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Tuesday, 24 May 2016

China-U.S. Battle for Global Leadership


When China caught up with Japan in terms of GDP in 2010, that fact attracted worldwide attention and sparked numerous responses and comments from the international media. Meanwhile, another event, probably just as important, which took place a few years later, has remained almost unnoticed.

Renowned Chinese economist Hu Angang insists that in 2013 China outstripped the United States in aggregate power: the ratio between the two countries’ hard power (excluding soft power) increased from 1:1.22 in 2010 to 1:0.98 in 2013. Hu presented his estimates in early 2015 in an article published in the Tsinghua University Bulletin. Later, the article appeared as a separate chapter, entitled “How China overtook America: a view from the perspective of Aggregate Power,” in his monograph Super China. Addressing the 6th World Forum on China Studies in Shanghai on November 20, 2015, Hu provided new estimates for 2014, which showed that China’s superiority over the U.S. had increased and deepened: China’s share in the world’s aggregate power stood at 17.13 percent, compared to the United States’ 15.25 percent, and the ratio between them increased to 1:0.89.
The importance of this event goes beyond the framework of econometrics, as it reflects fundamental changes in the overall balance of power in the world.
Hu himself emphasizes above all the practical significance of the new phenomenon. In his opinion, it was China’s parity with the United States in aggregate power that served as the material basis for a proposal to build a new type of interstate relations between China and the U.S., first advanced by Chinese leader Xi Jinping in March 2013. It is easy to see that this conclusion chimes with the statement by U.S. Sinologist David Shambaugh that the United States and China “are the only two true global actors on the world stage today.”
What are the factors of China’s success? The detailed description of the method used to calculate aggregate power, offered by Hu, gives an answer to this question and shows the most obvious strengths and weaknesses of this method.
Hu’s starting premise is as follows: If the aggregate power of a state is its overall capacity for purposeful achievement of strategic objectives, then national strategic resources are its main component and material basis. The aggregate power of China and the United States was estimated using 17 indicators related to eight kinds of strategic resources rated in the following way: economy, and science and technology—0.2; human capital, natural, military, international, and governmental resources and capital—0.1 of a total of 1.0.
The shares of China and the United States (in percentage terms) in global figures regarding all eight components of aggregate power served as a universal unit of measurement, which allowed combining heterogeneous components (see Table 1).

Table 1. Shares of China’s and the United States’ aggregate power in global figures (%)
Component
2000
2010
2013
China
U.S.
U.S.:
China,
times
China
U.S.
U.S.:
China,
times
China
U.S.
U.S.:
China,
times
Economic resources
7.62
21.68
2.85
13.90
17.17
1.24
15.86
16.49
1.04
Human resources
24.92
8.85
0.36
24.82
7.72
0.31
25.18
7.61
0.30
Natural resources
10.04
12.40
1.23
11.14
11.53
1.03
12.07
11.45
0.95
Capital resources
3.61
34.0
9.43
15.54
21.84
1.41
19.14
22.00
1.15
Intellectual and technological resources
3.92
27.85
7.10
15.55
21.34
1.37
2.20
22.45
1.01
Governmental resources
1.64
17.35
10.58
8.33
18.26
2.19
10.65
15.14
1.42
Military resources
8.35
20.00
2.40
10.97
21.04
1.92
12.56
18.16
1.45
International resources
3.32
16.09
4.84
8.67
11.20
1.29
10.01
10.98
1.10
Aggregate power
7.50
20.77
2.77
13.84
16.86
1.22
16.57
16.32
0.98
Source: Hu Angang. Super China (Chaoji Zhongguo). Beijing, 2015. Pp. 216-217.

