John Phipps: When China is #1

August 21, 2018 09:30 AM
 
US-China-Trade

In 1972, many of us oldsters got a rude awakening during the Olympic basketball competition when the US was handed its first defeat ever. The game was wildly controversial, allowing us all to dismiss the outcome as a nefarious fluke. However, it soon became apparent that even switching to professional players would not ensure American dominance of the sport. The disappointing outcome in 2004 left no doubt the days of an automatic Gold Medal were over.

As farmers and other businesses fixate on the real and potential additional loss of Chinese market share, they tend to gloss over one more interesting economic fact of life: China will soon—perhaps within a decade—almost certainly become the largest economy in the world by every measure. (Try this great interactive tool for forecasting this event.)

Indeed, using the metric I consider the most accurate for comparison—purchasing power parity (PPP)China passed the US in about 2013.

China Purchasing Power Parity

PPP is perhaps best explained as adjusting economic statistics not just for currency values but for the actual bang for the buck, or yuan. The best example is the famous (in economic circles) Big Max Index. If we set the price of a fixed, international product in the US at 1, then the cost in other countries will calculate a purchasing power comparison. For instance, a Big Mac costs $6.57 in Switzerland and $1.75 in Egypt. This reality is well known to retirees who live in Central America in the winter and then yammer on to their longsuffering neighbors all summer about how cheap it is to live there.

What does it mean for Americans and farmers in particular? I would suggest less and more than we think. Just like the 1980 Olympic shock, no longer being number one fades fairly rapidly. Although I still have memories of the disbelief and outrage, the impact on my life was miniscule. I did notice that Olympic basketball became and remains a lot more exciting. The initial effects of being the #2 Economy may be psychologically greater, but after ranting about End Times, American Decay, and Foreign Peril, some shiny object on a Twitter feed will move us past it.

For those who scoff that economics is not everything, Exhibit B would be research. China now publishes more scientific papers than the US, will soon spend more GDP on research, and is overtaking the US rapidly in biotech and space.

For soybean growers of sufficient age, similar memories of Brazilian output are now tender to the touch. While the US will top the production competition this year, it’s almost a dead heat these days. A couple of railroads and a port or two could unleash even more acres there to make another USA #2 statistic.

A bigger risk could be resorting to another arena to reclaim the upper hand. Our enormous expenditures and military infrastructure can keep us chanting “We’re #1!” for some time.

U.S. Defense Budget

The slight problem here is we not only have to fund this enormous cost, but we’re finding it hard to use this overwhelming power to gain any geopolitical advantages. After 17 years and over $1 trillion we have almost nothing to show in Afghanistan, for instance. Moreover, the idea of saber-rattling a country like China dismays the most ardent militarist. We can’t decisively win a land war against small guerilla armies, and we’re going to take the fight to 1.4 billion citizens? In addition, leveling Beijing won’t help our soybean surplus.

Of course we can always point to our massive nuclear stockpile, and even with the current president’s curiosity regarding why we don’t use them, it’s hard to game that to any acceptable outcome. Nukes feel like hammers, but they are actually deadweight.

Perhaps the greatest risk is loss of belief in the US dollar as the world reserve currency. Should Brexit falter and the EU remain essentially whole, there will be three roughly co-equal economic behemoths, with Japan and others a formidable second-tier. Investors could fall out of love with T-bills or at least, date other partners. Funding skyrocketing deficits may be more expensive, adding higher interest costs to lost market share as farmer problems.

When China is the world’s largest economy, the consequences for Americans will be real but simply a point on a longer arc. Our falling share of the global economy promises, among other things, even less leverage in trade talks, which is already becoming apparent.

U.S. Share of Global GDP

More importantly, our political lifecycle has devolved to just two years, while China has removed leadership term limits, allowing them to plan and execute over decades. Negotiations between a mayfly and an elephant do not favor the mayfly.

America’s relationship with China will also set patterns for other fast-growing nations like India or Indonesia. Despite the current belief in trade bilateralism, nations constantly compare deals, and none wishes to have a lesser one. Institutions like the WTO were laboriously, albeit imperfectly built to address this desire for equal treatment. As the US withdraws from broad agreements we will increasingly be dealing with different countries in different ways, meaning exporters will have to make and ship products to unique to each country, or more likely, end up agreeing to match standards and prices negotiated in existing broader trade agreements. This was the advantage we had built into the now-abandoned TPP to nudge China closer to acceptable standards and which will now exert leverage on America.

A world without American economic dominance will reshape our self-image as well. Not among those of us who remember the days when we were 40% of the global economy, but for generations that follow. Normal will be a world with players of similar heft and influence, whose good favor we cultivate rather than command.

Our country is young, and our citizenry largely disinterested in history, so the examples of the past faded hegemony may need to be rediscovered. Spain, England, and Italy (Rome) have all endured eclipsed power, and yet remain viable economies and cultures. When we’re No. 2, we will be the same United States we were before, only more aware of the limits of our abilities and power.

John Phipps, a farmer from Chrisman, Ill., is the on-farm “U.S. Farm Report” commentator and writes a column for Farm Journal. Contact him at johnwphipps@gmail.com

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Comments

 
Spell Check

Chuck Estons
Mankato, MN
8/26/2018 07:21 AM
 

  Unbelievable. This "article" is unadulterated Corporatist propaganda bought and paid for by China and Democrat/Socialist Leftists. China is communist evil. It's that simple you bloated dullards. American farmer; do you now see what your 75 year love affair with government subsidies and big Ag has wrought? I will work overtime in my community to destroy the carefully cultivate myth that our farmers are the guardians and purveyors of traditional America. The vast majority of you are corporate swine who deserve the economic hardships our long overdue and much needed tariffs will impart on your tax-payer-bought prairie mansions. OUTRAGEOUS!

 
 
PJ Jahn
Ptown, IL
8/20/2018 08:12 AM
 

  Very good article John! You put these important points forth in terms easily understood. How ever, I fear only a small portion of U.S. farmers have gave any of these any thought what so ever. I am hopeful U.S. farmers will read, and heed these facts. As it will effect the U.S. farmers a great deal in the very near future. We may have already started down this path, or at least pushed forward it starting with the trade issues we have going on now.

 
 
Adam Lasch
Lake Geneva, WI
8/27/2018 07:40 PM
 

  Oh John, John, John. I am sorry, but none of your predictions are going to come to fruition. I urge you to look up the Bretton Woods Conference during WWII. It was a meeting of the 44 allied countries and how they planned to set up trade and geopolitics after the axis powers were defeated. Basically, the USA was the only country with an industrial infrastructure and economy undamaged by the war. As such, the US was the only country with any kind of consumer market left of any size. In order to help fight the cold war we used access to the US consumer market as a bargaining chip to help rebuild Europe and the Pacific rim countries so they wouldn't fall to the Soviets. We agreed to open up our markets, and ensured free trade to any country using our Navy as the primary way to protect shipping routes. That is why our defense spending dwarfs all other countries. It has worked spectacularly well for the other countries for the last 70 years. We fight everybody else's battles in order to keep markets open and the global energy markets reasonably stable. The Bretton Woods era is over. The Soviets were defeated. We no longer need to import energy and as such no longer have a great need to protect the system we created. I highly suggest you real a book called "The Accidental Superpower" by Peter Ziehan. It dives into how the earth's geography has shaped the world we live in with a healthy dose of demographic analysis to clear away the clutter. China is not the threat every thinks. They need the US far more than the US needs them. Every country on earth needs access to the largest consumer market to have any chance at meaningful growth. China's demographic abnormalities (one child policy) have crippled them far more than anyone realizes.

 
 

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