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.


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