Why China will not buy the world
By Martin Wolf
July 9, 2013 7:26 pm
The Chinese economy is marked by its dependence on others
China frightens the west. Rarely, however, do westerners look at how the world looks to China. Yes, it has made enormous economic strides. But it still sees a world economy dominated by developed economies.
Among the few westerners able to look at the world from the Chinese point of view is Peter Nolan, professor of Chinese development at Cambridge university. In a thought-provoking book published last year, he addressed one of the big fears about China – that it is buying the world. His answer is no: we are inside China but China is not inside us.
To understand what Prof Nolan means by this, one must understand his view of what has happened during three decades of technology-driven global economic integration.
The world economy has been transformed, he argues, by the emergence, through mergers, acquisition and foreign direct investment, of a limited number of dominant businesses, almost entirely rooted in advanced countries.
At the heart of the new global economy are what Prof Nolan calls “systems integrator” companies – businesses with dominant brands and superior technologies, which are at the apex of value chains that serve the global middle classes. These global businesses, in turn, exert enormous pressure on their supply chains, creating ever-rising consolidation there, as well.
Using data from 2006-09, Prof Nolan concludes that the number of globally dominant businesses in the manufacture of large commercial aircraft and carbonated drinks was two; of mobile telecommunications infrastructure and smart phones, just three; of beer, elevators, heavy-duty trucks and personal computers, four; of digital cameras, six; and of motor vehicles and pharmaceuticals, 10. In these cases, dominant businesses supplied between half and all of the world market. Similar degrees of concentration have emerged, after consolidation, in many industries.
Much the same concentration can be seen among component suppliers. Look at aircraft. The world has three dominant suppliers of engines, two of brakes, three of tyres, two of seats, one supplier of lavatory systems and one of wiring. In the motor industries, as well as information technology, beverages and many others, the world has just a few dominant suppliers of the essential components.
We can now see the organisation of global production and distribution under the aegis of the integrator company. Such a business “typically possesses some combination of a number of key attributes, among them the capability to raise finance for large new projects and the resources necessary to fund a high level of research and development spending to sustain technological leadership, to develop a global brand, to invest in state-of-the-art information technology and to attract the best human resources”.
Moreover, “one hundred giant firms, all from the high-income countries, account for over three-fifths of the total R&D expenditure among the world’s top 1,400 companies. They are the foundation of the world’s technical progress in the era of capitalist globalisation”.
These companies have invested hugely across borders, not least in China. In the process, they are losing national characteristics and loyalties. This creates growing tension, as governments find “their” companies ever harder to tax or regulate. Nevertheless, the companies still retain national characteristics and remain rooted in national cultures.
How does China fit into this new world? It is a huge development success. But it has built that success on its willingness and ability to offer its workers and markets to the world’s producers. So in 2007-09, foreign-invested companies were responsible for 28 per cent of China’s industrial value-added; 66 per cent of its output from high-technology industries; 55 per cent of its exports; and 90 per cent of its exports of new and high-technology products.
Thus, the country is a crucial contributor to systems managed by foreigners. If the citizens and governments of advanced countries look askance at these global companies, how much more so must the Chinese?
China is not buying the world. Between 1990 and 2012, the global stock of outward FDI soared from $2.1tn to $23.6tn. High-income countries still accounted for 79 per cent of this in the latter year.
In 2012, the outward stock of US investment was $5.2tn, while that of the UK was $1.8tn, against $509bn from China. China’s net stock (the difference between its inward and outward stocks) was hugely negative, at minus $324bn. In 2009, 68 per cent of its outward investment was supposedly in Hong Kong. (See charts.)
As Prof Nolan notes: “Chinese firms have been conspicuously absent from major international mergers and acquisitions.” In view of its lack of natural resources, China is investing abroad in this sector. But, even here, the scale of its foreign investments are dwarfed by those of dominant foreign companies.
What does this analysis suggest? The most important implication is that China has barely developed any globally significant companies. Moreover, such is the lead of the advanced countries’ incumbents that it is going to find it extremely hard to do so. From the Chinese perspective, therefore, the striking feature of their economy remains its dependence on the knowhow of others.
