The View From China

A major requirement of conducting effective foreign policy is to understand the viewpoint of your main competitors, something that the Western elites have shown increasingly less able to do. There are exceptions, such as Stephen Cohen, but these are rapidly sidelined. More recently, John Mearsheimer has shown some ability to understand the Russian point of view with respect ton the Ukrainian conflict. In this essay, I try to place myself in the shoes of the Chinese leadership. I will do the same for Russia and Iran in future pieces.

China Gains More Strength Every Year

China is the manufacturing power house of the world and is focused on dominating the leading technology sectors the way that the US dominated them previously; this technology leadership is one of the remaining tenets of US power. In early 2023, the Australian Strategic Policy Institute placed China in the lead in 37 of the 44 critical technology areas that it tracks. The US was the leader in the remaining 7, with a large gap between China and the US and any other nations; Europe is nowhere.

In late 2023 the Information Technology and Innovation Foundation (ITIF) confirmed this, seeing China leading in 7 out of 10 of the industries within its Hamilton Index; computers and electronics; chemicals; machinery and equipment; motor vehicles; basic metals; fabricated metals; and electrical equipment. The US lead in only IT and information services, other transportation and pharmaceuticals. The share of Chinese production in these 10 industries nearly doubled from 2008 to 2020, from 12.9% to 23.9%, while the US improved a bit from 19.3% to 21.5%; with US gains predominantly due to the IT and information services area. Chinese industry is 70% more focused than the US in advanced industries. The ITIF report notes that:

For the United States, losing this race, either because policymakers are indifferent to the country’s industrial structure or because they choose to focus on other economic or societal goals, would be catastrophic, as it would turn the United States into a deindustrialized, United Kingdom-like economy. Time is short. The 2020s are likely to be the decisive decade in which to turn around U.S. advanced industry fortunes, because once China gains sufficient global market share, allied and U.S. production risks being permanently weakened.

The Chinese leadership very much understands this, and this is the core area of the real economic war between the West and China. From 1995 to 2020, Japan’s production share of advanced industries collapsed and is now only about 7.5% and falling, Germany’s share fell from a lower start level to about 7% and continues to fall. In the same period, the UK, France and Italy have all fallen to shares well under 5%. Japan and Europe are an advanced technology backwater, and becoming more so. With the huge investment mistakes of the Japanese car industry with respect to electric vehicles, Japan’s fall may even accelerate in the next decade.

Chinese GDP, and GDP per capita, growth continues to far outpace the West with continued growth of 5% or more per year. This creates strong Party-state legitimacy as the Chinese people see their lives improve year over year, at a pace that still doubles incomes every 14 years. Chinese GDP at PPP in 2023 was 32.9 US$ trillion, compared to 26.95 for the US, 6.49 for Japan, 5.54 for Germany, 3.87 for the UK and the same for France, 3.05 for Italy, and 2.8 for South Korea. At current relative growth rates, Chinese GDP will be pretty much equal to all of those other Western nations within a decade, while its GDP per capita at PPP will have grown from US$23,309 to US$37,968; about the same level that the Greeks currently enjoy.

With rising incomes, and industries rapidly moving up the technology curve, China will be able to offshore more and more of the simpler production steps while keeping the higher technology ones to itself; greatly increasing the level of integration of the ASEAN nations, and quite possibly North Korea. China’s neighbourhood will become more and more integrated with it, while Japan may shrink in both relative and absolute terms. China will also be capable of transacting more and more of its trade in Yuan rather than US dollars.

China has a massive population of 1.4 billion, which started to decline in 2022; with a median age of 39. Between 2020 and 2040 however, the Chinese labour force will only fall by 8%, a decrease which pales when compared to the probable increase in per capita GDP. China also has a strange income structure where the much better educated younger workers 25-34 have the highest incomes, and income falls rapidly in older age groups. This will facilitate large increases in older age groups over time, as the much higher levels of education move their way up the age curve. Chinese GDP per capita can also increase very substantially before it starts to reach Western levels. Demographics may pose an issue after 2050, but not before then.

The rapid move to electric vehicles will also start to cut into oil demand, reducing a Chinese dependence upon imported oil that currently stands at over 10 million barrels per day. As those imports fall, the share of Russian and Central Asian imports will rise, as will the share of domestic production (4 Mbpd). The amount of time that China’s large strategic oil reserve will last during a crisis will also steadily increase.

China has kept military spending at 2% of GDP, but as the economy keeps growing so does military expenditures. China’s expenditures are significantly more efficient and effective as those of the US as they are only focused on the defence of China and its environs, rather than on global hegemony. There also seems to be much less graft and profiteering in China’s MIC (Military Industrial Complex) than that of the privatized US one. In addition, China’s great advantages in manufacturing give its MIC a significant advantage over that of the US. China is in the position of the US in the 1980s, with a rapidly growing economy facilitating ongoing increases in military spending. The US is in the position of the Soviet Union, with a slow growing economy that will require the MIC to take up an increasing share of GDP to keep pace with China. A dynamic that can only reduce further the dynamism of the US economy with respect to China’s.

