Published On: Sat, Nov 17th, 2012

What happens when China becomes the largest economy in the world?

According to the OECD, China is due to overtake the US economy as the largest in the world in three years.  By 2030 it predicts that China will account for 25% of the world’s economy.  That is impressive.

Detractors of this accomplishment will point out that the Chinese population is four times bigger than that of the US and so it is only reasonable that China should eventually have a larger economy.  If you look further back in history, when an economy’s size was directly linked to the size of its population, China and India both had larger economies that those of Europe and North America.  Industrialisation allowed for Britain, and then the US and other European nations, to produce far more than their populations had historically been able to do so.  This brought economic, political and then military dominance.

Now that China has also industrialised, on a spectacular scale – and Britain and the US are going through a process of de-industrialisation – it seems obvious that equal access to industrial technologies, plus a much larger population, will result in China being the dominant economic power in the world for the remainder of the 21st Century.  With this economic power you should expect political and then military dominance of the world.

It is reasonable for Westerners to expect China to dominate the world…

At least, it is reasonable for Westerners to expect this outcome.  After all, that is what they did when the intricate pathways of history, technology, luck and progress converged on Europe in the 1500s and beyond.

A counter argument would say that, despite a larger population, China did not dominate the world prior to 1500.  Neither did India, despite their larger populations, economic output and relative military superiority.  China was relatively un-interested in the wider world. Its blue water fleet, which was capable of reaching the east coast of Africa and, theoretically, the Americas, was considerably larger and more impressive than the small Portuguese and Spanish caravels, which hugged first the shores of West Africa and then, eventually, the Caribbean.  And yet the Chinese fleet was disbanded in 1433AD.

European dominance from the 1500s onwards was also very accidental.  No serious investor believed that Columbus could reach China, and the riches that trading directly with East Asia would bring, by heading west.  The distance was simply too far (true) and no ship could carry enough provisions to get there (also true). The thought that Spain would be able to dominate China once Columbus arrived there was absurd.  Later, once in the New World, the thought that a few hundred European soldiers could topple both the Aztec and Inca empires was also absurd.  And yet, through the most bizarre of circumstances they did.  And once they did, they had the funding and the impetus to develop technologically to such a degree that they would, eventually in the 1800s, dominate China, India and the rest of East Asia.

So what happens when China becomes the largest economy in the world?  Given the fact that this is due in three years, it is likely that this scenario will happen.  If the US falls deeper into a recession it might happen next year.

…but what will really happen?

China is likely to follow a similar path trodden by the UK and the US.  To start with, probably very little will change.

The US overtook the UK as the largest economy in the world in the 1880s.   However, the UK still dominated the world politically and militarily.  Had it not been for the First World War, when the Germans stupidly provoked the US into supporting the UK and France via uncontrolled submarine attacks on US shipping and an ill fated attempt to get Mexico to invade the US, and the Second World War, when the Germans stupidly declared war on the US following the equally stupid Japanese attack of Pearl Harbour, the US would never have become as internationally dominant as it did.  Remember – the American Century was only possible because the industrial base of all of their rivals in Europe and Japan had been wiped off the face of the planet in World War Two.  All the best brains – including Nazis and Communists – fled to the US in the hope of better lives. This one off boost ended almost two generations ago, and is one reason why the US’s dominance is fading.

The US was very resentful of the UK’s continued dominance of the world from the late 1880s onwards, despite being the larger economy.  It had no desire to fight on behalf of the UK in order to maintain the UK’s dominance of the world – hence their reluctant support during the world wars and the overt anti European policy during the Suez Crisis of 1956.  China is likely to have a similar sentiment – that of powerless resentment. It is very hard to topple a major power without some calamity affecting it.

There is also no guarantee that China’s industrial dominance will last.

For the first time in history, the world faces a global constriction of natural resources relative to population growth.  Food production barely keeps up with population growth.   Fresh water, fisheries, fertilisers, timber, oil and gas supplies (with the exception of the short lived fracked gas boom in the US) are all declining.  China is not endowed with large natural resources and a large population makes it more vulnerable to external shocks than the US, which still has abundant natural resources and a more manageable population size.

