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The rise of China

China's global manufacturing dominance has made it the target of US sancstions.

It is becoming increasingly evident that China is replacing the rapidly weakening US economy as the engine of the global economy. To understand this, it is necessary to analyse what drives global GDP and China’s role in this process. Moreover, the shift of power from the US to China should ultimately be understood in the context of the long business cycle, which, as it approaches a new bottom, provides an opportunity for the emergence of a new global power.

China in the global economy

From the first figure below it may be seen that the driver of global GDP is global manufacturing. This in turn means that the country that dominates global manufacturing production can be argued to drive the global economy.

Until recently it can be seen from the second figure below that this mantle was shared by the US and Europe. However, it can be seen from the same figure that since 2010 China has assumed this mantle, with current projections suggesting that by 2020 it will likely account for as much global manufacturing output as the US and the Euro Area combined.

More than just t-shirts

China began its advance with the production of low value-added manufactured goods like garments and components of electronics, subsequently working its way up the ladder. Now it has shifted the gear and is producing high-value manufactured goods as well as globally successful branded technology.

One manifestation of this shift has been China’s increasing dominance of high value-added industry exports. The figure below provides an indication of this increasing dominance in certain key industries over the last 10 years.

While Huawei, which now dominates global smartphone sales, has become famous as a symbol of China’s success in the high-tech market, the figures show that China is strengthening its presence in many other high value-added manufactures as well. For example, it performs stronger in the global electric car market than both the US and Europe and globally leads in clean energy investment.

The rise of corporate China became extremely apparent in 2018, when, for the first time in history, China had more companies listed on the Fortune 500 than the US.

As the largest manufacturer in the world, China has naturally come to dominate the global market for raw materials. One of the implications of this is that whatever happens to the Chinese economy will directly affect raw material suppliers, many of them poor developing countries.

From the global workshop to the global market place

As China has come to dominate global manufacturing, the size of its middle class has exploded. This middle class is currently estimated to number some 500 million persons, putting the Chinese retail market on a par, or even larger, than that of the US (see figure below).

Given that the Chinese economy is expected to continue outperforming the US economy in the coming years, the size of its retail market is correspondingly expected to outpace that of the US and other developed market economies, permitting China to have the sort of protectionist power that the US currently possesses, should it choose to use it.

Indeed, the current trade war between the US and China has prompted concern among many US companies that they might be pushed out of the lucrative Chinese market. Even prior to the trade war foreign companies had cause for concern as Chinese companies were quickly establishing dominance in several key areas of their domestic market such as smartphones and automobiles.

Putting the US-China trade war into context

There can be little doubt that the trade war between the US and China is an attempt by the US to prevent the inevitable; the transfer of global economic leadership to the Chinese. It is not a coincidence that this situation bears a close resemblance to when the US took over from the UK as the dominant economic power at the beginning of the 20th century.

Similar to the present situation, the long business cycle was then approaching its bottom, allowing for the emergence of a new dominant force. The US sealed this transition when it established control over the emerging technologies of that time, which would ultimately propel the next upward phase of the long cycle.

China is arguably now at the forefront of developing and implementing emerging new fundamental technologies such as 5G, high-speed rail, and robotics, which are likely to play a vital role in the global economy over the next few decades.

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