2004 July 11 Sunday
China Becoming Much Larger Portion Of World Economy

Writing for The National Interest David Hale examines the sheer scale of China's economic growth.

China has developed a voracious appetite for raw materials. Its commodity imports cost $140 billion last year, and its trade deficit on them was $100 billion. China's imports of iron ore have increased from 14 million tons in 1990 to 148 million in 2003. China's imports of aluminum have shot up from 1 million tons to 5.6 million tons. Imports of refined copper have risen from 20,000 tons in 1990 to over 1.2 million tons last year. Imports of platinum have leaped from 20,000 ounces in 1993 to 1.6 million last year. Imports of nickel have risen from zero to 61,500 tons during 2003. The impact of China's raw material demand on global trade has been so dramatic that shipping rates have quadrupled during the past 18 months.

There are now some commodities in which China is a larger consumer than the United States. In late 2003 China accounted for 20.6 percent of global copper demand compared to 16 percent for the United States. In 2005 China will probably account for 21 percent of global aluminum demand compared to 20 percent for the United States. China also accounts for 35 percent of global coal production, 20 percent of zinc output, 20 percent of magnesium output and 16 percent of phosphate output. This is all the more remarkable given that China's real GDP is probably half of America's. And since the real incomes of China's people are only now rising to levels that generate large demands for material goods such as autos, appliances and houses, its consumption of raw materials is poised for explosive growth.

China now makes more steel than the United States and Japan combined. If China fllows a path of development that repeats the experience of Japan then China will eventually consume more steel per capita than the United States. With its much larger population China could eventually consume 5 times more steel than the US does per year. Whether the political system of China can maintain stablity and develop a legal framework that can support an economy of such complexity remains to be seen. But my guess is that China will surpass the United States as the world's largest economy in the first half of the 21st century.

At the moment the Chinese government is applying the regulatory and monetary brakes to cool off an overheating economy.

The torrid Chinese demand for raw material last fall and winter has largely evaporated, as credit-starved companies drew down their supplies and stopped placing new orders. Prices slumped in commodities markets as a result. As the lines of ships waiting to unload cargo at Chinese ports dwindled, ocean bulk freight rates tumbled as well, falling by more than half on some routes after shooting up seven or eightfold last year and early this year.

...

"Our orders came down 75 percent," said Harry Banga, vice chairman of the Noble Group, a big Hong Kong-based commodities and shipping business. "Not only ours, but everybody else's.

An industrializing economy can through depressions and still recover and regain a high level momentum. The United States had a number of severe economic downturns while it was developing most rapidly. But after each downturn rapid growth eventually resumed. China may be in for a bumpy ride. But unless it descends into civil war I expect it to eventually become the largest economy in the world. There is nothing inevitable that is going to keep the United States as undisputed most powerful country.

Share |      By Randall Parker at 2004 July 11 09:09 PM  China


Comments
John S Bolton said at July 11, 2004 11:55 PM:

In terms of the comparison of Chinese to American economic development; America never went to 50-100% of its economy given out through governmental credit expansion, as China has been doing. Imagine that the federal reserve were to issue $10 trillion dollars in new credit for use in investment projects within the country in one year; in comparative terms, that is what the Chinese have been doing recently. America did something approaching that in 1918 and in 1942, and it was associated with high inflation and severe resource shortages. In the case of China, the shipping rates show how the market responds to, and militates against such policies. The inflation rate in China could be several times what is reported, which would reduce their growth rate to the same level as other countries. Either they let the current inflation of credit work its way through their price structures, or they tax the earnings of their export industries at close to 100%, which leaves them insolvent and in need of more inflation just to stay open. Their methods are not such as can work long-term.

noone said at July 12, 2004 4:43 AM:

"Their methods are not such as can work long-term."
And our methods can?

Americans now measure their wealth,not in accumulated assets,but in accumulated debt.The housing bubble inflates prices,to americans this means they are more affluent because they can now access more debt.This debt will have to be dealt with,either we drastically reduce consumption to pay off the debt or default on the debt.

Either way we're screwed,the only question is how badly this will affect the rest of the world,after all,it's mostly their money we've squandered as well as our own.

Brock said at July 13, 2004 11:21 AM:

America's home prices are equity - and people borrow againt it. That's nothing new. In fact, it's one of the sources of our power and strength. The most common source of start-up financing for new business formations are second mortgages on the founders' homes. Small business if of course the reason we always end up on top - entreupreneurs like Michael Dell, Bill Gates and Henry Ford end up being the big business that dominates the world. By the time the world figures it out and plays catch-up, we've moved on to something else.

