedly enhances its soft power, especially vis-a-vis other developing and emerging markets. And its ability to grant or deny access to its domestic market gives it hard-power leverage, which its authoritarian politics and mercantilist practices allow it to wield freely.

Where does that leave us in assessing the overall balance of power? Importantly, the US still has at least five long-term advantages. One is geography. The US is surrounded by two oceans and two friendly neighbors; China, by contrast, shares a border with 14 other countries and is engaged in territorial disputes across the region.

The US also has an energy advantage. Over the past decade, the shale revolution transformed it into a net energy exporter, whereas China has become ever more dependent on energy imports.

Third, the US derives unrivaled financial power from its large transnational financial institutions and the international role of the dollar. Only a small fraction of total foreign-exchange reserves is denominated in renminbi, while 59% are held in dollars. Though China aspires to expand the renminbi’s global role, a credible reserve currency depends on it being freely convertible, as well as on deep capital markets, an honest issuing government, and the rule of law. China has none of these, making the renminbi unlikely to displace the dollar in the near term.

Fourth, the US has a relative demographic advantage. It is the only major developed country that is currently projected to hold its place (third) in the global population ranking. Seven of the world’s 15 largest economies will have a shrinking workforce over the next decade, but the US workforce is expected to increase by 5%. China, meanwhile, will suffer a 9% decline in its working-age population – which already peaked in 2014 – and India will surpass it in terms of population this year.

Lastly, America has been at the forefront in the development of key technologies (bio, nano, and information) that are central to this century’s economic growth. China, of course, is investing heavily in research and development, so that its technological progress no longer depends solely on imitation. It has managed to become competitive in fields such as artificial intelligence, where it hopes to be the global leader by 2030. US efforts to deprive China of the most advanced semiconductors may slow this progress, but they will not end it.

All told, the US holds a strong hand. But if it succumbs to hysteria about China’s rise or complacency about its “peak,” it could play its cards poorly. Discarding high-value cards – including strong alliances and influence in international institutions – would be a serious mistake.

One important issue to watch will be immigration. Around a decade ago, I asked former Singaporean Prime Minister Lee Kuan Yew whether China would surpass the US in total power any time soon. He said it would not, because America can draw upon and recombine the world’s talents in ways that simply are not possible under China’s ethnic Han nationalism.

For now, Americans have ample reason to feel optimistic about their place in the world. But if the US were to abandon its external alliances and domestic openness, the balance could shift.