Like Japan in 1941, it may conclude that it needs to go to war in order to secure more natural resources, but the reality of nuclear war is such that aggressive expansion to secure resources is fraught with serious downside risks.  Despite China’s desire to appear to have a monolithic and long historical continuity, the reality is that it has been smashed and split apart multiple times over the past 2,500 years.  China is probably more pragmatic and is likely to continue to colonise Africa by stealth to get the resources it needs.

In addition, advanced factory robots and 3-D printing may result in more manufacturing being done closer to home, significantly undermining China’s global clout potential.

So, barring a major war or calamity, it is likely that China’s usurpation of the Unites States as the largest economy in the world will result in almost no change at all to the world’s status quo for at least a generation, if not two.  We might watch more Chinese films, buy more Chinese home grown brands, learn Mandarin at school and borrow from Chinese financial institutions.

We already love Chinese food.  Nobody could ever say that about British or American food.

 


History Future Now, ebook edition, is now available from the Apple iBookstore!  So if you have a iPad or iPhone click on this link to download it.  It is currently on at a special offer of 99c.   The Kindle version has been submitted to Amazon and should be available shortly.
  • The OECD says China’s economy will be larger than the US’ by 2015.How will the world change when that happens? Read on http://t.co/iMi4gDrJ

  • Nang 能兴 Chang 张

    Size of the overall economy has no real meaning until the per capital GDP is such that it begins to mean something. So much of the current GDP is concentrated in investment and export with a small portion to domestic consumption. Until personal consumption reaches 30%+, then its impact will really be felt across the globe. That’s when China sneezes, the world catches a bad cold. So, it’s not too early to take a flu shot though.
    Posted by Nang 能兴 Chang 张

  • iona MacCarthy

    Thank you. Article looks at history too much.
    Chine will do in the future what is of benefit to its circumstances. Its demand for water, agricultural land (renting rather than seizing) and mineral resources will drive its strategy
    Internally it must balance economic growth, wealth distribution, minimise corruption and eventually surrender to a greater freedom of personal expression either peacefully or violently: people more educated and wealthier than their parents dont do docility the same way.
    Externally we already see a military muscle stretching eg Japan / islands combined with a tacit acknowledgement that its neighbours dont like been pushed around eg Myanmar. It already is the new “colonial” power in Africa due to available resources. It will shop in the West and eventually it will control the West unless we arrest our economic imbalances and decline.
    Posted by Fiona MacCarthy

  • George Lemieux

    Wasn’t Japan supposed to do that? Please…you close down Wall-Mart and China overtakes North Korea in unemployment rate 🙂 I hate these stupid experts who have nothing better to do than scare readers with Armaghendon-type scenarios that are not even funny since Hollywood got into the act.
    Posted by George Lemieux

  • Stephen Russell

    wont India & China compete for business?
    alas they hate each other, so military actions are possible alone.
    & with Made in China products lacking Western stds, dont see how China can make it.
    (maybe save area around Hong Kong Macau).

    Then If China is the largest economy, Wall St Index should move to Shanghai.
    Posted by Stephen Russell

  • Doug Linman, Ph.D

    Not sure what to say. The Title, to most, will cause reactions but the underlying absolute is far less a reality in operation. Unless you have personally been there and understood the readiness state of the country, it’s government and it’s billions of poor struggling people at the hands of a corrupt few, I would not take Internet hype to mean anything absolute. Certainly, all countries are observing each other and adjusting/aligning to maintain a reasonable world balance.
    Posted by Doug Linman, Ph.D

  • Colin Lim

    I thought the article summarised historical events to support the thrust of the statement above being made.
    I think there is alittle too much fear emanating from China’s economic ( and political) rise. The world needs countries economies to evolve constantly to avoid stagnation in world commerce. Just imagine for one minute in this period espescially since the GFC, if China went economically down as fast as it did rise the previous decade? I hate to think what would have happened to all OECD nations whose multinational companies either trade or have manufacturing plants in China. It is already difficult for businesses in the US to make a living the past few years, I hate to think their what their off shore manufacturing base effects would be, had China gone down the tubes in the past year. I think the compound effects on the US alone would be catastrophic.
    We all understand the cyclical nature of economies in countries and now we are seeing the cyclical nature of a country’s potential dominance economically and politically (this is not to imply military).
    The Australian Federal government has just released a “white paper ” to further engage with our Asian neighbours and China for this where the next trading boom area will be centred. Engagement to best benefit from trade and this is where diplomatically, it is essential our Government continues to strengthen trade and cultural understanding. Australia has benefitted immensely the past 10 years from China buying our resources and this has allowed us to trade through the GFC successfully, as has Canada.
    Posted by Colin Lim

  • Jeffrey Hilton

    No matter who overtakes whom, we are all rather selfish, self-righteous and short-sighted little creatures, and we shall, no doubt, inherit the wind.

