Here's the generally accepted script. The USA is in irreversible decline. China will supplant the USA as the new global hegemon.

The accepted script may be correct. But let's take a closer look at China.

In the 1970s China was a basket case with one great asset. It had a disciplined, industrious and, by poor country standards, well educated labour force willing to work for what was by Western standards a pittance. Two men, Zhou Enlai and Deng Xiaoping, had the vision to see that was enough. Zhou died in 1976 and it was left to Deng to turn vision into reality. In a very real sense we live in the world that Deng made.

Under Deng and his successors China turned itself into the world's manufacturing platform. Foreign companies, notably from Taiwan and Hong Kong, were encouraged to set up huge modern factories in China which assembled goods for export to the rest of the world.

As I pointed out in a previous post titled "China! China! China! China!....*", that model may be coming to the end of the road. From here on it gets harder. The Chinese leadership, recognising this, is pouring vast sums into R&D. Their stated aim is to add "Innovated in China" to "Made in China."

However this is an arena in which the USA has the advantages. It has an unparalleled network of well-funded national laboratories and universities. These act as a "brain magnet" drawing talented people from all over the world, not least from China. As a result, in size and overall quality the USA has finest scientific and engineering labour force in the world. Some countries may have better scientists or engineers in specific fields but no country has the breadth of talent that continues to thrive in the US.

I have no doubt China will emerge as a scientific superpower provided – and this is a huge proviso – the Communist part is prepared to loosen the reins of its control. I'm not yet convinced it will eclipse the US.

Comments?

*See: http://forum.onlineopinion.com.au/thread.asp?discussion=5101

Just to add a few more points which the 350 word limit did not permit:

(1) Rising manufacturing productivity means that labour costs are not as important as they once were. Thus China's low labour costs are getting less and less relevant compared to the costs associated with having your factory thousands of miles from your market. This is why I think China's current "business model" is coming to the end of the road.

(2) In any case if the Chinese want to enjoy rising living standards they need to move beyond providing low cost labour. Already Chinese labour costs are rising rapidly.

(3) Average labour costs in China are around $6 / hour compared to around $26 / hour in the USA. That sound like a huge gap until you realise that labour productivity in the USA is 3-4 times what it is in China. Factor in rising transport costs due to increased oil prices and the advantages of using China as a manufacturing platform are no longer so obvious for US companies.

(4) The political risk associated with doing business in China is also becoming more apparent. So is the loss of "agility" associated with having long supply lines.

(5) I do not expect a rapid turn around in a trend that has been going on for decades; but I do expect US "offshoring" to decline while "onshoring" increases.

(6) China will have to focus more on innovation and new products than simply being a low-cost source of labour. They will probably meet this challenge but it gets harder and growth will be slower. It probably also needs political reforms which authoritarian regimes find hard. Hard but not impossible. Taiwan and South Korea managed the transition from virtual dictatorship to democracy.

(7) For now the US still has the lead in technology and innovation. China, or any other country, will find it hard to match America's scientific and technological establishment. That, and not matching the American military, is the real challenge for China.

Steven I certainly hope you're right. However there are some strange things going on in manufacturing.

I've mentioned before, I was forced to go to Taiwan for the manufacture of some products. I'm sure they had the things manufactured in China, & with some plastic items, I'm sure they proved the tooling in Taiwan, with early production, then later moved production to China. The drop in quality between shipments was obvious.

However the thing I could never understand was the cost of brass items. I believe the brass was probably produced using our copper & zinc, which makes it even stranger.

I was getting a chrome plated item of 3 components, machined, chrome plated, assembled & supplied packed in individual boxes, with our printing, delivered into my store 30% cheaper than I could buy the brass feed stock in Oz.

I never bothered to try to find out why, I was too busy then, & I am not interested enough today, but it doesn't make sense. Someone is indulging in quite a rip off somewhere. I suppose labor cost comes into it, but there is not much labor in producing raw brass rod.

Do we sell our metals that much cheaper by the boat load, than by the truck load, or does government get it's fingers into the pie somewhere.

I do find it interesting that in the US the large volume of gas being "fracked" has brought the cost down dramatically, where in Oz it will/would do nothing for us. We will still have a parity price scheme, & will continue to pay through the nose for it, & for any power generated using it.

Interesting story Hasbeen

I once did some work for a South African company that designed the nozzles used in irrigation equipment. Although the design was done in South Africa the manufacturing was outsourced to a Taiwanese company.

