Will China Replace the USA as the World’s Leading Power

1 Introduction: Size, Growth, and War Potential

Hegemonic powers need strong armed forces as well as strong economies. Concerning military power, there are three nations which are much stronger than anyone else: USA, Russia and China. But Russia’s economic achievements are mediocre. Russia is not rich, its economic size is only about one tenth of America’s or China’s. It is debatable whether the American economy or the Chinese economy is bigger (Beckley 2018). If one accepts current exchange rates as they are, then the American economy is about 30 % bigger than the Chinese economy. If one considers purchase power parities, then the Chinese economy has surpassed the American economy by size a decade ago and is about 25 % bigger by now. Moreover, China is a more important trading partner for more nations than America is. Since China’s population is more than four times as large as America’s, approximately equal size of their economies implies Chinese living standards much below America’s.

As a Leninist autocracy China finds it much easier than democratic America to turn economic size into military power. In the past, the Chinese were cautious enough not to overinvest in military might and thereby to provoke hostility to the rise of China, but this seems to change (Doshi 2021). Their investment in missiles and bombs suggests that they are no longer satisfied with a minimal deterrence posture against the United States, but want to achieve something like parity and ‘mutual assured destruction’ against the USA, and by implication against Russia, too. The Chinese war fleet is already larger than the American fleet. Since the Taiwan Strait is the most likely location where American and Chinese forces might fight each other, it is noteworthy that American evaluations of what might happen there in case of a military confrontation have become ever more pessimistic.

In the long run military dominance or the war potential of nations depends very much on economic capabilities. Growth rates of America and China in the last 50 years suggest that China can grow three times faster than America. After Deng Xiaoping’s reforms, China’s economy expanded by a factor of 40 in approximately as many years (Weede 2022). Of course, the USA could not compete with that for the simple reason that it was already rich and the leading economy of the world. China, however, could exploit the advantages of backwardness. It could borrow principles of organization and technologies from more advanced economies, send students to Western universities, and sell its products to rich Western customers. Chinese growth depended on and exploited the economic freedom of the West which was a prerequisite of the West outgrowing other civilizations. Although the advantages of backwardness are diminishing with Chinese progress, they should still permit China to grow much more rapidly than the USA.

Chinese growth rates were driven by high savings rates and a lot of investment. Investment ultimately had to face sharply diminishing returns. It has already happened in real estate as well as in infrastructure. These sectors employ about 20 % of Chinese workers. It will not be easy to employ most of them profitably elsewhere. China finds it hard to expand consumption because a rudimentary welfare state forces the population to save for an uncertain future. Employing even more workers in export-oriented industries will be difficult as well, because Chinese manufacturing already has a dominant position in the global economy.

But the past engine of Chinese outperformance points to two reasons why the country might do worse in future than in the past. First, exploiting the advantages of backwardness presupposes some minimum degree of economic freedom at home. Under Mao Zedong and central planning, China could not do it. After the ‘great leap forward’ and an almost perfect abolition of economic freedom, more than 40 million Chinese had starved to death in the early 1960s. Under Xi Jinping, the communist preference for political guidance instead of the creative destruction of the market has reasserted itself. Respecting private property rights of entrepreneurs and shareholders in the means of production is not the natural inclination of communist cadres. After Deng’s reforms, however, local cadres competed against each other for advancement by promoting their local economies. In order to promote their career prospects cadres had to act, as if they wanted to respect private property rights. Thus, central planning was overcome by competition at lower levels of government and administration. More decentralized decision-making made it possible to exploit much of the knowledge scattered across millions of heads. Recentralization of decision-making, purge-generated hesitation of local cadres to assume responsibility and intermittent subjugation of successful entrepreneurs might reduce Chinese growth rates in future.

2 Tariffs, Economic Sanctions and Allies

Second, the Chinese export-oriented manufacturing economy might be vulnerable to foreign tariffs and other forms of economic warfare. Certainly, tariffs hurt both sides. Moreover, it is unlikely that many Americans want jobs in low-end manufacturing which Chinese still accept. As far as consumer welfare is concerned, trade wars are a negative sum game without winners. If the purpose of economic warfare, however, is to do better than your rival, to score relative gains or even to suffer less than your opponent does, then consumer welfare no longer matters. It remains to be seen whether China as the leading exporter of the world or America as the leading importer suffers more from economic warfare. Trump seems to believe that it is easy to win trade wars. America’s strength derives from its voracious demand for imports as well as its hegemonic position in global finance. After years of slow decoupling, America only absorbs about 15 per cent of Chinese direct exports and in recent months even less than that. Decoupling from a hostile America is compatible with Xi Jinping’s twin goals of independence from foreign inputs combined with a strong position in global markets and dependence of foreigners on China. China’s strength derives from its control of the production and refinement of rare earth minerals as well as its general manufacturing prowess. Mineral exploration and extraction often is a dirty business which rich countries like to delegate to poor nations. Currently, some rare earth production has moved from China to Myanmar, but it remains under Chinese control. Trump does not care if Western efforts to arrest climate change suffer from a lack of rare earths because of Chinese export controls. But the West and America itself require hardly replaceable rare earths for semiconductors, fighter aircraft, or submarines, too.