The US Loses Strength Every Year

The US main allies, the EU, Japan, South Korea, Canada, Australia and New Zealand are not well placed when it comes to leading technology sectors, drivers of growth and even demographics. Its hemisphere is also one full of lower growth economies with few technology leaders, in fact South America has significantly de-industrialized over the past few decades.

In the leading technology sectors the US may have gained a little against the rest of the world, and may pick up some of the energy-intensive European manufacturing operations, but has been overtaken by China and is falling further behind each year. The contrasting performance of the Chinese and US car industries in moving to electric vehicles is just one example of this dynamic, with Chinese car exports surging while US manufacturers (excluding Tesla) become more and more dependant on the US market.

Over the past three decades the US has expanded colossal amounts of money on foreign military adventures, at a cost of over US$6 trillion, with little to show in return. At the same time the US economy has become increasingly dominated by monopolies, oligopolies and the financial sector; the rentier sector of the economy has expanded greatly while manufacturing has been diminished. The US, including its bloated, profiteering, and dysfunctional MIC, is very dependent upon imported parts, including those from China and from other nations that utilize Chinese components. At the same time, the US maintains a massively expensive global network of bases and naval battle fleets.

In great contrast to the average Chinese person, the average American has seen their incomes at best wallow at the same level for decades as all economic gains are concentrated at the very peak of the income distribution. This has been exacerbated by the inflation spurt of the past few years, and now also rising interest rates. With a couple of decades of cheap money creating a mountain of debt, much incurred by working people in an attempt to maintain consumption patterns. Trust in societal institutions is at an all time low, and the “Trump vs the Rest” elite civil war has increasingly exposed the inner working of the elites to the population; tanking trust and legitimacy levels even more. A further wedge has been driven into the political scene with the issue of US support for the Zionist genocide. The year 2024 promises to be one of increasing political chaos and upheaval, with 2025 probably no better. It may well be into 2026 before any domestic stability and foreign policy focus can be regained. There is also still the possibility of a deep recession.

The US population is 335 million, which is slowly growing due to significant immigration offsetting a record low birth rate and an increasing death rate. Average life expectancy has been declining since 2014 due to increases in drug overdoses, liver disease and suicides. Trends reminiscent of the Russian experience in the 1990s; deaths of despair due to working class immiseration made worse by a rapacious profiteering health care sector. The mishandling of the COVID pandemic has added to this declining trend. The younger US population is increasingly overweight, unfit and poorly educated as shown by the falling percentage that would meet the military recruitment requirements. Only 23% of Americans aged 17 to 24 are eligible to join without being granted a waiver, down from 29% in recent years. Increasing disillusionment with US institutions, and low pay, has also lead to less and less younger people wanting to serve. The US position on the Gaza genocide is opposed by a majority of younger US citizens, which may serve to increase the disaffection with military careers even more. The physical quality of those that do leaves much to be desired:

They have to teach them how to run, and they've had issues with bone density to the point that, when they do run them, they've ended up breaking a leg or worse, a hip," the former official said. "I've even heard in some cases they're putting them on diets of Ensure -- you know, the stuff for old [people] like me -- in order to build that bone density.

The US role in the seizing of Russia’s central bank foreign assets, and the cutting off of Russia from SWIFT, has accelerated the move to trading in local currency pairs instead of via the US$. Its inability to corral more than its Western vassals into a coalition of the willing against Russia has seriously damaged its soft power position. The more recent embroilment in the Zionist genocide has done significantly further damage to that soft power, in contrast to a China that has maintained a carefully balanced approach. If the US drags itself further into the Middle Eastern quagmire, in addition to the Ukrainian one, the “pivot to Asia” will be put off for yet more years.

Europe Is Losing Its Relevance

With the cessation of cheap fossil fuel imports from Russia, Europe is no longer competitive in energy-intensive manufacturing and plants will tend to move to other nations with lower energy costs. Interesting that the CEO of Solvay, a Belgian chemical company never mentions the loss of cheap Russian natural gas as a challenge; instead she blames too much government red tape and not enough subsidies, staying on message at the World Economic Forum:

DW manages to cover every possible determinant for German deindustrialization, except for the self-harming Russia sanctions. The higher energy prices are mentioned, but not that they could be reversed simply by cancelling the sanctions. That option cannot be discussed within acceptable German political discourse; i.e. outside the AfD. Neither of course, the true purveyors of the terrorist attack upon Nordstream 2.

In addition, Europe’s inability to gain a strong position in the leading technology sectors places it at risk of being out-competed by other nations moving up the technology curve. The tendency toward fiscal austerity, together with the ongoing costs of supporting Ukraine and increased military expenditures, hamstring any attempts to fund a fulsome industrial upgrading strategy. The centrally important car industry, which supports so many other sectors of the economy, is deeply challenged. It faces the annihilation of its sales in China, which provide up to 50% of the profitability of the major producers, and faces increasing Chinese (and Tesla) competition at home.

