There can now be little doubt that just as the conventional wisdom way overstated the economic prospects of Russia in 1960 and Japan in 1990, so have China’s prospects been greatly exaggerated in this decade. Indeed, I think there is a good chance that, measured at market exchange rates, U.S. gross domestic product will exceed China’s for another generation.
As with Russia and Japan, this reflects the fact that countries whose growth is driven by super-high capital investment in manufacturing eventually hit a wall. As in those cases, it reflects demographic disaster, with the number of births in China now less than half of what they were seven years ago and marriage rates collapsing. On top of that, China’s export growth engine is stalled by a lack of global willingness to accept more of its production, and its infrastructure and real estate sectors still must work off the massive overbuilding of recent years.
In Russia and Japan, tremendous technology — exemplified by Sputnik in the case of the Soviet Union and electronics leadership in Japan — was not enough to prevent relative economic decline. The same will likely be true in China, even if it ends its corrosive political interference with top companies. What does all this mean for the United States? No one should conclude that we can be complacent about the Chinese geopolitical challenge. Indeed, as Russia’s behavior in Berlin, Cuba and Eastern Europe during the 1960s illustrates, nations that see the economic route to glory foreclosed can become irrational and dangerous.
It is not Xi’s intention to wish us well; he does not seek to be slotted into the global order on our terms or desire to maintain current balances of power. Our buildup of alliances needs to be complemented by increased national security spending and firm signals that aggression will not be tolerated.
At the same time, however, we must be careful that valid security concerns do not lead to economic policies that provoke the very kinds of aggression that worry us most.
Policies that limit commerce with China are surely necessary in some areas on national security grounds. But contrary to what is often asserted by advocates, these policies exacerbate inflation, reduce the purchasing power of middle-class incomes and interfere with American competitiveness.
To build on national security adviser Jake Sullivan’s recent formulation, if the United States is going to fence off some “yards” of its economy from China, yards being small is at least as important going forward as fences being high.