Prof. Stephen Brooks, Ben Vagle ’22 Talk American, Chinese Economies

Since the launch of the Open Door Policy by Deng Xiaoping in 1978, China has been open to foreign investment and, as a consequence, has experienced unparalleled economic growth. Over the last 40 years, the country has lifted nearly 800 million people out of poverty and contributed close to three-quarters of the global poverty reduction during that timespan. China arguably leads the world in electric vehicles, renewable energies, and electric batteries, among others, and is having a major impact on every critical technology in the world today. 

Popular media often claim that China is catching up to the United States – or is even poised to surpass it – as the world’s preeminent economic superpower. Furthermore, the prevailing conventional wisdom dictates that in the case of a military conflict with China, Washington would not be able to undertake a broad economic cutoff without hurting itself just as much, or even more. But government professor Stephen Brooks and Ben Vagle ’22, a policy analyst at the Treasury Department, challenge these notions. In a talk held on April 4 titled “America’s Edge Over China,” the speakers painted a contrarian picture that argued that conventional wisdom is, in fact, wrong on all fronts.

In front of a packed audience at the Rockefeller Center, Vagle and Brooks contended that America’s economic power has been underestimated because conventional economic measures have ignored the United States’ unprecedented control over the world’s largest multinational corporations. The U.S. dominates the world economy in terms of taking in profits. Around 47% of world profits overall accrue to the United States. In high-technology industries, this number even reaches 55% of world profits, compared to China’s current share of 8%. This is a phenomenal statistic, and to a large extent due to the way Washington has structured globalization over the last decades to benefit itself. 

When looking at the profit shares of the world’s 2000 largest firms, the magnitude becomes even more clear. Of the 27 business sectors listed, the U.S. leads in 20 of them and leads by a lot. China, on the other hand, only leads in three: banking, materials, and construction, the latter of which has little geopolitical significance. Furthermore, most of the remaining world profits are accrued by nations allied with the U.S. in Europe and Asia. The bottom line is that the U.S. economic lead remains immense. The speakers contend that China has a long way to go before it becomes as economically powerful as the Soviet Union was vis-a-vis the United States at the height of the Cold War.

Simultaneously, China’s economic prowess has been dramatically overstated in a number of ways. A widespread contention among popular media is that China manipulates its economic data to its advantage. While this notion is generally accepted among Western economists, another reason lies in the challenge of measuring an economy that is as structurally distinct as China’s. According to the analysis of Brooks and Vagle, China’s official GDP figure overstates the economy’s true size by about one-third. 

Professor Brooks repeatedly stressed the argument that territorial output (i.e., that which is happening within a country) should not be the metric with which to gauge economic power. Instead, one should look at firms. When looking at what is made in China, that is indeed impressive. But when looking at what Chinese firms make in China, it is much less impressive. A good chunk of China’s high technology production and manufacturing is, in fact, owned and controlled by foreign firms. This means that such firms are also free to leave, which is especially crucial in a crisis. That is not to say that great Chinese firms don’t exist: the Huaweis, DJIs, and DeepSeeks of the world prove otherwise. The point is, however, that these companies aren’t representative of corporate China as a whole. For every brilliant Chinese firm, there is a vast amount of Chinese companies that are not globally competitive.

The Chinese state also plays a significant role in shaping this landscape, often by choosing which industries or companies to support. However, when the state intervenes to pick winners, it often does so with limited success. While some companies may thrive, more often than not government intervention leads to the backing of uncompetitive firms. There are far more Chinese companies struggling to survive than is often acknowledged by the media.

A very interesting graph presented the rise of China’s patent applications. Around 2010, the Chinese surpassed the U.S. in patent applications per year. As of 2021, their patent output was about three times that of the U.S. This has often been used as an argument in popular media that Chinese technology is rapidly developing and surpassing that of the West. But a look at the amount of money spent on patent royalties paints a vastly different picture: here, the U.S. leads the world by far, followed by Japan, Germany, and the United Kingdom. In other words, while China indeed files a lot of patents, these patents aren’t good enough to entice other firms to pay royalties for them.

China also faces a long series of difficult structural challenges. First, the country’s population is rapidly aging. Historically speaking, any country that has successfully transitioned from middle-income to high-income has done so with a younger population. In this sense, there has been no precedent. Second, China’s economy is structured in ways that will be very hard to change. It has about 40% of its GDP devoted to investment and has remained at this level consistently for the past 20 years, an unprecedented and unorthodox situation. This makes sense for low-income countries that want to grow: investing in education, hospitals and infrastructure is necessary (consider Japan during the 1970s). But China has continued to build and invest, which has been responsible for a huge chunk of its GDP growth in recent years. While these investments are counted as GDP, most of them are not needed and economically harmful.

All in all, the economic gap between China and the United States is still very large. So what would an economic cutoff look like? A unilateral peacetime decoupling would be unwise for a number of reasons. Not only would the U.S. incur substantial losses, but U.S. allies would likely be very unwilling to participate. More importantly, such a decoupling would rid the U.S. of one of its strongest deterrence tools while prompting China to lash out in unpredictable ways. 

However, doing nothing in the event of a confrontation over Taiwan would likewise be extremely costly. If China were to isolate Taiwan from the global economy, Vagle and Brooks estimate that the costs could rival those of a 50% trade cutoff with China. The only path to victory would be a joint decoupling of the U.S. and all its allies. In such an event, the losses China would incur would be five to seven times greater than those of the U.S. While the U.S. and most of its allies would return to their original growth trajectories in the long-term, China’s growth would suffer a permanent decline due to the removal of many foreign-based firms from China, directly or indirectly. They would, in essence, have no more nations to trade with. Such consequences could lead to regime-ending damage, but for this scenario to work, the U.S. must have allies in the first place. With trade policies of the current administration jeopardizing our longstanding partnerships, the result is a significant erosion of leverage.

Vagle and Brooks ended the talk with a list of recommendations to the United States government: Rapidly build stockpiles of raw materials, incentivize substitutes, and plan for industries that would be heavily impacted by a potential cutoff. In any scenario, political and economic cooperation with our allies in Europe and Asia would be essential. To summarize, the U.S. is not just ahead – it has designed the system it leads. The only real threat? Complacency and self-sabotage. For further references, their book Command of Commerce: America’s Enduring Economic Power Advantage over China is a highly recommended read. It is refreshing to see Dartmouth, both its professors and alumni, contributing to our understanding of the global challenges ahead, especially in a fair and mostly apolitical way.