It turned out that in South Africa the cost of the metals used to manufacture the nozzles exceeded the landed cost in the USA of the finished product from Taiwan. The company would not have been able to compete had it attempted to manufacture in South Africa.

Interestingly FoxConn, the world's largest assembler of consumer electronics in China is a Taiwanese company. I guess it's Taiwanese companies that have really mastered the art of mass assembly.

FoxConn are, of course, not constrained to operate in China. They now run facilities in Mexico as well.

See for example:

Cisco signs over Mexico manufacturing facility to Foxconn

http://www.zdnet.com/blog/btl/cisco-signs-over-mexico-manufacturing-facility-to-foxconn/52610

My guess is that FoxConn wants to diversify away from China.

Which reinforces the point I want to make in this thread. The eclipse of the US by China is by no means a foregone conclusion as some people seem to think. It may happen. But it may not.

There is another factor which I saw discussed on TV yesterday and it is
the demographic nature of China and the US.
The population in the US will be significantly younger than China's.
This of course is caused by continuing immigration into the US and
aging in China due to the one child policy.

China has an upcoming food problem with 300 million farmers moving to
the new cities that will have to be built.
Then of course there is the energy problem just to complicate it all.

Hi Bazz

Yep demography is another issue facing China. As a pundit in the Economist magazine put it:

"Will they get old before they get rich?"

I think the rise of China will slow over the coming decade. I don't think they're going to implode or suffer some sort of catastrophe though given the inherent instability of authoritarian regimes that's always a possibility. But neither are they going to be the gorilla everyone seems to imagine.

It seems the era of American supremacy may last a bit longer.

*Do we sell our metals that much cheaper by the boat load, than by the truck load*

Hasbeen, that is because local companies price to what the market
will bear, some markets have far higher profit margins then others.
So they would have simply screwed out of you, whatever they could.
What they sell internationally, has to be done at a globally
competitive price.

The price of steel is a fine example. Bluescope steel will sell
internationally for a few hundred $ a tonne. The same steel locally
is much more expensive and yes, a truckload of it is quite different
in price, to a boatload.

Even now, if I buy a steel section where there is import competition,
its hugely different in price per tonne, to where there is not.
On the latter, they screw me for whatever they can, because they can.

Steven, I think that the whole thing will kind of balance out in
the end. America won't be the kind of super industrial power that
she once was and China won't dominate the world either. There will
be a role to play for both countries and of course a host of other
countries who are moving up the industrial scale, such as Korea
and others.

I read somewhere that Foxconn are already looking at using huge
numbers of robots for assembly of electronics, so don't underestimate
the innovastive abilities of the East. They train far more engineers
and science graduates, unlike us and the Americans who train lawyers.

Today its all about operating globally. There are companies like
Korg who make their products in Japan, but also have a US offshoot
to add to their innovative skills with things like software and
design. There are chemical companies in Japan, who develop new
compounds which are sold as herbicides, but use Bayer and others
to market them, as they simply don't have those kinds of supply
chains in place.

China today realises that simply accumulating trillions of $ is not
much good to them, as those $ won't be worth anything. So alot
of their growth will come internally, as people push for a better
lifestyle. Yes, their growth will probably slow down, but so what?

I feel that China still has a long way to go.
China is still determinedly socialist and
authoritarian. It will be interesting to see
how far the country will stray from the socialist
path and whether economic liberalisation will in
turn lead to political democratisation. Of course
given China's size and potential, its economic
future will be of world-historical significance.

Lexi

It's a difficult question. Both Taiwan and South Korea achieved economic "lift off" while they were dictatorships. As they grew wealthier they morphed into democracies.

Pinochet, like South Korea's Park Chun Hee, was a brutal dictator yet he arguably laid the groundwork for the relative prosperity Chile enjoys today.

It would be great if democracy and economic lift-off always went hand in hand. But historically that has not always been true. Quite often democracy has come with prosperity and not the other way around.

And of course dictatorship does not guarantee economic lift-off. I doubt Hugo Chavez's legacy in Venezuela will be prosperity. If anything, the opposite. And his friends, the Castro brothers, have not done Cuba any favours.

The Burmese generals, Egypt's Nasser and Mubarak, Iraq's Saddam Hussein, Libya's Qadaffi and Syria's Assad have all be catastrophes as is the mullah regime in Iran.