According to Hu’s estimates, China made a decisive breakthrough to catch up with the U.S. in aggregate power in the first decade of the 21st century, when it reduced the gap from 1:2.77 in 2000 to 1:1.22 in 2010. The biggest progress in bridging the gap was achieved in such components of aggregate power as capital, intellectual and technological resources.
In order to understand how correct and valid the estimates and arguments of the Chinese scholar are, let us consider them in more detail. I want to make it clear that I have no intention to refute them. Rather, I would like to analyze what Hu describes as “strategic resources” of China, their dynamics and possible changes in them in a broader context.
In Hu’s estimates, economic resources of a state are represented by one indicator—gross domestic product calculated at purchasing power parity exchange rates, or, rather, shares of Chinese and U.S. GDP in global GDP at PPP. This is definitely one of the most advantageous indicators for China, showing the scale of its economy, especially given the fact that in 2014 the International Monetary Fund significantly upgraded GDP at PPP ratings for several developing countries, including China. Positive dynamics will most likely continue for China in the next few years (see Table 2).

Table 2. Forecast for GDP dynamics in China, the U.S. and Russia until 2020
Country
Indicator
Years
2015
2016
2017
2018
2019
2020
China
GDP at current rate, U.S.$ bn
11,384
12,254
13,173
14,272
15,620
17,100
GDP at PPP,
U.S.$ bn
19,510
20,985
22,632
24,506
26,624
28,921
Share in global GDP at PPP, %
17.24
17.70
18.09
18.48
18.91
19.35
Russia
GDP at current rate, U.S.$ bn
1,236
1,179
1,309
1,447
1,613
1,791
GDP at PPP,
U.S.$ bn
3,473
3,493
3,589
3,718
3,856
3,998
Share in global GDP at PPP, %
3.07
2.95
2.89
2.80
2.74
2.67
U.S.
GDP at current rate, U.S.$ bn
17,968
18,698
19,555
20,493
21,404
22,294
GDP at PPP,
U.S.$ bn
17,968
18,698
19,555
20,493
21,404
22,294
Share in global GDP at PPP, %
15.88
15.77
15.63
15.45
15.20
14.92
Source: International Monetary Fund, World Economic Outlook Database, October 2015.

