America vs. China: A Counter-Narrative Arises

US-PRC flags 4Given all the fanciful prognostications about how China is poised to eat America’s lunch, it might sound odd that the country’s new leader, Xi Jinping, is sloganeering about the need for national “rejuvenation” and “revival.”  He is, of course, attempting to harness patriotic sentiments in order to boost the Communist Party’s eroding legitimacy.  But his words might well have been an acknowledgement of the daunting array of challenges China now faces.

A regular theme in this blog has been that America’s strategic prospects are being revived by the dynamism of its private sector even as China faces a more problematic future.  As earlier posts (here, here and here) have outlined, the marked surge in U.S. oil and natural gas production that has transformed the country’s energy outlook over the last few years promises to have far-reaching economic and geopolitical ramifications.  The bonanza of low-cost energy, which the Wall Street Journal dubs “Saudi America”, has also given the U.S. manufacturing sector a significant competitive advantage.

Separate from the energy boom but fortifying its manufacturing effects are America’s innate advantages in what is becoming known as the “third industrial revolution” – one that is powered by high-skill labor as well as seminal progress in the areas of artificial intelligence, robotics, nanotechnology, composite materials, and “additive manufacturing” or three-dimensional computerized manufacturing.

The net effect of these two developments is that U.S. companies are beginning to relocate production capacity back to the United States, a pattern that is reversing some of the outsourcing of the last two decades.

These points have been amplified by a number of developments and observations over the last few weeks:

  • A just-released report commissioned by the U.S. Energy Department finds that the new-found bounty of natural gas is so large that even major exports of the fuel would not bring about a sharp rise in domestic energy prices.  It estimates that exports would produce $10-30 billion in annual earnings, and the construction of gas export terminals would generate thousands of construction jobs.  The Obama administration has so far approved the construction of only one terminal project but is now expected to green light a number of others.
  • The New York Times a few days ago had an article about how the energy windfall has created a boom in Houston, complementing last month’s report in the Wall Street Journal about the reviving economic hopes in former steel towns in Pennsylvania that are located near the gas-rich Marcellus shale formation.
  • The Bureau of Labor Statistics reported this week that the number of jobs in the U.S. oil and gas sector has reached a 25-year high.
  • Philip Stephens, the Financial Times’ chief political columnist, wrote a few days ago that “the age of offshoring is likely to give way to the era of onshoring” and that “Europeans are already complaining that cheap US gas is encouraging a flight of energy intensive businesses across the Atlantic.”
  • The December issue of The Atlantic, with its cover emblazoned with “Comeback: Why The Future Of Industry Is In America,” carries articles about the insourcing boom and about how technological innovation portends better times for U.S. manufacturers while social and economic changes in China are making outsourcing more problematic.
  • Indicative of the onshoring trend, which is especially prominent in the global computer industry, Apple has announced the return of some of its computer manufacturing to the United States.
  • The New York Times reports that General Electric has launched a major new project focused on applying digital technology to the industrial economy.  IBM and Cisco are pursuing similar initiatives.  The September/October issue of Foreign Affairs also has an interesting piece on the digital fabrication revolution.

All of this evidence bolsters the case for America’s strategic future.  But what is the argument for believing that the conventional wisdom overrates China’s prospects?

First, it is questionable whether China will be able to replicate the U.S. energy renaissance.  China does possess vast shale reserves – thought to be much larger than America’s – and Beijing is making a big push to increase its shale gas output.  But the huge Tarim Basin, for example, is located in the country’s remote and rugged northwest, far away from the pipeline networks necessary to carry the fuel to industrial areas as well as the copious water supplies needed for new hydraulic fracturing (“fracking”) drilling techniques.  (On China’s serious deficiencies in water resources, see here.)  The Wall Street Journal reports that no meaningful exploration has begun in the basin due to its rough terrain and lack of water.

The Sichuan Basin, in the heavily-populated southwest, is the country’s main gas-producing region and is close to the Yangtze River.  But while China’s largest energy company has done some exploration work there related to shale gas, according to the Journal it has been reluctant to prioritize these efforts due to the high costs and a lack of access to fracking technology.  (Also see this analysis in today’s South China Morning Post.)