    -JH
    Posted by Jeffrey Hilton

  • Fabrice Gouttebroze

    Interesting point of view, but I would also point out the political and sociological dimension to the equation: it seems to me that nations really emerged as super-powers only once they established a stable system to empower their citizens: Britain emerged first once it had a functional parliamentary monarchy, France followed once it established a stable republic (the 3rd republic), and the US had that from the onset, and indeed seized their opportunity when European countries annihilated each other. What democracy does is to get people to feel part of a common vision for the nation. This enabled France and Britain to get buy in from their people for their respective colonial visions, the US for their foreign policy, for better or for worse.
    China has yet to resolve this dimension of the equation: material success for a few is not enough, a vision shared by a greater number is necessary to emerge as a super-power. Whether the new Chinese leader will be able to initiate the path to greater share of power or not will be a critical success factor.
    Posted by Fabrice Gouttebroze

  • Shaylynn Derouchie

    I think Japan (1949 – started capitalism) will likely be the largest economy, they have grown the most over time and with a smaller population than China and US. They have managed to already be ranked 3rd as far as economy and they didn’t start getting their economy back on track until 1960, which is just over 50 years ago. China (1978 – started capitalism) started working on their economy much later, but also have an extremely large population (1.3 Billion) to take care of. The US (1900 – Capitalism) started working on their economy much earlier and has a population of about 314 million. Japan embraced capitalism and continues to prosper at astronomical rates. I would say if the US wants to get the economy back they would need to start learning the teaching of “W. Edwards Deming,” his influence in Japan over their economy is incredible. Deming is just starting to be an influencer in the US right before his death (1993) and still continues to influence.
    Posted by Shaylynn Derouchie

  • Victoria Della Porta

    Smart business practice never places all eggs in one basket ie. one single vendor. How did we all get here? All our eggs are in China! In silos, we have all placed our eggs one at a time in one basket in order to save on the mighty dollar. Well, now we need to look at the real price of our actions and hopefully re-evaluate.
    Posted by Victoria Della Porta

  • Sam Jones

    The USA drops down a notch and there will be some wailing and gnashing of teeth in the US from a vocal minority, mainly working for Fox News. That will cause a slight and temporary uptick in the purchase of dried foods and bullets. And, er…., that’s about it.
    Posted by Sam Jones

  • What happens when China becomes the largest economy in the world? http://t.co/tx7gT2h1

  • James McGowen

    Nice article. Not the usual rot about China attempting to economically crush the USA and the west. China is just another big player in an evolving world economy. The more economically interdependent we become the less likely it is that we’ll dash it all over some ridiculous, overblown political squabble.
    Posted by James McGowen

  • Good,Bad and Ugly

    A solid analysis of China’s potential advance based on economic principles, but from a western point of view.
    The history of China and of the many Chinese ethnic groups have not been taken into account.
    In addition, this history and the mind set of the ethnic groups are controlled by the communist totalitarian system and this concept of communism in real terms, and its accompanying domination, has been ignored.
    Restart the analysis including these political and sociological dimensions. If the status quo does not change neither will the fear and loathing forced upon the Chinese peoples by the dictates of the communist hierarchy.