China will continue to absorb more and more resources, but don't make a straight-line graph. Economies become more efficient consumers of material and energy over time. The US uses less steel and oil per dollar of output today than at any point in history. The steeply ascending slope will mellow out.

Randall, maybe I'm reading too much into it, but your post had a forboding overtone to it. Are you concerned that China will become the largest economy in the world? That's nothing new, after all - really a return to normal after a 400 year hiccup in history. For several millenia China was always the largest, most powerful nation on Earth. Only fleeting Western empires (such as Rome) would eclipse its power, only to be left behind again. Historically however, a powerful China was not a dangerous force. It rarely exhibited the expansionist Imperialism of the Japans and Germanies of the world. The Communist takeover of Tibet was really an anomalous period in China's history - but then almost everything the Communists did was anomalous. China has a long history of mercantile relationships with its peaceful neighbors, and that is the reputation it is trying very hard to make for itself today. An economy as large and complex as theirs surely would require cooperative relationships with others.

If anything, a China dependent on the outside world for pretty much every kind of natural resource is a China with a vested interest in world peace and stability. If the whole Taiwan thing can be straigtened out I look forward to joint patrols with the Seventh Fleet. America has been the sole provider of peace and stability in the world for long enough, as far as I am concerned.

Brock said at July 13, 2004 11:24 AM:

I apologize. Really need to start using the Preview button.

noone said at July 13, 2004 2:16 PM:

China is neither a mature economy or a mature "Great Power",like pre1914 Germany,it is in their interest to destabilize the current system and dependency on outside resources provokes attempts to control the outside resources(what do you think we're doing now?).
History doesn't end,now that the Cold War bottleneck is broken it's simply beginning to move again,China,India and Islam,even Russia and the EU,see themselves as local hegemons now.All see a relative US decline as most certainly in their interest,as we dominate everywhere they see as thier own spheres of influence(people in India will tell you,politely,but with gritted teeth,that it is called the "Indian Ocean",for a reason).

India see's a US carrier group(1 of 12)more powerfull than the entire Indian Navy

China see's US support for a rogue province in rebellion(what will we do when they back
Mexico's claim on California,Texas and Arizona?oops).

Russia looks to it's Near Abroad and see's US military bases popping up.

The nations of the EU,after 500 yrs on top,can't accept their fall to 2nd class status.

Not a recipe for a post-national global world.Too many dogs eyeing our bones,each convinced they deserve them more than we do(and a large part of our own poeple agreeing with that view).

Randall Parker said at July 13, 2004 3:10 PM:

Brock,

If liberal democracy is the solution to stopping Islamic terrorism (and I personally do not think so) then how can a future where the top country is no longer a liberal democracy bode well for US efforts to spread liberal democracy into the Middle East? I mean, if liberal democracy is so wonderful and a panacea then the rise of China ought to be viewed with alarm.

As for Taiwan: Its liberal democracy is going to become roadkill unless the Taiwanese build or buy some nukes. The mainland Chinese are not going to accept continued Taiwanese independence indefinitely.

As for China and expansion: China was built by expansion that spread over many centuries. The southern parts came much later than the northern parts. Also, you are leaving out Xinjiang's annexation which gets much less attention than Tibet because it doesn't have a hip lama guy cruising around the white and cheese reception circuit of upper class liberal Western elites.

Return to normal: The world used to be a much bigger place and being the biggest power didn't have any affect since much of the world knew little about and had little contact with the rest of the world.

Fly said at July 13, 2004 3:18 PM:

I also tend to be optimistic with regard to China. I believe it will become a first world country. It will be nationalistic. It will exert its economic and military power. That need not be a bad thing.

I believe terrorism represents the greatest threat to civilization. As technology advances, small groups will have more and more power to do tremendous harm. All societies are vulnerable. As China and India become more advanced and wealthy, they will have a vested interest in stopping terrorism. (During the cold war the great powers used proxies to battle. Each side had its freedom fighters. The world has grown too dangerous for such games.)

I believe China will have difficulty digesting Hong Kong. I don’t believe China will be able to conquer Taiwan. Even if the US decided not to help defend Taiwan, I don’t think China would succeed. Taiwan has the technology to quickly become a nuclear power.

What may happen is that over time China itself will change. The Chinese leaders send their children to US universities. More and more Chinese are getting exposure to the outside world. Slowly I expect the ideas of Hong Kong to permeate mainland China. If that happens, then someday Taiwan might willingly join a larger China.

Fly said at July 13, 2004 3:30 PM:

Randall, I posted before seeing your post.

My answer to your questions about China is “timing”.