This explains China’s desperate efforts to obtain that knowledge. A further implication is that China is very far indeed from “buying up the world”. The paranoia about its impact is unwarranted.
A deeper question is whether, in a world of ever more global companies, it makes sense to worry that companies are not “yours”. I suspect the answer is: yes. China is right to worry about this. Companies still have national attachments that shape how they behave and, in particular, their role in developing a particular country’s competences.
But, for a nation as vast as China, this may matter less than for most others. In the end, almost all global companies are likely to find themselves enveloped by China: it will be too central to their activities for them to escape its demands.
If that happens, it will be because of a natural process of integration. For the future of the world economy and indeed the world, the further development of such deep global entanglements is desirable. We should keep calm and just carry on.
October 6th, 2013
by Dr. Sawraj Singh
One of the characteristics of western capitalism is that it always passes through sinusoidal cycles of recessions, depressions, and recoveries. Therefore, many people think that the present crisis of western capitalism is just another temporary phenomenon. However, the present crisis is different. In all likelihood, the West will not fully recover from this and when this crisis resolves, there will be fundamental changes in the world. A new world order will emerge in which there is no western domination or American hegemony.
It’s been a banner month for the oracles of American decline. The shutdown of the federal government, the prospect of a default on the country’s debt, and the political dysfunction that made the United States seem rudderless on Syria and forced the cancellation of President Obama’s trip to Asia seemed to confirm that the end of American preeminence is finally upon us.
Council on Foreign Relations President Richard Haass argued that Washington was “hastening the emergence of a post-American world.” The Guardian’s Timothy Garton Ash wrote that “the erosion of American power is happening faster than most of us predicted — while the politicians in Washington behave like rutting stags with locked antlers.” And the financial Web site MarketWatch declared: “This is what decline of a superpower looks like.”
The idea that such a moment was coming has dominated U.S. foreign policy circles since the late 2000s. The declinists warn that in light of American difficulties at home and abroad, and the rapid rise of new powers such as Brazil, India and China, we should prepare for a global order no longer dominated by the United States. Some argue that the United States should retrench and do less. Others that it should share the burden of leadership with the emerging titans.
But predicting the decline of the United States has always been risky business. In the 1970s and late 1980s, expectations of waning power were followed by periods of geopolitical resurgence.
There’s every reason to believe that cycle is recurring today. Despite gridlock in Washington, America is recovering from the financial crisis and combining enduring strengths with new sources of influence, including energy. Meanwhile, emerging powers are running into troubles of their own. Taken together, these developments are ushering in a new era of American strategic advantage.
Emerging economies were the darlings of the past decade, growing at an average of roughly 7 percent annually between 2003 and 2012. By some calculations, China was poised to surpass the United States in GDP by 2016.
Today, the picture couldn’t look more different. Brazil’s growth rate has fallen from more than 7 percent in 2010 to just under 1 percent. Likewise, Indian growth tumbled to about 3 percent in 2012, down from double digits as recently as two years earlier. Perhaps most pronounced, China’s government is revising down its official growth targets. Analysts are no longer asking whether there will be a Chinese economic slowdown but rather how hard the landing will be.
Morgan Stanley has identified five particularly fragile emerging-market currencies: Brazil’s real, India’s rupee, Indonesia’s rupiah, South Africa’s rand and Turkey’s lira. Those countries are vulnerable to high inflation, large deficits, low growth and a downturn in China. And they may soon face problems in international financing.
The political systems in emerging powers are fraying, too. There have been huge protests in Brazilover wasteful government spending and inadequate social programs. Russia looks more authoritarian by the day. And the Chinese Communist Party is stepping up efforts to crack down on journalists, academics and bloggers in what seems to be an attempt to control the discontent that accompanies slower growth and painful economic reforms.
These “rising powers” are hardly faring better collectively. The international institutions they established — BRICS, the Shanghai Cooperation Organization and IBSA — continue to disappoint.
At the same time, the United States is experiencing a turnaround of fortunes. The unemployment rate has fallen to just over 7 percent from an October 2009 peak of 10 percent. By contrast, euro-zone unemployment remains stuck at around 12 percent.