  • Professor MR Dua

    it’ll not be the same set of environment that occurred when the u s a arrived at that stage many years ago.
    Posted by Professor MR Dua

  • Peter Mertz

    Not much will change at first…it has been predicted as long as Napoleon. Hopefully American marketeers will realize their survival depends on education, cultural understanding and acceptance, and free market capitalism will actually reap some real bilateral profits.
    Posted by Peter Mertz

  • Victoria Della Porta

    Smart business practice never places all eggs in one basket ie. one single vendor. How did we all get here? All our eggs are in China! In silos, we have all placed our eggs one at a time in one basket in order to save on the mighty dollar. Well, now we need to look at the real price of our actions and hopefully re-evaluate.
    Posted by Victoria Della Porta

  • Robin Stevens Payes

    In the field of education it’s become universal wisdom that because American students lag behind those in Singapore, China and India based on international test scores (PISA), the US is destined for decline. But it seems foolish to compete based on presumed measures of success and what they herald for the future, as Tristan’s article points out. There are so many factors contributing to success–individually or nationally–history shows us that extrapolating from a snapshot measurement to some straight line outcome in the future on is pretty short-sighted. I think trends do show manufacturing moving back closer to distribution markets (good news for American workers that US companies may be moving back home). A growing emphasis by schools on fostering creativity and innovation in learning, not rote memorization, at least gives the U.S. a shot at continuing global leadership. And shifting global economic trends from consumer growth to whatever we are evolving into points to the idea that just about everything we’ve always assumed in the past 250 years or so is up for grabs. Maybe dominance and competition will turn into more cooperation (although I am NOT necessarily suggesting it’s a given that in 2212 we will all be holding hands and singing kumbaya). Surely there is enough for all.
    Posted by Robin Stevens Payes

  • Nicholas Bass

    play the game Risk, and see what happens.
    Posted by Nicholas Bass

  • Bohling

    China with face a labor shortage in a generation. Since that is the single key in their economic growth, that will also be its undoing. Also, as mentioned, automation will too. The CCP just throws money at a problem until it goes away, and then make any balance discrepancy go away by just erasing it.

    Competing with China on a cost basis is entering a race to the bottom. They currently hold an unprecedented edge in that. They can spread the cost of manufacturing around to almost nothing as it is. If an economy, say the Americans, Europeans, or whoever, were to bring that cost to zero, that is the only way to compete and win. But, if no one is working, then no one is buying.

    If the Americans really want to take away or eliminate Chinese economic dominance, then they will have to apply lessons learned from dealing with the Soviets.

    Take away their edge. The Russian money-maker was oil and arms. The Americans got cozy with OPEC and convinced them to drop the price of oil. That took money away from the Soviet machine.

    Create a dependence. Through Soviet mismanagement, they became dependent on foreign food sources. In the 1980’s, the Americans took away wheat shipments.

    Outspend them, and coax them into a conflict they cannot win. With a lack of income and food shortages, the Americans engaged in an arms race that the Soviets could not win. They also got them involved in a war in Afghanistan that they were not going to win.

    This is a horrible over simplification of cold wars last years. There were many factors that went into this. The race for the 3rd world also played into it. As did many other things I am over looking.

    If the west could take away China’s manufacturing edge, through investment elsewhere or automation, that would take the income away. If the west was to develop a petroleum free economy or energy source, then have speculators raise the price of oil drastically, that would further cripple them. Then engage in another arms race, and…well this could spiral out of control.

    Arm chair political scientists and economists never solved anything. But fun to talk about.

  • jracforr

    China will likely do what their Mongol ancestors did when they became powerful. They will seek new territory in Central Asia and the Ukraine, not necessarily by conquest but by trading alliances. The Chinese may very well be the greatest threat to Islam, and the likely source of it’s demise, if the Islamic world embraces radicalism .If history is cyclical,they may harbor expansionist tendencies in the Pacific but these will fail. It is hard to imagine one billion people staying in China once they become powerful, but they are not likely to go to Africa,instead they will expand within Asia.It it not the US that need fear China it is all those Islamic states in central Asia that need to worry. The US may be foolish enough to go where it has no business but if wisdom prevails it can survive this era intact.

  • What happens when China becomes the largest economy in the world? – According to the OECD, China is due to… http://t.co/XamtP8QkM5 #HFN

  • jguevaraescudero

    Good article..today I heard that China will surpass the USA’s economy this year (2014). They have the largest rising middle class 300 million plus of them. I hope we don’t go to war with China… At this time we are threatening Russia… We don’t want to push the Russians to the Chinese’s economy.

HFN on Twitter