There also are sharp institutional constraints at play.  Despite increasing efforts to tie up with Western firms, China’s energy sector is dominated by lumbering state-run behemoths that cannot effectively utilize innovative drilling technologies or resolve the daunting problems caused by the country’s complex geology.  Government ownership of mineral rights is another inhibiting factor.  As the Journal explains in another article this week, the shale energy revolution in North America was brought about “by small, independent companies willing to take enormous financial risks, and helped along by landowners who owned their mineral rights and were ready to sell for a share of the profits.”  Because this entrepreneurial model does not exist in many other nations, the article argues that the United States and Canada “could remain the main countries to reap the economic advantages of shale development for some time.”

Just as some expect (here and here) that greater U.S. energy self-sufficiency will result in a general American disengagement from the Middle East, China’s poor prospects for shale energy production may explain its growing involvement in the Persian Gulf as well as its increasingly assertive behavior in the potentially resource-rich waters of the South China Sea.

Turning to broader economic challenges, China is in danger of losing its status as the hub of global production – its main claim to fame – as labor-intensive manufacturing capacity increasingly migrates to lower-wage countries in Southeast Asia (see here, here and here).  Many in Beijing are certainly aware the growth model that made the People’s Republic the world’s envy is now sputtering and in need of major overhaul.  Six years, Premier Wen Jiabao acknowledged that the Chinese economy was “unstable, unbalanced, uncoordinated and ultimately unsustainable.”  But it is an open question whether the requisite political will can be mustered to reform the state-centric model of economic management, especially since the country’s 145,000 state-run companies are not only a key source of wealth and privilege for rent-seeking Communist Party elites but also generate important revenues for all levels of government.

Consider, for example, the reaction to a new World Bank report prepared jointly with the Development Research Center, a high-level think tank in Beijing that is attached to the State Council, China’s top executive body.  The report warns that the country’s economic trajectory will be derailed by 2030 if the dominance of clunky state-run enterprises in the national economy is allowed to continue.  Highlighting the glaring absence of a vibrant private sector capable of sparking creativity, it bluntly argues that “Innovation is not something that can be achieved through government planning.”

But this message is sharply at odds with the policies pursued for the last decade under Hu Jintao, the departing president, who oversaw a large increase in the reach of state-run companies while blocking the entry of private firms from key industrial sectors, like energy production, power generation, banking and telecommunications.  At last month’s party congress, he urged the incoming leadership to “unwaveringly consolidate and develop the public sector of the economy” and to “invest more state capital in major industries in key fields that comprise the lifeline of the economy and are vital to national security.”  The top official in charge of state conglomerates underscored this theme and in a rebuke to the World Bank report argued that “Scholars may have different views, but that’s the development need of the enterprises and the state.” (Quotations taken from here and here.)  It is doubtful that the new crop of leaders sees things differently.

All of these factors make it very unlikely that China will be able to capitalize on the technological innovations that will power the new era in U.S. manufacturing.  Indeed, a counter-narrative is starting to emerge to the “China rising” saga:

  • The Washington Post reports that America’s manufacturing comeback has now become the inspiration for Chinese economic reformers.
  • A growing number of wealthy Chinese entrepreneurs are leaving China, many for the United States (see here, here and here).
  • Philip Stephens, the Financial Times columnist, reports that the Chinese Institute for Contemporary International Relations, which has close ties to Beijing’s intelligence agencies, recently conducted a study of the various elements of U.S. power.  It found much more that was positive than negative, leading Stephens to conclude that long-term trends are on America’s side.

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3 thoughts on “America vs. China: A Counter-Narrative Arises

  1. Pingback: Can Xi Jinping Revive the “China Rising” Narrative? | Monsters Abroad

  2. This article, like so many coming from Washington DC, focuses on “America’s strategic future” and then posits that cheap energy and some return of manufacturing assure that. But, I would submit, this is the wrong question and furthermore, that the latter are only partial answers to it in any case.