For example, according to IMF estimates, China’s share in global GDP at PPP will increase from 17.24 percent in 2015 to 19.35 percent in 2020, while the U.S. share will decrease from 15.88 percent to 14.92 percent. Accordingly, the respective ratio between the U.S. and China will decline from 0.92:1 to 0.77:1.
There may be two kinds of fundamental objections or, at least, doubts about China’s steady progress. The first and most obvious one is that, although GDP at PPP is a very popular indicator nowadays, the main indicator of economic hierarchy of states is GDP expressed in U.S. dollars at market exchange rates. An IMF forecast says that the U.S. will preserve its confident edge over China until the end of this decade, although Chinese GDP will increase from 63.3 percent of U.S. GDP in 2015 to 76.7 percent in 2020.
Doubts of the second kind are generated by obvious difficulties faced by the current transformation of China’s economic growth model. Creating a “new normal,” which involves serious changes in the structure of the economy, has proven to be more painful to Beijing than it was expected two to three years ago. It is not ruled out that economic growth rates and the dynamics of building up China’s aggregate power will decrease significantly in the near future.
Human capital resources are defined as the product of a country’s population of working age (15-64 years) multiplied by the average level of education (mean years of schooling). This resource is one of the main comparative advantages of China. Its stability over the last quarter of a century has been largely due to growth in mean years of schooling of the working-age population from 6.43 years in 1990 to 9.35 years in 2013. Despite the high level of education of the U.S. population (an average of 12.23 years in 1990 and 13.3 years in 2013), China, thanks to its large population, has the greatest advantage over America precisely in human capital resources, which exceeded those of the U.S. 2.39 times in 1990 and 3.31 times in 2013. This gap in China’s favor is expected to remain in the foreseeable future. Most likely, China’s mass transition from the forced one-child family model to the now allowed two-child model in 15 to 20 years will compensate for the decline in labor resources due to the increasing aging of the population.
The natural resources indicator used by Hu includes three equal sub-indicators of crop acreage, freshwater resources, and commercial energy resources. The shares of China and the United States in the world’s freshwater resources remain unchanged—5.8 and 5.09 percent, respectively. The decrease in China’s share of global crop acreage from ??about 15.8 percent in 1990 to 8 percent in 2013 (the figures for the U.S. were 11.8 and 11.47 percent) was made up for in the overall natural resources indicator by a fast growth of China’s share in global commercial energy resources from 10.07 to 22.4 percent. This factor allowed China to slightly outrun the U.S. in terms of their share in world natural resources. However, Hu emphasizes, China’s per capita indicators in this field are much lower than the world average, and the country is interested in importing large amounts of natural resources, including from the U.S. In 2015, China continued to import much of its fuel and raw materials, including 335 million tons of oil and 952 million tons of iron ore (the figures for 2014 were 308 million and 932 million tons, respectively).
Generally, there is little chance for China to markedly improve its position in the world in this component of aggregate power. Moreover, it is generally recognized that the shortage of cultivated areas and fresh water may become a real Achilles heel for the country.
Hu defines capital resources as a derivative of the volume of domestic investment, the market value of shares, and net foreign direct investment, calculated in current U.S. dollars at market exchange rates and taken in a ratio of 0.4; 0.3 and 0.3.
In terms of domestic investment (share in the world’s total), China in 2010 for the first time outstripped the United States, although only five years earlier, in 2005, it was 3.2 times behind the U.S.. In 2013, China’s share reached 23.77 percent, while the U.S. share stood at 17.12 percent.
In terms of the market value of shares, the United States is far ahead of China (by 332 percent in 2013). At the same time, as regards net foreign direct investment used, the U.S. has been falling behind China in recent years (16.4 and 24.2 percent, respectively, of the world’s total in 2013).
Speaking of capital resources in general, the U.S. with 22 percent is somewhat ahead of China (19.14 percent).
Hu’s interpretation of capital resources as an important component of aggregate power of a country seems to have weak spots. Above all, this applies to the market value of shares. Numerous comments by foreign experts on a 50-percent crash of the Chinese stock market in early 2016 unanimously described the value of shares in the country as overrated.
During the rule of Hu Jintao and Wen Jiabao, investment in China exceeded reasonable amounts and led to the creation of huge production facilities with excess capacity, which is now seen as a weakness rather than strength of the country. The situation in the steel industry provides a particularly illustrative example. According to the Economist, in 2014 China produced 441 million tons of excess steel, that is, half of all steel production (822 million tons).
China achieved particularly impressive results in building up intellectual and technological resources thanks to a targeted financial and technological policy. Between 1990 and 2014, China increased its share in the world’s resources in this field from 0.86 to 23.5 percent, leaving the U.S. behind with 19.3 percent (Table 3).

Table 3. Shares of China and the U.S. in world technological power, %
2000
2010
2013
2014
China
U.S.
U.S.:
China
China
U.S.
U.S.:
China
China
U.S.
U.S.:
China
China
U.S.
U.S.:
China
R&D spending
3.29
26.68
8.11
11.65
21.96
1.88
16.07
21.45
1.33
18.01
21.45
1.19
Number of Internet users
5.43
29.42
5.41
22.83
11.03
0.48
22.97
9.85
0.43
22.93
9.50
0.41
Applications for patents and inventions
3.77
21.48
5.70
19.59
24.55
1.25
32.13
22.26
0.69
37.89
22.32
0.59
Number of scientific and technical publications
2.92
30.43
10.42
9.92
26.14
2.64
13.45
24.36
1.82
15.11
23.92
1.58
Aggregate technological power
3.85
27.0
7.01
16.0
20.92
1.31
21.16
19.48
0.92
23.49
19.30
0.82
Source: Hu Angang. Shier wu shiqi jingji shehui fazhan pingjia (Assessment of Social and Economic Development during the Twelfth Five-Year Plan Period). – Hu Angang’s Presentation at the 6th World Forum on China Studies in Shanghai on November 20, 2015.

