Chapter IX power, Wealth and Interdependence in an Era of Advanced Globalization
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- Predicting Chinese Growth
- TABLE IX.7 Alternative Scenarios for China and U.S. GDP in 2034 Country/Growth Rate 2033 GDP
- Alternative Perspectives on Chinese Growth
- IV. Power, Wealth, Conflict and Peace in the 21 st Century
- U.S. and China Power Scenarios
- TABLE IX.8 U.S. and China Comparative Military Spending 1990-2013 (constant 2011 billions $US)
- FIGURE IX.1 Global Military Spending, 2013
TABLE IX.6 Types of Upgrading Imitation Local innovation and upgrading to global standards Global innovation either at the fast follower or leading edge (first mover) level Each of these levels requires knowledge acquisition and application, but at progressively more sophisticated and complex levels. Imitation involves the ability to effectively borrow (or steal) ideas, techniques, models and operations of products from other more advanced sources and reengineer and duplicate these capabilities in replicas or variations of products. The “knock-off” products readily available in emerging economies, such as the “Rolex” watch for $4 or the “iPhone” for $20 which work (more or less) for a while, are examples. However much western firms condemn these products, they do demonstrate a certain level of sophistication in knowledge acquisition and application. A more legitimate example is the Chinese search engine Baidu, which was created as a “knock-off” of Google. 26 Imitation occurs across many areas of an emerging economy and creates a knowledge base that permits upgrading and local innovation.27 A broader but related capability involves obtaining global knowledge through legitimate means – such as a joint venture – and leveraging that to produce similar products. Achieving widespread upgrading across the value chain, and even better, significant local innovation in products and processes, has already begun to happen in China. At early stages of industrial development, upgrading and local innovation tend to be combined as firms are able to improve their value chain position by adding “new to the firm” or local industry capabilities. Sometimes this can represent local innovation by recombining global capabilities with an improvement special to local markets and preferences. An example from China was Haier’s addition of a special heavy-duty filter to their washing machine sold in rural China. This permitted customers to wash their vegetables without clogging the washing machine. Such innovation, though it does not enable globally competitive capabilities, does promote firm upgrading that can lead to such capabilities. Private software firms in Hangzhou were found consistently to generate important forms of upgrading to improve such competencies as organizational integration and the transformation of external knowledge.28 A more important form of upgrading that links local capabilities and global competition occurs is the special ability to produce varying quantities of products, including mass production, with significant options for customization in Chinese factories. This is a globally competitive specialization, focused mainly in the information technology industry, and continued innovation of local capabilities builds China’s position in the global value chain.29 The ability of Taiwan, Korea and Singapore to achieve the level of upgrading needed to sustain economic growth, notwithstanding the somewhat easier global environment than is faced by China, bodes well for China’s chances.30 For China has one enormous advantage over these smaller nations: its population provides a massive domestic market, which creates opportunities for producing and selling by Chinese firms, even in competition with foreign firms. Chinese firms in the near term do not need to depend that much on exports, such as smaller Asian tigers have done, to achieve economic growth. Can Chinese firms compete against foreign firms in the China market and engage in upgrading across the value chain? Perhaps the strongest incentive for Chinese firm upgrading is the intense competition provided by foreign firms operating in China.31 With some restrictions, the Chinese economy is mostly open to foreign firms, who are able to set up wholly owned operations in China and both produce and sell. These firms create a very competitive environment for domestic Chinese firms, who have very good reasons to work hard to provide value to Chinese consumers. Even in situations where Chinese firms have lost domestic market share to foreign firms, there is considerable evidence of successful efforts to upgrade across the value chain and sustain a viable competitive position. Thus, rather than seeing a set of one-sided gains for foreign firms, Chinese firms have made important gains as well. A complex and highly competitive Chinese auto industry, with foreign firms dominating domestic markets, nonetheless saw the rise of several Chinese firms developing cars just for the Chinese market and achieving important growth in