With the tendency toward fiscal austerity, the large indebtedness of a number of nations (e.g. Italy, Greece), and the lack of drivers of economic growth, the probability is for a continuation of the low to no growth of the 2010s with the possibility of a significant financial crisis. The US-driven decoupling from China, e.g. the Italian exit from the Belt and Road Initiative, will only add to the low growth path. Any moves to confiscate Russian foreign exchange reserves that are predominantly held in European banks may also have negative growth impacts.

The European Union as a whole has a population of 450 million people, with the UK adding another 67 million. The major nations are Germany (84 million), UK (67 million), France (64 million), Italy (59 million), Spain (47 million) and Poland (38 million), and they comprise the majority of the population (359 million). The population is in a small accelerating decline in Germany and Poland (started in 2018), and to a greater extent in Italy (started in 2016), while stable in France and Spain and growing quite rapidly in in the UK. The median age ranges from 41 (UK) to 46 (Italy) and is on the rise.

These populations are becoming increasingly disaffected with their government’s policies toward Ukraine in a time of austerity, and a recession that has already started may feed into this disaffection. Europe may be becoming increasingly irrelevant to China, with any FDI in Europe focused on nations that are considered to be more friendly such as Hungary and Slovakia.

Japan Is A Declining Power

Japan’s share of the Hamilton Index industries has collapsed since the mid 1990s and is continuing to decline. The woeful position of its massive car industry with respect to the move to electric vehicles may lead to the loss of much of its Chinese and Asian sales, as well as reductions in the US market. The new CEO of Toyota, hand-picked by the Toyoda family member who lead Toyota into the hydrogen blind ally, is staying with the generally anti-EV strategy; even investing in ammonia-based engines. That’s like doubling down on Betamax after VHS had overwhelmingly won in the market place.

And abject failure with respect to hydrogen cars does not seem to faze Toyota!

The Japanese population peaked in 2010 at 128 million, and is on an accelerating decline path with a natural fall in population of nearly 800,000 in 2022 with minimal net immigration. The median age is 49 and the 0-14 year old share of the population is only 12%, which will create a very serious problem for any attempt to significantly increase the armed forces in future years. The outlook for Japan is at best stagnation while it manages its massive government debts and a rapidly declining population that threatens to significantly reduce both the working population and property prices.

A Win-Win Approach Can Deconstruct US Hegemony Peacefully

China does not need to win in any military sense, it simply needs to continue to develop good relations with other countries across the world; nations that it will increasingly trade with and invest in. It has shown great flexibility in responding to shifts in the international system, and we can see a focus more toward the Middle East and Africa as Europe is bullied into keeping its distance and South American governments change (e.g. Milei in Argentina).

Notwithstanding Filipino grandstanding, the “trade with and respect the sovereignty of” approach to foreign relations has paid dividends with respect to the ASEAN nations that represent the fastest growing economic region in the world. Countries that are neutral between China and the US. The same for Central Asia, and of course an Iran that China is increasingly integrating with. India with its 1.4 billion population is no real threat to China given its independent leanings and its utter inability to develop a real industrial policy that will lead to technological upgrading while providing meaningful work to its increasing legions of unemployed. India will certainly continue to not be the new China. The rise of Hindutva also risks increasing domestic polarization between Hindus and Moslems. China’s diplomatic successes in the Middle East, and the moving away of many African nations from Western domination also plays well into China’s strategy.

The neutrality of the ASEAN and Central Asian nations, together with the increasing integration with Russia and Iran (and possibly with North Korea facilitated by Russia), provides a safe EurAsian neighbourhood for China’s further development. This is then fruitfully extended across the Middle East and Africa. Europe, apart from Hungary and Slovakia, may be on the back burner until it establishes some level of strategic autonomy; that may have to wait for the inevitable Ukrainian collapse. Brazil and Mexico also offer continued opportunities.

We should expect China to be patient and flexible, given that it is winning, especially as long as the US is militarily tied up in Ukraine and the Middle East. China’s diplomacy with respect to the Palestinian issue shows this patience and careful balance, being seen as supportive of the Palestinian cause; with the Palestinian envoy to the UN calling China “a true friend ready to do everything they can to help the Palestinian people”. A position that plays well outside the Golden Billion of the West, and especially across the Muslim and African nations.

Political chaos in 2024 and 2025 may further disable any attempts by the US to reorient to face off with China. In reality, the US has few real options in facing off against China given its economy’s significant dependences upon Chinese imports and the lack of willing sacrificial lambs; even the Taiwanese are not ready to trip over the Chinese red line of declaring formal independence. As each day passes, the military and economic outcomes of a face off with China get worse for the US and better for China. That horse may have bolted sometime in the 2010s and it is far too late now to try to bolt the door. The onus is on the US to make the play, with the only true additional red lines being perhaps a full-scale NATO attack on Russia or Iran; both of which would be disastrous for the West. Other than that China’s approach is one of “steady as she goes” with small course corrections as required by changing circumstances, while maintaining professional and respectful relations with other nations.