But Suharto brought relative piece to what was in the 1960s a war-torn country. He may not have been a nice guy but he probably laid the foundation for Indonesia's relative prosperity and democracy.

However the main point I was trying to make is that the accepted script of America in terminal decline and China the future world hegemon may not be true. I am sure China's relative power will grow but I doubt it will eclipse the US for the foreseeable future.

Of course America may self-destruct. That's how most powerful nations come to grief.

The truth is that most nations are their own worst enemies. In the words of Pogo "We have seen the enemy and it is us."

Dear Steven,

Brilliantly argued.
I fully agree.
You continue to surprise me.

Dear Stephen and Lexi,

It is an interesting proposition that economic liberalisation leads to a democratisation of the political process.

But look at the poster child of laissez faire capitalism and political freedom, the USA. It is in the bottom quartile for the CIA Geni index of income equality ie >40 (along with China), it has by far the highest per capita incarceration rate of its citizens in the world, 25% of its children are living below the poverty line, and crony capitalists own the political system where 85% of elections are won by those with the biggest purses.

These very same statistics in a dictatorship would have us screaming blue murder.

With extremes like China and the US we should be very protective about ensuring we hold the middle ground, constraining our capitalism where appropriate while maintaining decent degrees of personal freedoms, and striving for equality through policy where we can.

Social democracy has a lot going for it.

Dear csteele,

Unless we are careful we could face a clash of extremes
in these early days of the 21st century. We've become
rightly afraid of the potential catastrophes of severe
weather events due to climate change. We have the threat
of over-population, some are telling us to consume,
consume, consume, and that "greed is good." What we need
to recognise is our - ecological, social, and economic
reality. Only the idea of sustainable development
based on the golden rule ("the mean" - otherwise known as
moderation in all things), and a steady-state economy
will offer us hope.

Csteele wrote:

>>It is an interesting proposition that economic liberalisation leads to a democratisation of the political process.>>

It may be an interesting proposition but it's not one I put or even subscribe to.

I simply pointed out that in some cases what appeared to be quite dreadful and even ruthless governments laid the foundations for economic "lift off" and subsequent prosperity. Once prosperity had been achieved they morphed into democracies. Three notable examples are South Korea under Park Chun Hee, Taiwan under Chiang Kaishek and Chile under Pinochet.

In none of these cases was prosperity achieved through helter skelter economic liberalisation. Instead there was a carefully controlled liberalisation.

And in all these cases the paths to prosperity were not smooth. There were many bumps in the road.

You mention the US Gini coefficient.

The economist, Simon Kuznets, theorised that as countries underwent a phase of rapid growth income inequality grew. Once the societies matured things evened out. Most Western economists thought Kuznets had it right and in most Western countries that it true until around 1980. After that we witnessed a surge of inequality.

So was Kuznets wrong? Or was it some nefarious plot by Reagan and Thatcher?

A more likely answer is that Kuznets was wrong to think in terms of national economies. We need to take a global view. Since the late 1970s the world has undergone a massive growth spurt unlike any that has ever been witnessed before in history. Perhaps that is why we are witnessing such huge jumps in inequality.

However there are no more China's and India's to be absorbed into the global economy. Once that process is complete and given the rapid decline in human fertility the world may look very different in 2030.

The main point I wanted to make in this thread is that I'm not at all sure China will become the global hegemon everyone imagines. It may of course. And the USA may commit suicide. But I'm moderately sceptical on both counts for reasons I've outlined in this and other threads.

Dear Steven,

Sorry for the previous diversion.

You wrote;

“However there are no more China's and India's to be absorbed into the global economy.”

You seem to be ignoring a rather large land mass with a rather large population – Africa.

Don't worry, many in the West do the same.

Speaking recently to some Aid workers working in different areas within Africa it appears the Chinese presence is not not a new thing and it is strong and growing. The big experiment will be to see if America can wean its self off its current, horrendously expensive military budget which it utilises to project power and influence, and in some cases to secure markets. Or will take the virtually self funding 'business model' route that seems to be the preferred method of the Chinese?

Both approaches serve the business interests of each respective country but the Chinese model is by far the more sustainable.

In 2009 China overtook the US as a investor in Africa. Its huge diaspora, well over half a million strong, have provided a ready path for securing markets, mining leases, construction contracts etc.

To me the answer to your question will will be determined by how well China can resist diverting capital, resources, and manpower into trying to match the US military power.