market share at the low end. In the construction equipment industry, which has boomed given immense construction across China, domestic firms hold a dominant market share at the low end of the market. And in the computer numerically controlled machine tool industry, in spite of significant imports, domestic producers dominated the low-end market. Many of these same domestic firms in each of these three industries have succeeded in leveraging the capabilities in low-end markets into higher value segments. This is because competition between foreign firms and Chinese firms in Chinese markets can be on a much more level field in low-end markets and increasingly in middle level markets. Not only do Chinese firms have cost advantages over foreign firms, these firms also have matured to the point where they are able to narrow significantly the quality advantages of foreign firms. This has permitted firms in each industry to move successfully into middle market product spaces.32 Ironically, opportunities for upgrading quality levels by Chinese firms expand as foreign firms, seeking to lower costs, increase purchases from local suppliers. This requires efforts to transfer technology and knowledge to these local firms in order to raise their quality. Local Chinese final producers can also reap the gains in quality by buying from these same suppliers and thereby improve their competitive position against foreign firms. Moreover, local OEM firms also gain through technology and knowledge transfer directly as they participate in joint venture relationships with foreign firms and in multiple supply chains. The presence of foreign firms also aids local firms by providing advanced training for Chinese workers who often are hired by local firms or even start up their own firms. Even more important is the growing capacity of Chinese firms to purchase foreign firms and gain access to technology and knowledge.33 The most likely form of advanced innovation from China and Chinese firms will not come soon from globally leading edge innovation but instead from “fast follower” efforts.34 This is generally the same sort of innovation that comes from many advanced firms and nations around the world and involves a much more advanced form of imitation. An example may help: Samsung, a Korea firm with massive R&D capabilities and deeply embedded in global knowledge and innovation networks, responded to Apple’s release of the truly innovative iPhone with a “fast follower” smart phone that duplicated many of the features and capabilities of the iPhone and even added some improvements. Achieving this rapid response to a global innovation was itself quite remarkable, based in the massive system of knowledge and production capabilities Samsung owns and manages.35 A significant number of Chinese and emerging economy firms have the capacity for a “fast follower” strategy or can reasonably aspire to such a role. Chinese examples include the networking firm Huawei, the computer firm Lenovo36, the appliance firm Haier, the smartphone firm Xiaomi, and the auto firms Chery and Geely.37 In one of the most advanced information technology segments, the integrated circuit design industry, only two Chinese firms break into the global top 25 firms – a list dominated by the United States and Taiwan – but these Chinese firms rank in the top nine of the fastest growing.38 For these and other Chinese firms to achieve success in adopting a “fast follower” strategy, they will need to develop substantial internal knowledge, technology, productivity, product development and marketing capabilities along with a diversified set of connection to global knowledge and trading networks. Perhaps the most critical element in creating sustained Chinese growth is the ability to access, apply and leverage knowledge about technologies, products and processes. This requires a strong domestic knowledge base located in firms, universities and government, the ability to apply knowledge to new products and processes, and significant connections to global knowledge networks. There are multiple pathways for access - many legitimate, many not, many in-between - whereas application and leveraging depends on incentives, opportunities and capabilities.39 Not surprisingly, given the remaining large distance between the Chinese knowledge base and the global frontier, the Chinese government is deeply involved in organizing efforts to obtain knowledge from abroad. These governmental activities include both military and commercial areas and involve large institutes in China designed to receive, organize and diffuse foreign obtained knowledge.40 Another option for knowledge acquisition by China comes from using its vast holdings of foreign exchange to purchase foreign firms and obtain knowledge by buying and owning it. Some recent prominent examples include an effort by Chinese machine tools companies to upgrade capabilities by purchasing small and medium sized German machine tool firms and the purchase of the Swedish auto firm Volvo by the Chinese firm Geely. These