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Goal is to close gap in relative prosperity

By Michael Dunford | China Daily Global | Updated: 2024-05-28 09:11
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According to the International Monetary Fund, the per capita income of the United States at present is 6.5 times higher than that of China in nominal terms and 3.4 times higher in Purchasing Power Parity terms or after correcting for differences in the cost of living. The goal of China and the Chinese people is to close that gap in relative prosperity (in average real income per head) so that the Chinese people are able to realize their aspirations for a better life.

Yet in recent years the US has repeatedly expressed concern about the growth of the Chinese economy and has sought to curb China's progress in multiple ways. In 2018 the US started a trade war imposing high tariffs on Chinese imports. In 2019 it embarked on a technology war — often 'justified' in security terms — to curb the development of Chinese science and technology, placing some 150 Chinese companies on a sanctioned entity list and seeking to force the sale of Chinese technologies to US interests. The US banned Huawei from its networks and pressured other countries to do the same. Companies were banned from supplying software and components to Huawei and other Chinese companies. Just recently, in the light of the remarkable recovery of Huawei, the US revoked export licenses for several US semiconductor firms supplying Huawei.

Recently it has offered 'economic advice' and made 'economic demands' that China curb its production capabilities on the grounds that it is engaged in overproduction, which, if China complied, would actually stall its economic and social progress, amounting to economic suicide.

The US has a past record of maintaining its economic leadership by suppressing the development of potential rivals. In the 1960s, it slowed the growth of Germany once it had nearly restored its position as the largest and most influential economy in the world; in the 1980s Japan's real GDP per head reached that of the US but its growth was stalled after the Plaza Accords and trade restrictions; in the 1990s, the Asian financial crisis slowed the growth of East Asian economies (which, however, posed no challenge to the position of the US) and forced them into distressed asset sales. While the US could make Japan or Germany or South Korea comply, it has been unable to impose compliance on China. The impact of its actions are of course significant, but the US has not managed to prevent China from making progress economically and in the industries of the future.

In the years since 1949, through capital investment and productivity improvements, China has lifted itself from its position as one of the very poorest countries in the world to the status of a middle income country. Further progress depends not only upon continued productivity growth (innovation and its translation into new investment), but also addressing climate, development, security and other global challenges.

China has chosen a path involving the development of new productive forces and investing in green and digital industries including electric vehicle, solar energy, wind turbines, robotics, artificial intelligence and 5G communications. As a result of its chosen course, China has achieved significant improvements in productivity, considerably cheapening products that will help address the climate crisis and improve quality of life.

After some 500 years in which Europe and subsequently the US have dominated the world, their goal is to retain global leadership. And yet the investment record of these countries is very poor, and their economies are dominated by consumer services. As a result, their productivity growth has slowed and their own industries are uncompetitive in many of the emerging industries.

The claims about overproduction are spurious. In general, production capacity can exceed potential sales (at prices that cover costs). In China, capacity utilization rates are around 76 percent compared with 78 percent in the US. It is clear that the objection arises from the cost competitiveness of Chinese products. Producers in western countries cannot match Chinese costs and prices. This is not because of subsidies but because of differences in productivity and investment and the presence in China in almost the entire supply chain. China's automated plants can produce 1,000 electric vehicles per day or thousands of 5G base stations. Moreover, Chinese products sell for much higher prices outside China than they do in China. From the point of view of the people who purchase these goods, their cheapness and price-quality ratios are important advantages. It seems clear that buyers are placing orders for Chinese made goods. If they could not sell them, they would not order and stock them, and Chinese enterprises would not produce items that generate, in anything less than the very short term, less revenue than they cost to make. In this situation, the onus is on rich countries to invest and improve their own productivity.

It is important to remember that on the expenditure side, Gross Domestic Product (Gross Domestic Expenditure) is equal to investment plus consumption plus net exports. In the world economy, exports as a share of world GDP have fallen. China is addressing this issue through a strategy of dual circulation and by reorienting its trade toward the Global South and East. (China's exports to the Global South and East doubled in the last three years and now exceed those to developed country markets). The fact that China is increasing productivity and reducing costs and that some of these products play an important role in a zero-carbon transition makes these strategies increasingly attractive, especially if matched by development finance, and means they have considerable merit.

But China has also chosen to increase investment. The western counties insist that China should invest less and spend more on consumption. To do so would reduce China's medium-term rate of growth and reduce its capacity to innovate and grow through the diffusion of innovations, even though consumption may indirectly stimulate investment. Investment in any case creates incomes — wages and orders and orders themselves result in wages which are spent in part on consumption. In any case China's critics should realize that in spite of an emphasis on investment — decades of relying on an investment-driven growth model in the words of the Financial Times — Chinese domestic consumption of Chinese manufactured goods has grown faster than the output of the Chinese manufacturing sector for nearly two decades.

Given however that China's per capita income is still far behind that of developed countries, China should certainly not abandon its GDP growth targets to serve the selfish interests of the Collective West, fundamentally of its elites whose incredible wealth should be invested to improve the quality of life of their people rather than telling China to forego its own economic progress.

The author is an emeritus professor at the University of Sussex and visiting professor at the Institute of Geographical Sciences and Natural Resources Research of the Chinese Academy of Sciences.

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