Does size matter?

This week unexpectedly brought the inevitable news that China’s GNP exceeds US GNP.  The sky did not fall. In fact, the crossover likely happened some time ago. No one noticed. Nor does this development make China’s the largest economy on earth. The European Union still holds that trophy, if you count its 28 member states as a single entity. You should, at least for economic purposes.

That gives us a hint of whether size matters. No one even mentions when the EU surpassed the US, because it doesn’t really matter. Europe is still a pygmy in world power rankings. Its economy is large, but for the moment not growing fast (maybe not even growing), and its military capabilities are limited and shrinking. Power is in the eye of the beholder. What the world beholds in Europe is wealth but not power. It projects an image of success but stagnation or even decline. The world admires Europe, but it does not respect it.

The US, some would say, is in danger of falling into that same category. It is important for perspective to remember the last time the US suffered a panic about the growing economic power of a potential rival. That was the 1990s, when Japan loomed large. Clyde Prestowitz’s 1993 bestseller subtitled We Are Giving Our Future to Japan and How to Reclaim It now sells for a penny. The Japanese economy as stagnated for two decades as its population ages and declines.

China matters more than Europe and Japan, because it combines rapid economic growth with expanding military and technological capability. America has little to fear in the coming decade or so, so long as our allies in Asia do not trigger a crisis over some East or South China Sea island or reef. But if China continues to grow and invest as it has in the last ten years it will be a serious rival ten, or certainly twenty, years from now. There is no lack of American commentators warning us of this, the most recent Wes Clark in this morning’s New York Times.

Even then though the US will likely still be its military superior. The US is currently spending more than three times what China spends on its military (not corrected for purchasing power), which is close to twice China’s ratio of military expenditure to GDP. China has a long way to go still if it to catch up.

Military challenge is not however the big problem China poses. China will be far more problematic if it fails to grow and prosper. The Hong Kong “occupy” movement is promising because it opens a crack in China’s one-party autocracy. But it is also a warning that chaos in China is possible. Either slowing economic growth or growth so rapid that it ignites serious inflation could lead to eventual recession and growing unrest. China’s financial institutions are in no better shape than Japan’s were when it took a dive into no growth. No capitalist economy has proven itself immune to the business cycle. Even if growth remains strong, modernization theory predicts that China will face irresistible pressures to democratize. No autocracy has proven itself permanently immune to instability and middle class aspirations.

In any event, China will not grow at 7-8% forever. It is also aging rapidly, a result of its decades of one-child policy. This means real difficulty in meeting future social security needs of its elderly, and real limitations on its future labor force. This on top of structural problems in its financial sector, inefficient state-owned enterprises and other hangovers from the past make it unlikely the world can count on a China as reliable in its growth spurt as it has been for the last decade. And economic failure at home could give an autocratic China incentives to embark on adventurism abroad.

So size does matter, because Chinese economic failure of any sort in coming decades will make a big difference. A much more negative difference from the American perspective than its success.