Can China and the U.S. Escape the Thucydides Trap?

Abstract

When a rising China meets a ruling United States, how will the global competition pattern change? Can China and the United States escape the Thucydides Trap?Justin Yifu Lin thinks that China’s rise has been achieved in a peaceful way, unlike the “law-of-the-jungle” approach adopted by the West for its own development. It, therefore, provides a new possibility—that development can be achieved in a peaceful and mutually beneficial way. He also thinks that contrary to the “China threat theory,” China’s rise will help build a new, stable international landscape and environment in which all countries can develop together.

Justin Yifu Lin is the dean of the Institute of New Structural Economics, dean of the Institute of South-South Cooperation and Development, and professor and honorary dean of the National School of Development at Peking University. A former senior vice president and chief economist of the World Bank, he is also founding director of the China Center for Economic Research at Peking University, where he taught for 15 years. He is a state councilor, a senior position in the State Council, China’s cabinet and a member of the Standing Committee of the Chinese People’s Political Consultation Conference, the top body advising the government. Justin Yifu Lin is the author of more than 20 books.

Justin Yifu Lin

The gap between the Chinese economy and the U.S. economy narrowed down in 2020, as China’s GDP rose to about 70 percent of the United States’. Two decades ago, it was only about one-tenth of that.

The change indicates China’s rise. When a rising China meets a ruling United States, how will the global competition pattern change? Can China and the United States escape the Thucydides Trap?

Justin Yifu Lin thinks that China’s rise has been achieved in a peaceful way, unlike the “law-of-the-jungle” approach adopted by the West for its own development. It, therefore, provides a new possibility—that development can be achieved in a peaceful and mutually beneficial way.

He also thinks that contrary to the “China threat theory,” China’s rise will help build a new, stable international landscape and environment in which all countries can develop together. He is optimistic that China-U.S. relations will improve in 2050 and in this article he explains why.

The “Latecomer Advantage”

How long can it take for a country whose industries lagged in every respect to become the world’s second largest economy, the largest trader in goods and the biggest holder of foreign exchange reserves?

In China’s case, it took less than 40 years. In 2012, China’s total GDP at constant prices was 24.5 times higher than in 1978, and its share in the world economy increased from 1.8 percent to 11.5 percent. In the decade since then, China’s economy has continued to grow at a high rate.

How did China create such an economic miracle? What has it done right? It remains a riddle for economists.

Scholars say China’s sustained high economic growth defied the rules of Western economics. If evaluated with the Western criteria of development, such as the state should not have absolute power, the judiciary should be independent, and the property rights of individuals should be protected, China should not be among the top countries and yet it achieved this economic miracle. How did such a paradox happen?

According to Lin, Western economics is mostly a set of rules that the Western countries summarized from their own development experiences. However, it overlooks a key issue—that the opportunities and challenges that the developed West face are different from those encountered by the developing countries.

For example, Western countries emphasize market and property rights protection. The reason is that since the industrial revolution, they have been world leaders in technology and economic growth depends on technological innovation. To achieve technological innovation, they have promoted research and development for more inventions. The investment in research and development can be protected only if the inventions are protected.

While there is a technology gap between developing and developed countries, the former can access the mature technologies and industries of the latter. That also involves some technological innovation but the cost and risks are much less than if they had to invent these technologies themselves. In this way, they can achieve more rapid technological progress than progress in domestic inventions, and that’s the “latecomer advantage” of developing nations. The bottlenecks for invented technology and introduced technology differ greatly; therefore, the areas and ways in which the government and the market play a critical role are also bound to be different.

Traditionally, the Chinese have the mentality of “learning from the West,” thinking that they can learn from the Western experience and use it to build their country and make it prosperous and strong like the Western countries.

But after World War II, very few developing economies caught up with the developed countries. Mainstream Western theory thinks the successful developing countries or regions followed “incorrect” policies. However, the countries that did adopt the policies regarded as “correct” by the West turned out to be largely unsuccessful.

China’s Rise Not by Plunder or Hegemony

There are major differences between China’s rise and the West’s. China has followed its own path. Also, China’s influence has been achieved through its own sustained economic development and its mutually beneficial and globalized trade, not by plundering resources abroad.

Since the geographic discovery of far-flung countries and the industrial revolution, the growth of the developed nations can basically be characterized as following the “law of the jungle” and expanding colonies overseas. After the two world wars, they used their technological and military might for political hegemony and gaining or maintaining control over the rest of the world.

Traditional Chinese culture, on the other hand, advocates the philosophy that if you want to be successful, you should help others to be successful. There is a code of conduct for individuals: Cultivate your moral character, manage your family affairs well and serve your country. The government also has a goal: As the national economy grows and people have a good life, it also wants other countries to develop and their people to live a good life. Moreover, China advocates “living in harmony despite differences” and “seeking common ground while reserving differences,” espousing inclusive participation so that all countries can help one another and develop together.

Because of this huge gap in culture and other aspects, the Chinese and Western historical development trajectories differ greatly.

China’s development proves that there is another path to modernization, one that is different from the path taken by the developed nations. It also shows that a country’s rise can be achieved without following the law of the jungle that the Western world followed. It is possible to obtain an alternative path of development in a peaceful, mutually beneficial way and create a win–win situation.

Changes Unprecedented in a Century

In 2018, the Chinese leadership observed that “the world is undergoing profound changes not seen in a century.”

What triggered these changes? It is largely because of the rise of emerging market economies such as China, India and Brazil. Among them, China showed the most significant change. Based on market exchange rates, it surpassed Japan in 2010 to become the world’s second largest economy, and in 2014, it surpassed the United States to become the world’s largest economy in terms of purchasing power parity.