efforts can also provide access into global knowledge networks.41 Achieving innovation at more advanced and even globally leading edge levels requires a diverse set of capabilities. One of the most important is a high level of effectiveness from firms, universities and governments along with deep connections with each other and from each of these institutions into global knowledge networks. Some Chinese innovation regions succeed better than others in these tasks.42 At an even broader level, a nation seeking to become a global technology and innovation leader needs to achieve a level of breadth, depth and diffusion of knowledge. China has a limited set of firms, universities and other institutions where this has been achieved. This means R&D spending, which has risen rapidly, remains too diffuse rather than diffused and operates more to support a process of learning rather than actual advancing basic and applied research.43 Nonetheless, China has made enormous strides in achieving this level of innovative capability and has positioned itself for a likely move to global parity within a relatively few years. The accomplishments of China can be seen in
China has achieved much in the past three decades, not only in its astounding growth rates, but equally in the repeated structural transformations in the economy to adapt to new stages in the growth process and to changes in the global economy. There are simply too many Chinese firms that have been very successful in the competitive environment of China and the global economy, China is too deeply connected into global knowledge networks, and the current and potential size of the Chinese market is simply too big to accept the pessimistic view of China’s economic future.45 Predicting Chinese Growth The most likely Chinese scenario for the next several decades is for growth to continue, but at a slower pace, perhaps in the 5%-7% range.46 For the U.S., the most likely scenario is to continue to average 2.5% growth over the next twenty years. The following chart (Table IX.6) creates a range of outcomes in GDP size for China and the U.S. based on these averages. TABLE IX.7 Alternative Scenarios for China and U.S. GDP in 2034 Country/Growth Rate 2033 GDP U.S. @ 2.5% $26.2 trillion China @ 7% $40.0 trillion China @ 6% $32.0 trillion China @ 5% $26.5 trillion At an average of 7% real growth, the Chinese economy will double in size every ten years. This means in in 2034 the Chinese economy will be four times larger than in 2014. Using PPP calculations for analysis, the Chinese economy is approximately $10 trillion in 2014 and would thus be $40 trillion in twenty years. If the U.S. experiences average real growth of 2.5% over the same twenty years, the economy will total about $26 trillion, substantially smaller than the Chinese economy growing at 7%.47 But 7% growth continuing in China for another twenty years is unlikely. More realistic would be a 5%- 6% rate sustained for this period. But, even at this growth rate China will at least equal or surpass the size of the U.S. economy. How will changes like this affect the stability not only of the global economy but global politics as well? Alternative Perspectives on Chinese Growth We have just concluded that the most likely outcome of the shifting economic relationship between China and the United States over the next twenty years is for China to achieve a rough parity and perhaps surpass the U.S. in economic size. Such an outcome suggests the possibility of a major transformation in global relations. At the same time, we have made clear the wide range of possible outcomes that also have a significant probability. We now consider how someone might disagree with this conclusion. The first dissenting perspective sees a long period of continuing U.S. dominance; the second perspective anticipates the emergence of China’s dominance over the global system. One scholar in particular has been widely viewed as dissenting from the view that China will be the most powerful nation in the world in relatively short order. Michael Beckley argues instead that China may be rising but is not catching up.48 Beckley is an especially strong advocate of the view that measures of absolute advantage are more important than measures of relative advantage. By that standard, China remains farther behind the U.S. today than twenty-five years ago. Moreover, U.S. power rests on its innovation capabilities and its ability to design a global system that disproportionately benefits the U.S. Much of this U.S. advantage rests on the advanced and unmatched capacity for innovation in basic science, applying science to products and production, and the management of knowledge-based industries. Like Steinfeld, Beckley sees China’s technological position as relatively weak, overwhelmingly dependent on foreign firms and receding from the U.S. position. In sum, Beckley believes we are wrong to anticipate an end to the unipolar world of American dominance.49 Contrasting sharply with both Beckley and this chapter, two scholars have been outspoken in