The Occasional Blogger is Right Again

Yesterday, “The Occasional CEO” posted a new blog article entitled “So THIS is What an Invasion Looks Like”.  In the post, author Eric Schultz cleverly debunks the myth that China is in the midst of an economic invasion of the United States.  I thoroughly enjoyed the article and would recommend that you read it.  I also would like to complement its conclusion, with which I heartily agree, with my own take on the topic.

Schultz’s main argument is that innovation is the primary difference between the American and Chinese economic rises.  The United States rose to power based on its ability to out innovate all competitors.  It produced technological solutions that the world needed and used the British free trade system to export them to the world.  This is vastly different than the Chinese model, which is to use low wages and shaky intellectual property enforcement to manufacture already invented products more efficiently than any other country. 

While China’s efficiency cannot be ignored, its economy is flawed and unsustainable because it is dependent on the poverty of its workers and on other countries to drive the global economy through innovation.  In this way, China will always be a follower instead of a true global economic leader.

Like Schultz, I fully expect the United States to continue to lead in global innovation and high technology exports while China continues to be a low cost, high volume exporter (at best).  This is because the United States is operating in a global system that is uniquely suited to its political, military, and economic systems while China will have to modify its historical inclinations to succeed.

For better or worse, we are living in the world that the United Kingdom built.  This is a world of international free trade and democratic governments.  It is a world where naval power matters more than land-based military power.  It is also a world where English is the international language of business. 

This is the world that was built by the United Kingdom during the Pax Britannica in the nineteenth century.  Using its navy and merchant marine, the United Kingdom drastically expanded the scope of the global economy by founding and trading with its colonies in North America, Australia, India, and Africa.  Many of the trade routes that were used by the British are still in use today.  These include the trans-Atlantic route between the US/Canada and Britain and the route from the Indian Ocean to the Mediterranean and North Seas via the Suez Canal.  This naval power and trading system made the United Kingdom and its European neighbors fabulously wealthy when compared to the rest of the world.

Then, as Darth Vader famously told Obi-Wan Kenobi, the student became the master.  The United States, which had begun its existence as a British colony, overtook the British in the early twentieth century and became the leading global power.  This happened because the United States is essentially the United Kingdoms on steroids. 

It was and is a maritime power with a large navy, democratic government, and free market economic philosophy.  Even better, Americans speak English, which the British had established as the international language of trade.  With all these similarities to the United Kingdom and a larger population, greater natural resources, and a safer neighborhood (far from Europe circa WW1), America was a natural to overtake the United Kingdom as the center of the world economy.

The same cannot be said for modern day China.  Like Britain, the United States has expanded international trade to levels never seen in history.  It has utilized its access to the Pacific Ocean and East Asia to open up new trade routes and international markets for its goods.  It also used WW2 and the Cold War to export its democratic and free market systems to key partners in Europe and Asia.

This has created an international system that is dependent on having a liberal, free trading country at its center.  For all of exporting prowess and economic might, China is not this type of country.  It is an authoritarian land power with little naval strength and no history of democratic rule.  It has adopted some free market principles over the past three decades, but those changes have been treated like experiment instead of as doctrine, as they are in the US or the UK.  I find a perfect metaphor for China in its most famous landmark: a Great Wall meant to keep foreigners out.

In order to overtake the United States as the linchpin for the global economy, China would have to fundamentally change the system to suit its own strengths.  While not impossible, this is far more difficult than succeeding as the United States did: by combining superior geography and resources with the same social and economic policies as the current world leader.  Changing the current system will affect all of the countries that are benefitting it and will cause far more resistance (just ask 1930’s Germany and Japan). 

This is the reason that I agree with the Mr. Schultz.  China could overtake the US and become the center of the global economy, but I just don't see it.