The eight countries that dominated the global economy and politics in the past century have lost their power of dominance. In 1900, the Eight-Power Alliance, consisting of Britain, the United States, France, Germany, Italy, Russia, Japan and Austria-Hungary, attacked China. At the time, these eight countries accounted for 50.4 percent of the global economy in terms of purchasing power parity.

Years later, the “core” eight-member-pattern changed with the collapse of the Austro-Hungarian Empire and Canada joining the Group of Eight (G8). In 2000, the G8 still accounted for 47 percent of the global economy in terms of purchasing power parity. In other words, over the span of a hundred years, the share of other countries in the global economy increased only by 3.4 percentage points.

This situation changed after 2000. And in 2018, when the concept of “changes not seen in a century” was introduced, the G8’s share in the global GDP in terms of purchasing power parity had fallen from 47 percent to 34.7 percent, losing its dominance.

China-U.S. Relations May Improve in 2050

China overtaking all but one economy is bound to drive changes in the international competition landscape. The U.S. has begun to feel increasingly overwhelmed by its own dominant position in the world. The Barack Obama administration proposed to return to the Asia-Pacific and deploy military forces in the Pacific. After Donald Trump took office, he launched a trade and technology war on China, creating more tension in China-U.S. relations.

How to address this problem? Development is key. China needs to focus on itself and continue to develop and provide development opportunities for other countries.

China had “two centenary goals.” The first was to eradicate absolute poverty and build a moderately prosperous society in all respects by 2021, the centenary of the Communist Party of China. With that achieved before the deadline, the remaining goal now is to build China into a modern socialist country that will be prosperous, strong, democratic, culturally advanced and harmonious by 2049, when the People’s Republic of China celebrates its centenary. By 2050, when China achieves its second centenary goal, the world may enter a new stable state if by then China’s per capita GDP becomes half of the United States’ while its total economy becomes double the United States’.

The U.S. has imposed science and technology bans and trade tariffs on China mainly because its level of technology is higher than China’s. However, by 2050, there will be other changes. It is estimated that Beijing, Tianjin and Shanghai as well as the five eastern coastal provinces of Shandong, Jiangsu, Zhejiang, Fujian and Guangdong will then have a combined population of 400 million. The population and GDP per capita of these areas will be at the same level as the United States’ if China’s overall GDP per capita reaches half of the United States’ by then. The population, income level and the industrial technology level of China’s most developed regions will be almost equal to the United States’. If that happens, the technological bottleneck that the U.S. has been imposing on China would be basically gone by then.

However, more than 50 percent of the Chinese population—or nearly 800 million people—live in central and western China, where the GDP per capita is about one-third of the United States’. These areas have potential for rapid development. By 2050, when China’s economy becomes twice the size of the United States’, it will still be developing faster because of these regions. In other words, the U.S. will no longer have a technological edge and would be incapable of changing the situation in which China’s economy is twice the size of its own, nor would it be able to ignore the opportunities for its own development that the Chinese market will offer. All these factors will create a foundation for peaceful cooperation and development.

If China concentrates on developing itself and utilizes its potential, it can have a better future and can lay the foundation for a new and stable global pattern. The rise of China will help build a new, stable international landscape where all countries can develop together.

Root Cause of America’s Problems: Silicon Valley and Wall Street

Is China’s development the root cause of America’s problems? Most developed countries are reluctant to admit that the causes of their problems lie in themselves. Instead, they blame others and look for scapegoats.

Since 2008, China has contributed over 30 percent of global economic growth every year. Western countries can also develop well if they can seize the opportunities in China.

For example, Germany, the most developed European country, has been called a “miracle.” American economist Michael Spencer, joint winner of the Nobel Prize in Economic Sciences in 2001, once said it was the rapid development of China that contributed to the German miracle after the 2008 crisis. China was undergoing industrial and technological upgrading and massively imported new technologies and equipment from Germany, helping Germany revive.

On the other hand, the situation in the United States is a study in sharp contrasts. The American middle-income group has shrunk, the income of general workers has not significantly increased, and the polarization in U.S. society has worsened. A lot of research shows this was caused by Wall Street and the Silicon Valley.

After the U.S. dollar’s direct convertibility to gold was terminated in 1971, the U.S. took advantage of the dollar’s status as the world’s reserve currency to advocate financial liberalization. This allowed Wall Street to enter developing countries and speculate for profit with the dollar’s status and U.S. capital accounts. The large sums of dollars that flowed into the stock markets and bond markets of the emerging economies and then quickly withdrew caused consequent financial instability in these countries. One study shows that in 2007, a handful of Wall Street companies controlled as much as 40 percent of the overall corporate profits in the United States.

Let’s now look at the role of the Silicon Valley. The United States is at the forefront of the global technology and continues to invent new technologies. The Silicon Valley, where most of the tech companies are located, enjoyed patent protection on new technologies, which enabled it to straddle the whole world as its market and derive an astronomically high income.

From the 1970s and the 1980s, those two have been the two major contributors to American growth. But they created only a limited number of jobs, which resulted in U.S. manufacturing hollowing out. Some of the industries that still remain in the United States are general services companies with very low value added. The service industry does create many jobs, but the income is very low, and the wealth stays in the pockets of a small number of people on Wall Street and in the Silicon Valley. That is the root cause of the United States’ domestic problems.

The United States’ wealth is unevenly distributed. So it needs to hike taxes. After taxation, the wealth brought by technological innovation or financial liberalization should be invested in improving infrastructure and education, so that more better-paid jobs can be created.

Unfortunately, that is not what Washington is doing. Instead, it’s attributing its domestic woes to China’s rapid development and globalization. It should look for the causes within itself and find solutions to benefit not just itself but other countries in the world as well.

(Interviewed by Pang Wuji)