    The most important question for any country, except perhaps during time of war (and, it is no coincidence given America’s political choices, that except during the 1990s, the USA has been in a state of war, at least from a fiscal perspective, since WWII) is how to improve quality of life for its people. GDP growth, manufacturing growth, energy sector growth, etc. – they are all means to that end. Indeed, what exactly are these “strategic prospects” that the author refers to? The ability to continue to the present defense spending ratio with China? The ability of America to shape events in other countries? Having many, if not most, of the world’s most powerful corporations headquartered in the USA? These seem to me secondary at best to the question of providing a high quality of life for all.

    In this regard, the past 12 years have been a failure in America. Median income is lower than at the beginning of the last decade. Unemployment is higher and workforce participation rates are lower (yes, some of the latter is from the aging of the population, but certainly not all of it). The Gini coefficient is at the highest level since WWII. Those without a university education have seen incomes, on average, drop dramatically, with those without a high school diploma having an income an astounding 66% lower on average in real terms than 40 years ago. The university-educated, even if incomes have held more or less, are much more heavily indebted and this debt makes any of life’s common financial setbacks measurably worse. Infrastructure needs investment that it has not received, again lowering quality of life as well as economic potential. Over 20% of American children live in poverty.

    Now, the booming energy sector may increase GDP. But, it is a capital-intensive industry that will not employ huge numbers of people. Less oil imports reduce the trade deficit but, strategically, oil prices are still world prices, so what happens in the Persian Gulf still would affect things in the USA even if crude oil imports represented only 10% of crude oil throughput in U.S. refineries. And, as natural gas booms, coal declines, erasing some of the net employment gains in the broader energy sector. As for the new start-ups that Fallows discusses (in the linked “The Atlantic” article), are they likely to provide a significant new source of employment on a macro level? This seems unsure at least. Now, cheaper energy does help make some ares of manufacturing particularly competitive, and perhaps this has the greatest potential for providing much-needed employment. However, it also appears likely, given the recent DOE-commissioned report, that natural gas will be exported sooner or later, increasing domestic prices. Finally, fracking has many negative environmental externalities that are currently not internalized, but these costs are still present even if not apparent in the price.

    Even if one has a more optimistic view of the contribution of the developments of the previous paragraph to the American economy, the real issue today is the increasing disconnect between economic growth and increases in wages and employment. Worker compensation as a share of the economy has fallen to its lowest level since 1955, while corporate profits represent the highest percentage of the economy since the 1950s. Legislation, most notably in Michigan last week, has weakened the ability of unions to organize workers which is connected to the loss of worker leverage. Health care costs are twice as high in the aggregate as the OECD average yet, at least until 2014, at least 15% of the population has no health insurance. A closer look at a state like Texas is instructive. There has been an “energy boom” Texas, and yet the state has one of the largest percentages of workers making minimum wage, most new jobs are low-paid and 25% of the population lacks health insurance. So, even if there is a “new era” for U.S. manufacturing, it remains doubtful that it will lead to a new era of general prosperity.

    Hence, it is high time that American policymakers stop thinking about the strategic competition with China and more about the state of affairs within their own country. Indeed, if they had done that 20 years ago, they would have been more circumspect about entering into such a large trading relationship with China. After all, if China is such a “strategic rival”, why would you want to enrich it while benefiting America very little, if at all? Regardless of the, as W. Bush would put it, “strategery”, we do know that as much as two-thirds of gains from trade with China were lost in additional government welfare expenses (see the August 2011 MIT study, Autor et al.), not to mention the significant declining wages associated with the 1,156% increase in bilateral trade 1991-2007, as noted in the same MIT study. If there is some real benefit from changes in the energy sector and re-shoring, let us hope that policymakers consider these phenomena can best be applied toward reversing the negative trend of diminished quality of life in America. For, in the long run, no country in which the majority of the population’s standard of living is declining can remain strategically strong.

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  3. Pingback: America the Energy Superpower: An Update | Monsters Abroad

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