Why China holds the advantage over America even amid deglobalisation
- Populous countries will outpace smaller ones in innovation – even the richer ones – if barriers to migration grow high enough
- If China makes the most of this, the US will find it all but impossible to hamper its economic progress
In just four decades, China’s economy has achieved an unprecedented level of wealth and development, and, until recently, its upwards trajectory of economic growth and prosperity seemed set to continue.
This is not good news for China, which would prefer that the world maintain the economic openness it achieved in recent decades. For that reason, China had been working hard to align its economic and trade activities with international rules and norms. But now it seems that China must prepare for a future characterised by higher trade barriers and restrictions.
These fears are overblown. China is unlikely to return to a state-controlled economy or enact isolationist policies. Instead, the increased role of the state in the economy and a shift towards self-reliance should be interpreted as a response to a changing – and, at times, hostile – external environment.
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As for technological progress, a larger population implies more talent and higher returns for innovation.
But, amid the retreat from globalisation, China’s advantage may be even greater. In a 2018 paper, Klaus Desmet, Dávid Krisztián Nagy, and Esteban Rossi-Hansberg showed that in a world of restricted cross-country trade and migration, countries with large populations can provide more opportunities to increase economic output through internal trade and specialisation.
The most populous countries are not necessarily the richest today, the authors note, largely because of migration. But if barriers to migration grow high enough, populous countries will outpace smaller countries in innovation, even if the latter are richer.
Projections of China’s future growth suggest that if China makes the most of this advantage – as it seems poised to do – the US will find it all but impossible to hamper China’s economic progress.
This is a distinct possibility. But visionary politicians should appreciate how much more could be achieved on both sides if the countries instead worked together. The US would be far better served by seizing the opportunities China’s rise creates.
And, while China’s large population affords it a major advantage in a deglobalised world, it still has a lot to learn from more advanced economies, beginning with the US. China remains a developing economy, after all, with a per capita GDP amounting to just over one-quarter of the OECD average.
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More broadly, while a more populous country has a large domestic market to fall back on, that is no substitute for access to the global market. Likewise, ties to the outside world, including the sharing of knowledge and ideas, invariably accelerate technological progress.
And an open and decentralised economic system that encourages market-led activity is far more conducive to the iterative process vital to the commercialisation of innovation.
It’s clear that China has much to gain from a more open global economic system. China’s leaders have emphasised that they are not abandoning the path of market-led development and returning to a closed economic model – and there is no reason to believe otherwise.