The following is a review of Eclipse: Living in the Shadow of China’s Economic Dominance, by Arvind Subramanian.
Arvind Subramanian begins this compelling book with a provocative scene. It is February 2021. The newly elected U.S. president, accompanied at Chinese insistence by U.S. Congressional leaders, make a humiliating pilgrimage to the International Monetary Fund to secure a $3 trillion bailout. China, the world’s largest economy, dictates the terms. Among them is a naval pullback from the Pacific.
“This was blackmail….But we were in no position to argue,” Subramanian quotes a senior adviser as saying – in fact an adviser to Prime Minister Anthony Eden talking about the US role in the 1956 Suez crisis, but a crisis that is very much on Subramanian’s mind as he ponders the ascendancy of China. While Suez saw the UK give way to the US, Subramanian believes something similar could happen in the future between the US and China. The great strength of Subramanian’s book is that it is not based on a potboiler hypothesis but on a hard-headed reading of economic numbers.
It is a truism to say that the era of unchallenged U.S. global supremacy is over. Subramanian, senior fellow jointly at the Peterson Institute for International Economics and the Center for Global Development, marshals an impressive array of data to make a strong case that China’s economic dominance will occur far more quickly than imagined: “The shift away from the United States toward China is more imminent, more broad-based, and greater in magnitude than is currently anticipated or contemplated.” Subramanian contends that the economic dominance of China will encompass wealth, trade, external finance and currency – and will be as overpowering as that of Britain in its golden days of empire or the United States in the decades after World War II.
The debate about US supremacy, whether it is hard military power, soft power, or smart power, is, as Subramanian notes, an “overgrazed field,” with authors ranging from Henry Kissinger to Thomas Friedman recently weighing in. Subramanian’s contribution is to quantify economic dominance and to make some reasonable projections about the next 20 years.
This path-breaking book lays out in clear terms just how rapidly this transition is occurring and should be on a must-read list for anyone concerned with Sino-U.S. relations. Indeed, using purchasing-power parity numbers (which adjust for differing prices between China and the U.S. for the same work, whether it be by office clerks, waiters or farmers), China’s economy is already roughly the same size or a bit larger than the U.S.’s. By 2020 China will be substantially larger and by 2030 it will be game over as far as economic size.
Many U.S. thinkers, such as former Treasury Secretary (and Barack Obama’s one-time national economic adviser) Larry Summers, say that the worries are overdone, and that economic supremacy is America’s to lose. “We…have the most flexible, dynamic, entrepreneurial society the world has ever seen,” says Summers. “If we can make the right choices, our best days as competitors and prosperous citizens still lie ahead.” Subramanian rejects these claims of American exceptionalism and the book is an eloquent rebuke to the idea that the U.S. will continue to dominate the global economy.
Size matters, but it isn’t the only factor: Subramanian skilfully constructs a simple measure of economic dominance to underscore how fast and how much China has risen — and what the trajectory for the next two decades looks like. His goal is to quantify economic dominance, to track its history by looking back to the era of British and American supremacy, and to project trends over the next 20 years. He constructs a novel index of economic dominance looking at GDP, trade and currency dominance (as measured by net exports of capital).
Even using very optimistic growth figures for the U.S. (2.5 per cent annual per capita growth) and pessimistic numbers for China (5.5 per cent average per capita growth), the Chinese economy quickly becomes larger than the US economy. Indeed, Subramanian seems to use conservative projections not just for growth but for capital flows, potentially understating China’s current account surpluses, and thus the rise of the Renminbi as a reserve currency.
Partly, China’s growing economic size is what Subramanian calls the “revenge of the populous.” With four times the U.S. population, China can be poorer on a per capita basis yet have a larger economy. Late-developers like China and India have the advantage of being able to play catch-up. They can learn, and in a digital age they do learn with blistering speed, and thus show historically high rates of growth. By 2030, Subramanian estimates that the BIICs (Brazil, Indonesia, India and China) will have about the same weight in the world economy (39.6 per cent) as their share of world population (41.9 per cent) would suggest. This is the first time since 1500 that this will be the case. In fact, China would do better than average, with 23.5 per cent of the world economy and 17.8 per cent of the population.)
Central to Subramanian’s thesis is the role of the currency. Many small moves have been made to liberalize China’s currency, with some of the most significant announced in August 2011 during vice premier Li Keqiang’s (李克強) visit to Hong Kong. Given China’s economy, history would suggest that the Renminbi would become a global reserve currency in around 10 years. A variety of factors, including weak rule of law and the desire of China’s Communist Party to control the financial system (which would be dramatically weakened in the case of a convertible currency) may slow the dominance of the Renminbi. But if Subramanian is correct, the era of the Renminbi will arrive well before 2030.
Subramanian does note that China needs to undertake “far-reaching reforms of its financial sector and exchange rate policies. China will need to eliminate restrictions on foreigners’ access to the Renminbi for the entire range of financial and trade transactions and deepen its financial markets so that investors gain confidence in their liquidity and depth.” On a more fundamental level, China’s demographics start becoming far more challenging after about 2025. Demographics, along with the environment, arguably poses China’s starkest long-range challenge, but Subramanian avers that because his projections stop in 2030 he needn’t worry too much about this issue.
How should the US and the rest of the world react to China’s seemingly inevitable economic ascendancy? Subramanian contends that the best way of ensuring that a pax Sinica will be beneficial to the world order would be to bind China into world organizations. A revived multilateralism centred on the World Trade Organization (WTO) will go a long way toward ensuring that China is integrated into the world in the most constructive fashion. This is a promising idea, one that Subramanian could explore more fully.
Subramanian concedes that it is an open question as to whether a closed, authoritarian country can exercise economic dominance of the sort that the numbers suggest China will enjoy. Readers of this book will have to decide whether that is a likely scenario – or whether the demands of global economic leadership, and the imperatives of a fully convertible currency, will nudge China toward a broader opening.
Originally published in the Hong Kong Economic Journal. Can be accessed at forum.hkej.com/node/74972.