predicting a coming era of Chinese dominance. Subramanian and Jacques, in separate books,50 chart a future of Chinese dominance and “rule” significantly at variance with the conclusions of this chapter. Each focuses on economic power as the origin of national power. Subramanian places a special emphasis on financial power, with the debtor-creditor relationship between the U.S. and China having a defining importance. China will be able to translate its significant economic power – based in GDP, trade and finance – into the achievement of the RMB as the key currency in the coming years. The author’s measures of relative economic capabilities already show China at near parity with the U.S. in 2010 and projections indicate an index of Chinese economic advantage of as much as 80% by 2030. Indeed, these predictions suggest China’s economic power will roughly equal that of the U.S. and the European Union combined in 2030. At the same time, Subramanian expects China will remain deeply linked to the global economy and will not seek to overthrow the system.51 As we see, making predictions is very hard, especially when it is about the future.52 Reputable scholars come to widely varying conclusions about the future of China’s economic position. Some see the Chinese economy as much weaker than it appears and facing significant decline in growth rates. Others see China as much stronger than we realize and likely to continue its rapid rise. We have argued that China has achieved much in the past thirty years, and though it remains well behind global technological and per capita income levels, China retains great capacity to sustain significant economic growth into the next several decades. In about twenty years, China will have achieved rough party with the U.S. in many measures but will remain behind in per capita income, technological capabilities and military strength. We now turn to a second facet of this analysis, one with equally large room for disagreement: how will the new world of power and wealth affect the potential for global cooperation and conflict? IV. Power, Wealth, Conflict and Peace in the 21st Century The relationship between the US and China will have an outsized impact on global relations in the 21st century and, consequently, this topic has drawn commentary and predictions from many scholars, pundits and political commentators. There is no lack of positions about what will happen and the real challenge is to sort through the array of ideas and understand the reasons for the differences. Not surprisingly, differences in conclusions are often related to difference in theories and perspectives. Some of the best of these studies work to use a perspective to identify a single element that will influence overall relations and then spin out a scenario based on that element. Some focus on power, some on the process of power changes, yet others on financial relations. Two main groups of conclusions arise from this: those who expect an increasingly conflicted world and those who look toward a relatively peaceful system of interactions. We will review the perspectives and the analysis they provide for the political economy of power and wealth in the 21st century. The greatest value from such an exercise is to identify those main causal forces that are likely to affect outcomes and the causal processes by which this may happen. The examination of U.S.-China relations has been dominated by three schools of thought, each of which offers important insights but none of which is adequate to assess the range of potential outcomes. The first school is neorealism, which defines the relationship in terms of power, based on decline and rise. Power in this conception is almost always linear and its effects are defined by the capacity for political influence and the potential for military conflict. The second school is neoliberalism, which examines the effects of economic interdependence and liberal international institutions. These are thought to be supportive of a peaceful relationship among nations. The third sees relations affected by the ideas of elites and the political systems of the nations.53 However, these schools may be overly narrow for trying to understand such a complex and dynamic relationship. These ideas need to be supplemented by perspectives that are able to see more complex processes that permit several possible outcomes with some sense of the probability of happening. The analytical approach adopted in this section is distinct in two ways: first, we consider a range of possible outcomes in the U.S.