Moreover, China’s share in global manufacturing is about 30 per cent and twice as big as the American share. In chemical industries China’s share is about half of global production. In ship-building the Chinese position is even stronger and the American position is vanishingly small. If current trends continue, the gap will grow. Possibly, a dominant position in rare earth mineral production and refinement as well as in manufacturing supply chains is even more valuable in conflict than being a huge source of global demand and controlling global financial flows. China’s economic structure seems to be associated with a better war potential than America’s. China does not meekly submit to dollar dominance. Instead it establishes yuan-based payment systems and diversifies its reserves, for example by shifting from US treasuries to gold. So far, de-dollarization is a slow process, but China works at it. Trump’s focus on the reindustrialization of America implicitly admits that the Chinese position is quite strong and the American position comparatively weak.

It is not clear whether Trump’s economic war strategy is consistent or self-contradictory. On the one hand, he seems to enjoy the strong position of the dollar as the leading means of payment and store of value for central bank reserves. This role of the dollar permits America to impose strong sanctions on other countries. Dominant currency status, however, seems to be correlated with an overvalued dollar which reduces the competitiveness of American industries on global markets. It is not easy to determine the fair value of currencies. But it is at least plausible that some European or East Asian currencies have sometimes been undervalued and thereby contributed to the deindustrialization of America. Simultaneously, a strong dollar has made it easier for America to finance its current account deficit as well as the government deficit which recently tends to be in the order of magnitude of six or seven percent of GDP. Trump has no credible plan to reduce the American mountain of government debt.

Although bystanders and smaller economies will suffer more than the giant contenders from trade wars and rolling back globalization, together the actions of the rest of the world might decide the contest of the giants. Having lots of economically advanced allies in Europe and Asia, the USA should be able to easily isolate China economically, but Trump’s tariffs against friends and enemies alike are apt to throw away this advantage. You do not win friends or allies by a ‘sticks only, no carrots’-strategy. According to scenarios suggested by Brooks and Vagle (2025), the Chinese economy is much more vulnerable to decoupling than the American economy, if but only if American allies cooperate. Since American allies like Germany, Japan or South Korea would suffer much higher losses because of decoupling than the United States itself, inducing cooperation requires American leadership skills and some readiness to compensate allies. Under Trump, these skills as well as the readiness for compensation might be lacking.

3 Conclusion: Challenges to Both Rivals

Who wins the race for growth depends on who avoids the worst mistakes. In China’s case the worst risk is underrating the importance of economic freedom at home. In America’s case the worst risk is loosing allies by a protectionist turn and a mindless flight from free trade and globalization. Of course, restrictions of economic freedom are not the only problems which the giants contending for supremacy face. China will suffer the consequences of the last ‘success’ of planning, i.e. its one child policy which was abandoned much too late and only once the Chinese people had overcome their traditional preference for lots of children. China becomes grey, before it can become rich. Although the United States also suffers from a lack of fertility, the problem is not as bad as it is in China. Moreover, as a rich economy America can easily attract qualified immigrants and thereby expand its human capital. Both countries, America and China, suffer from unsustainable government finances. The path back to fiscal rectitude will be difficult in both countries. The United States suffers from a lack of elite willingness to handle the problem, whereas China obfuscates the problem by pushing it downwards to lower levels of government and their finance vehicles.

Both must share an interest in avoiding the escalation of their rivalry to nuclear war. Having discarded the hope for a capitalist or commercial peace (Weede 2018), they are both condemned to survive under the shadow of mutual assured destruction. The pacifying impact of trade rests on the expectation that trade, or access to resources and markets, will continue. It requires a new look at economic sanctions and tariffs. By interfering with trade, Western sanctions against Russia after its aggression against the Ukraine and Trumps volatile trade war against almost everyone must undermine the expectation of future benefits of trade and globally interconnected markets. Given the rareness of evidence in favor of the effectiveness of economic sanctions in eliminating undesirable policies of other nations, least of all against great powers, a capitalist peace perspective implies the recommendation to use tariffs as well as sanctions much less frequently than politicians in America and China do. They are likely to eliminate a pacifying factor where it is most urgently needed, in the Sino-American rivalry.

The wider or visionary perspective of the capitalist peace is useful not only in connecting it with the issue of sanctions, but also in demonstrating the inherent limitations of capitalism as a tool to achieve peace. From a static perspective, capitalism, economic freedom, or trade may exert some pacifying impact, as argued above. But capitalism is a dynamic economic order. It is about ‘creative destruction’. Capitalism is not egalitarian. Like enterprises, nations grow at different speeds. They rise and decline. Capitalism and unequal economic growth rates upset global pecking orders and contribute to power transitions which are related to risks of war, especially great power war. Whether the contribution of capitalism to power transitions or its pacifying impact prevails, cannot be judged with much confidence.