I think they are a pragmatic and patient people.

csteele

No I am definitely not ignoring Africa. I come from there.

Call me racist if you like but I am deeply sceptical of Africa's ability to play a major role in world affairs. I would be delighted to be proved wrong.

I agree the present Chinese government is pragmatic. But they are also nervous. They know major reforms are needed but the Chinese Communist Party (CCP) seems almost paralysed by fear.

The question in my mind is this. Will the CCP be prepared to countenance a diminution of their power in which case China, like other countries before it, may morph into a stable democracy.

Or the CCP may try to cling to power precipitating unrest and damaging their economy.

The CCP may also decide to play the nationalist card in which case we may be in for a rough time.

On the whole though I do not expect the Chinese government to be too aggressive. Their aging population makes military adventurism unlikely though they may still be very assertive and that could scare their neighbours into the arms of the US.

Dear Steven,

I will leave Africa alone for another discussion since this is about China.

I'm not sure I would agree that the CCP is paralysed by fear. I get the sense that there is a long term vision for China far more substantial at least than the election cycles and political corruption afford the US.

The ingredient I find fascinating is the role of fundamentalist Christianity, especially in an emerging economy such as China. Its adherents now well outnumber the Communist Party membership and the faith's natural fit to raw capitalism (forged and honed in the US) leads me to think they are going to be a real force within China.

That the CCP has let them flourish without the significant oppression often dealt to other groups is also interesting. Perhaps it is purely pragmatic. A decade ago a writer for the journal Foreign Affairs wrote; “A similar pattern can be seen in China today, where there may be more than 60 million Protestant Christians (compared with 700,000 in 1949). Some Chinese sociologists have noted the "coincidence" that the most significantly Christianized city, Wenzhou, where some 14 percent of the population is now Christian, is also one of China's top performers in domestic commerce and foreign trade.”

Perhaps the leadership saw economic benefit in not reining them in.

But the explosion of China's so called 'house churches', which largely go undocumented since as soon as a group get to a reportable size they split, shows the cat may well be out of the bag.

If anything is designed to strip away pragmatism it is fundamentalist Christianity.

Just the other day there was news about an planned Asian tour by Lady Gaga had run into problems in Indonesia and South Korea. Different faiths, same fundamentalists.

Perhaps FC had a role in creating the South Korean success story or perhaps it just comes with the territory.

However I don't think it can be dismissed as a future factor in the Chinese story.

Well csteele, here's the bottom line

To me the CCP leadership look like any other power elite concerned first and foremost with maintaining their own power and privileges. That doesn't mean I think they're stupid or inherently evil in the way, say, Stalin was. On the contrary since Deng I think they've proved themselves to be reasonably smart.

They're authoritarian rather than totalitarian. Think Second Reich rather than Third Reich except they're probably smarter than the Kaiser.

But neither do I think they're especially benign or in some way super-smart or super-wise. Their treatment of Chen Guangcheng fits in with my way of thinking. I don't think it's some kind of aberration. Nor do I buy that it's a "Western plot."

And for the rest I think they have as much muddle as in any Western democracy only they're better at keeping it under wraps. I have little doubt the infighting in the CCP is as fierce as that in the ALP but it's invisible to us. After all the consequences of leaking to the media in Australia are not the same as leaking in China.

To my way of thinking the best possible outcome for China and the world is that the CCP leadership have the sense to allow the country to morph into a democracy as happened in South Korea and Taiwan.

You on the other hand seem to see them as a group of benevolent and wise leaders guiding the country onto the right path.

From my perspective the evidence supports my point of view.

You seem convinced your point of view is correct.

Neither of us at this stage has any chance of convincing the other that they are right.

We've both stated our positions and all that's left is to sit back and watch the show. If we're still around in 20 years or so we can have a "post mortem" on the game.

Dear Steven,

I think you may be attempting to put words into my mouth.

You wrote; “You on the other hand seem to see them as a group of benevolent and wise leaders guiding the country onto the right path.”

No, not at all. I basically said I hoped they were smart enough not to repeat America's mistakes with hyper-democracy (ie one that now treats corporations as people) and hyper-capitalism.

You spoke of the leadership being paralysed with fear yet wrote;

“As I pointed out in a previous post titled "China! China! China! China!....*", that model may be coming to the end of the road. From here on it gets harder. The Chinese leadership, recognising this, is pouring vast sums into R&D. Their stated aim is to add "Innovated in China" to "Made in China."”