-China power relationship; second, we consider multiple causal elements and the interaction of these elements as forces affecting US-China relations.54 Projecting the economic and military power capabilities will be based on varying sets of assumptions, each with a different probability of being realized. This permits a range of outcomes with different probabilities; from these we attempt to focus on a subset with the greatest likelihood of happening. But readers will be able to make their own judgments about the realism of the choices. In addition, we work to combine different theoretical perspectives in ways that permits a more complex and nuanced analysis of the processes that can lead to war or peace. U.S. and China Power Scenarios In this section we examine in more detail the elements of national power and the relation to wealth, recognizing the many dimensions of this relationship. National power is both a relational concept – the interactions among nations – but is equally a complex combination of capabilities by any particular nation – many complementary elements must work together to create national power.55 We focus now on the level of current military spending and make a range of predictions for the next twenty years. TABLE IX.8 U.S. and China Comparative Military Spending 1990-2013 (constant 2011 billions $US) 1990 1995 2000 2005 2008 2010 2012 2013 U.S. 527.1 411.7 394.2 580.0 649.0 720.4 668.8 618.7 China 19.8 23.1 37.0 71.5 106.8 136.5 157.6 171.4 China as % of U.S. 3.75 5.61 9.38 12.33 16.45 18.94 23.56 27.70 Source: http://www.sipri.org/research/armaments/milex/milex_database FIGURE IX.1 Global Military Spending, 2013 
Source: SIPRI: http://www.sipri.org/research/armaments/milex/milex-graphs-for-data-launch-2014/The-share-of-world-military-expenditure-of-the-15-states-with-the-highest-expenditure-in-2013.png Table IX.7 demonstrates that, at present, the United States has overwhelming dominance in military spending. Figure IX.1 provides additional comparisons. The U.S. in 2013 represents 37% of global military spending, which roughly equals the military spending of the next ten nations combined.56 At the same time, we can see that China has a rapidly growing level of military spending as a proportion of U.S. military spending. 57 One prediction is that China will equal U.S. military spending beginning in the early 2030s and then surpass the U.S.58 How are we to judge this recent process of change? Remembering that we can examine this in terms of relative advantage or absolute advantage, the Chinese are making relative advances and recently perhaps now even absolute advances. In 1990 China had 3.75% of U.S. military spending, about the same as South Korea and India. In 2013, China has 27.7% of US military spending, which is almost as large as the next three nations – Russia, Saudi Arabia and France – combined. In relative terms, this is a major improvement. In absolute terms, China has made less progress. In 1990, the U.S. held an absolute advantage in spending of $527.2 billion; in 2013 the absolute difference in military spending had decline somewhat, to $447.3 billion. When military spending is calculated as a percent of GDP, we see that for both China and the U.S. spending has declined. U.S. spending as a percent of GDP has declined from 5.3% in 1990 to 4.4% in 2012; for China, military spending has declined from 2.5% of GDP in 1990 to 2.0% in 2012.59 How do we interpret this and other data about the wealth relationship of China and the United States? The range of discussion and conclusion is very wide. Some analysts foresee a rapid transition from a dominant U.S. to a dominant China. Others expect the dominance of the United States to last for a considerable period of time. And a third group finds the wealth relationship more complex. The term “dominance” would seem to have a clear meaning, but that is not necessarily so. It should mean the ability to prevail consistently in having the preferences of one state define outcomes in international affairs, even as no other state is able to achieve its preferences except as these correspond to the dominant state. Is it reasonable to expect continued dominance by the US, the ascendance of China to dominance, or the emergence of a more bipolar world with both the US and China contending to achieve their preferences on a range of issues? If we focus just on projections of relative/absolute GDP, share of global GDP, and military spending, what kind of material power analysis emerges?60 Directory: tlairson -> ipe tlairson -> Nyt amid Tension, China Blocks Crucial Exports to Japan By keith bradsher published: September 22, 2010 tlairson -> China Alters Its Strategy in Diplomatic Crisis With Japan By jane perlez tlairson -> The Asia-Pacific Journal, Vol 11, Issue 21, No. 3, May 27, 2013. Much Ado over Small Islands: The Sino-Japanese Confrontation over Senkaku/Diaoyu ipe -> Chapter 5 The Political Economy of Global Production and Exchange tlairson -> Nyt india's Future Rests With the Markets By manu joseph published: March 27, 2013 tlairson -> Developmental State tlairson -> The Economist Singapore The Singapore exception To continue to flourish in its second half-century, South-East Asia’s miracle city-state will need to change its ways, argues Simon Long tlairson -> History of the Microprocessor and the Personal Computer, Part 2 ipe -> For richer, for poorer Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes Download 212.88 Kb. Share with your friends:
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