Of the four indicators that form, in equal shares, aggregate intellectual and technological resources, China is ahead of the U.S. in the number of Internet users and applications for patents and inventions. This is quite natural given the more than fourfold difference in the size of population between the two countries. While still lagging behind the U.S. in R&D spending and the number of scientific publications, China has markedly reduced this gap. The United States itself has played a significant role in that, as tens if not hundreds of thousands of Chinese students study in American universities.
In the foreseeable future, China will continue to build up its intellectual and technological resources, as, Hu believes, technological innovations and the spread of more efficient technologies are the most important way to increase China’s aggregate power. At the same time, China’s share in the world’s technological power may decrease, like that of the U.S., primarily because of its fast growth in the rest of the world.
Governmental resources are represented by one indicator: financial expenditures of the central government. They characterize general capabilities of states to mobilize and use its resources. As in most other cases, Hu used World Bank data. It may be added that China has been usually given low ratings in popular international indices in recent years as regards the quality of governance, assessment of government performance, etc. (for example, Britain’s Legatum Prosperity Index in 2015 ranked China 52nd, but only 67th in governance).
Military resources as a factor of aggregate power of a state are defined by Hu as the strength of the armed forces and military expenditures (rated 0.4 and 0.6, respectively). China’s standings in the world in these two components of military power have been changing in opposite directions: as regards the strength of the armed forces, China’s share decreased from 16.21 percent in 1990 to 10.63 percent in 2013, while in terms of military expenditures, it increased from 2.87 percent to 13.85 percent. The United States is 1.45 times ahead of China in terms of overall military resources. It should be emphasized that this is a minimum estimate of the gap between the U.S. and China in military power. However, Hu notes that the comparison of the two countries’ military resources requires further and more detailed study.
International resources are presented by equally rated indicators of the export and import of goods and services. The foreign trade boom experienced by China after joining the World Trade Organization propelled it to leading positions in international trade in goods and their exports. However, in trade in services, China is placed second, trailing closely behind the U.S. (Table 4).

Table 4. Foreign trade of China and the U.S. in 2014 (U.S.$, billion )
China
U.S.
Trade in goods
export
import
4,303
2,343
1,960
4,032
1,623
2,409
Trade in services
export
import
604
222
383
1,140
686
454
Source: World Trade Organization Press Release, 14 April 2015.

In 2013, China’s share in world exports of goods and services reached 10.36 percent, compared with 3.5 percent in 2000. The figures for imports of goods and services were 9.67 and 2.13 percent, respectively. However, further progress in this sphere may prove increasingly difficult for China. In 2014, its foreign trade in goods grew by only 3.4 percent, and in 2015 it decreased by eight percent, with exports declining by two percent and imports by 14.1 percent.
The rivalry between China and the United States in foreign trade may soon elevate to a new, global level, as Beijing and Washington are now informal leaders of two global projects for international economic cooperation—the new land-based and maritime Silk Road and the Trans-Pacific Partnership.
But the rivalry between the two leading world powers also continues, directly or indirectly, in all other components of aggregate hard power. China seeks to catch up with the U.S. in soft power, as well. Seven or eight years ago, Chinese scholars estimated China’s soft power at about one-third of that of the U.S. Since then, much has been done to promote the Chinese language and culture in the world and foster a positive image of China. However, foreign estimates of China’s soft power are still low. For example, Britain’s Soft Power Index ranked China only 30th in the world.

Therefore, it is hardly possible to unequivocally assert that China has already surpassed the United States in aggregate power. A comparative analysis of the aggregate power of China and the U.S. needs to be continued and deepened, as the edifice of the future world order will largely depend on it. Moreover, remarkable estimates and attractive methods used by Professor Hu have some questionable moments. And yet, the most important thing is the very declaration that China has reached parity with the U.S. in aggregate power, and this should be taken quite seriously.

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