Militarily and economically China won’t be a threat outside its immediate region for at least twenty years. In that time I expect to see many changes in China (and in the world). By then I expect all the major powers to recognize their vulnerability to terrorists. In twenty years a rogue nation such as N. Korea could well have the power to destroy a major power. The major powers operate as rational players so I expect them to cooperate to prevent the rise of rogue nations and terrorists.

Randall Parker said at July 13, 2004 3:33 PM:

Fly, It is a bit of a stretch to call Japan a liberal democracy. Do you think China will ever become one? We haven't conquered and occupied it to work out the transformation. How's it going to happen? Popular revolution?

Things all may work out hunky dory with China. But I do not think it makes sense to assume that will be the case.

Fly said at July 14, 2004 12:59 PM:

“Do you think China will ever become one? We haven't conquered and occupied it to work out the transformation. How's it going to happen? Popular revolution?”

Randall, I strongly believe that the world is changing rapidly. The ramifications of new technology will change all societies. In twenty years I expect the US will have more in common with China than seems likely at this time.

What will change China is the same thing that will change the US and all the countries of the world, increasing access to information technology and communications.

Much of the turmoil in the world today is in reaction to the increasing globalization of culture and commerce. In twenty years I expect the process to be far advanced.

noone said at July 15, 2004 8:16 AM:

Fly,you,like most poeple,overlook the achilles heel of both globalization and technical proliferation:

Cheap energy

Fortunatley,our enimies are only now really beginning to realize the way to bring down the "Great Satan" is oil and are still leary about the consequences for themselves,oil which is the bedrock,keystone,centerpeice,etc.,of our technology and societies.
Triple,or more,the price of energy and the cost of everything rockets,food gets(relatively)more scarce and expensive,Chinese goods are no longer competitive,causing high unemployment and thus unrest,western lifestyles are curtailed and 3rd world lifestyles are severly curtailed and econmic and political liberalization slows or even stops.We have some idea of what would happen if they popped a nuke in D.C. or New York(nuthin' good),but what would happen if they pop a nuke at the major oil hub on the Persian Gulf? Anybody care to speculate?

Fly said at July 15, 2004 8:49 AM:

Noone,

If the ME oil supply were suddenly cut off, the spot market price of oil would soar. Gas prices would quickly rise. People would drive less and fly less. Inflation would increase as higher fuel prices drove higher product prices. The economy would take a big hit.

The Fed would respond by easing money flow to keep the economy out of recession. We’d have to live with a period of higher inflation. (Not a big problem due to the amazing productivity increases we’ve been seeing.)

The market would respond by shifting to more fuel-efficient products, by converting to other fuels, and by expanding the development of marginal oil supplies, e.g., Canadian oil sands.

The long-term effect would be uncomfortable but not a disaster.

A nuke in New York City might well shatter the international financial community. The US might respond with nuclear attacks on all US enemies. The resulting world war would devastate civilization.

The US and the world would recover in a drastically altered state. Quaint ideas like personal privacy, civil liberties, and tolerance for other cultures might be gone forever.

Fly said at July 15, 2004 9:11 AM:

More on “cheap” energy.

The loss of ME oil would have a major short-term effect on energy prices. In the long run it would have little effect on Western society. The Saudi’s price oil to maximize their income. If they raise their oil prices then other energy sources become more competitive. Raise oil prices too far and a host of alternate fuel sources are economically competitive and will become even more so as production ramps up. That would then drive down the cost of Saudi oil. The ME oil producing countries have oil that is very cheap (only a few dollars a barrel) to extract. However those countries charge far more and reap an enormous profit. So Western countries see little benefit from “cheap” oil.

The Saudi’s have to ability with short term pricing changes to jerk around the Western economies. They don’t have to ability to force long term price increases. (In fact the real price of Saudi oil has significantly declined over the last two decades.)

New biotech and nanotech makes the long-term energy picture even more promising. With a significant push by the government and industry, I believe that very cheap, environmentally benign energy could be common within two decades.

Randall Parker said at July 15, 2004 10:42 AM:

Noone,

I keep wondering whether the Jihadists will decide to go after the oil fields of Muslim countries. Yes, they can see reasons not to do so. But at some point they may see the benefits to them as outweighing the costs. I wonder how they calculate the costs and benefits.

Tim Costello said at February 17, 2005 7:28 PM:

[Web site administrator note: This article was cut down to an excerpt to avoid copyright violation]

China stresses scientific innovation
(China Daily)
Updated: 2005-02-18 08:40

Chinese scientists and companies are required to develop more independently-created technologies or products instead of completely imitating or importing technologies from foreign countries.

Technological standards and intellectual property rights have become serious barriers hindering the country from international competition, due to the relatively weak creativity of domestic industries, Vice-Minister of Science and Technology Shang Yong told a conference discussing innovation in Beijing yesterday.



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