Compare that to the cuts to education and training for instance by our Victorian Liberal government.

Or compare the recent introduction in China of a nearly universal health care insurance scheme covering nearly 1.3 billion people, to the furore in the US over Obama's, in reality, quite insipid health care reforms.

I'm not sure this is evidence of paralysis. 'Obamacare' and debt ceilings fit the bill far better. And you have twice acknowledged the Chinese 'smarts'.

You wrote; “From my perspective the evidence supports my point of view. You seem convinced your point of view is correct. Neither of us at this stage has any chance of convincing the other that they are right.”

You seemed to have created a fence out of thin air and and plunked it between us.

I am no more convinced about correctness of my point of view than you should be of yours. In fact I don't think we are all that far apart on China, our main disagreement would appear to be the viability of the US. However the best we can say is that you are a little more optimistic on that front. The next decade should tell us one way or the other.

Is the whole concept of one nation rising and the other falling itself questionable ?
Surely what lies ahead is all of us going down with the tide ?

Bazz,

You're on the right track.
The one thing that is always guaranteed is "change". The Western industrial paradigm is the represented by the power exuded from its "superpower" - America.

The U.S. has peaked and it aint coming back. China has its own problems, and has only managed to become a giant by "unsustainable" growth and monumental polluting practice.

The industrial model can't sustain itself and eventually must contract. How that pans out, we can only surmise at this stage.

Is the USA the emerging superpower - again?

Nope

*The industrial model can't sustain itself and eventually must contract. How that pans out, we can only surmise at this stage.*

The industrial model underpins the tens of millions in cities model.

Sounds like the "Daisy the cow on 5 acres model" makes perfect sense
and is not a bad way to live

csteele, I apologise if I've misrepresented your views.

I am far from certain that the US will rebound and remain a first among equals. But I think it possible and more probable than not.

But it could go badly wrong for them. Nations are usually their own worst enemies and the US is proving no exception.

But I am certain that the Chinese leadership are not possessed of any special wisdom.

For the rest, gentlemen we've placed our bets. Now it remains to be seen how the game turns out. If we're still around in 2030 we can hold a post mortem.

As for the "industrial model" - that is changing so rapidly that it's hard say what will happen.

Interesting video from The Economist:

The third industrial revolution begins

http://www.youtube.com/watch?v=-vSOroLQUx0

I think the "industrial model" will continue but it will hardly be recognisable.

There is an interesting piece in New Scientist:

China is taking control of Asia's water tower (New Scientist, 28 April 2012)
http://www.newscientist.com/article/mg21428624.400-china-is-taking-control-of-asias-water-tower.html?full=true

>>The country's engineers are damming or diverting the five great rivers that flow out of Tibet and into neighbouring countries>>

These huge engineering projects could have devastating consequences for Bangladesh, India and Vietnam. The rivers affected are the Indus, Brahmaputra, Irrawaddy, Salween and Mekong.

I wonder how this will play out.

To quote from the article:

>>In a region where water supplies are stretched and nations play hydrological hardball, the stakes are high. China was one of only three nations to vote against a proposed UN treaty on sharing international rivers. As Loh Su Hsing, a fellow at the foreign affairs think tank Chatham House in London, wrote recently: "The big issue for Asia is whether China will exploit its control of the Tibetan plateau to increasingly siphon off for its own use the waters of the international rivers that are the lifeblood of the [downstream] countries.">>

Anybody got any ideas?

Could we see "water wars" - China vs the rest?

This has been brewing for sometime. I first read about it approx 6 years ago.
It could start a war that even China could not win.
When the life of 100s of millions are at stake, whats a few nuclear weapons ?
If China's water problem is a bad as we hear, then millions will starve
in one country or the other.
Would you let your country go without and sacrifice them for another
countries people ?

Hmmmm.

The question is, Bazz, what can the downstream states do?

Also, would the Chinese leadership be dumb enough to make nuclear armed India desparate?

The Vietnamese are already suffering as a result of Chinese tampering with the flow of the Mekong river. But Vietnam is helpless in this situation.

Another upstream state that seems to be making a water grab is Turkey.

Truly we live in interesting times.

Not much anyone can do.
Just tell the people that there is not enough water and suggest they
migrate somewhere. Trouble is they are in the main poor people and do
not have the resources to pay people smugglers.
However perhaps one or two hundred million will have enough money to do just that.