The U.S. fiscal picture is also looking up. The nonpartisan Congressional Budget Office estimates that the annual budget deficit will drop below $650 billion in 2013, the smallest shortfall since 2008 and approximately half the size it was in 2011. Meanwhile, the dollar remains the world’s top reserve currency.
Even more transformative, the United States is experiencing an energy revolution that the McKinsey Global Institute estimates could add as much as 4 percent to annual GDP and create up to 1.7 million new jobs by 2020. America is poised to overtake Russia as the world’s largest producer of oil and natural gas, and there are signs that low-cost and abundant energy is driving a revival of the U.S. manufacturing industry. Although the United States will have an enduring interest in stable global energy prices, it will no longer rely on direct and uncertain access to Middle Eastern oil, in sharp contrast to energy-starved countries in Asia.
In terms of hard power, the U.S. military is at the forefront of next-generation technologies, including unmanned systems, robotics and lasers. Even more superior than its hardware is its software: the command and control systems to conduct highly advanced joint operations and major wars.
The United States also remains the linchpin of the international community. Through hard-nosed diplomacy, economic pressure and the specter of military action, Washington has retained its ability to marshal effective multinational coalitions, bringing down Libya’s Moammar Gaddafi, getting weapons inspectors on the ground in Syria and embarking on serious negotiations to curb Iran’s nuclear weapons program. You can quibble with process and style, but it’s hard to argue that any of these would have happened without the United States.
More broadly, and most important, the United States is blessed with a superior combination of sound fundamentals in demography, geography, higher education and innovation. That ensures it has the people, ideas and security to thrive at home and on the world stage. There’s a reason elites around the world remain eager to send their fortunes, and often their families, to the United States.
Of course, the economic recovery is incomplete, and much remains to be done on the debt and growth, but as Australian Foreign Minister Bob Carr aptly noted in July 2012, “America is just one budget deal away from ending all talk of America being in decline.” Easier said than done, but still easier to address than the mammoth challenges facing the emerging powers.
As partisan as Washington is today, the United States has overcome episodes of far greater social discord and political turmoil. The recent souring of public opinion on the obstructionists in Congress is a healthy reminder of America’s propensity for political renewal.
In this dawning era of strategic advantage, the United States will confront foreign policy challenges largely associated with weakness and instability abroad. Washington will wrestle with the consequences of a fragile China and its implications for the economics and politics of East Asia. The Middle East will continue its painful and bloody revolution. And Europe appears increasingly unable to move beyond protracted stagnation, eroding its ability to play a constructive role in world affairs.
But being lonely at the top will also engender huge opportunities to build the kind of liberal order that the United States failed to consolidate in the 1990s. Rather than simply reengineering the existing system, this will require U.S. leadership to build international norms, rules and institutions from the ground up. Washington will have new leverage to renegotiate its relationships and engagements with the Middle East; the success of U.S. sanctions on Iran is only the first manifestation of America as an energy powerhouse.
The United States can also lead in knitting together historic trade pacts across the Pacific and Atlantic oceans, reenergizing a first-rate global trade agenda long sabotaged by protectionism and low standards. And Washington can use its newfound strength to exercise restraint and develop international rules around emerging security issues such as drone warfare and offensive cyber-capabilities. All of this will contribute to a more prosperous and secure United States.
The principal risk to these efforts is that Americans could choose to wall themselves off from the world after a difficult decade. According to a survey by the Chicago Council on Global Affairs, 38 percent of Americans want to stay out of world affairs, the highest share since 1947, and the figure rises to a majority among young Americans who came of age during the Iraq and Afghanistan wars.
But retrenchment would be a huge mistake. America’s domestic revival provides all the necessary tools to facilitate American leadership abroad. Being humble about the United States’ ability to shape foreign societies, particularly through military means, is no excuse for a lack of ambition to continue advancing U.S. interests and universal values overseas.
Rather than bracing for American decline, Washington should prepare to lead the world anew.
"Consequences of U.S. Decline"
Book Review: 'The Myth of America's Decline,' by Josef Joffe
After the 1957 Sputnik launch, one Nobel Prize winner predicated that the Soviet Union's economy would overtake America's by 1984.