Public confidence in the state of US technology leadership has fallen to historic lows. The reason for this is clear: a 24/7 news cycle that converts outrage and panic into ad dollars, with focused attention to American ‘decline’, the escalating conflict in Ukraine, as well as the emergence of a rising power in the People’s Republic of China with anti-American ideology.
Beneath these headlines lies an overlooked and inescapable truth: America still towers over its foreign rivals as the world’s only superpower, with an unmatched technology ecosystem at home and deeply entrenched geopolitical advantages that extend well beyond the 21st century.
Summary
- The assumption that China will replace America as the global technology leader in the 21st century is not supported by the current set of facts.
- America’s unique technology ecosystem and geopolitical primacy in 2022 are severely underestimated by most mainstream commentators.
- America remains a peerless technology superpower with deeply entrenched geopolitical and economic moats that will accrue to America’s benefit in the current century.
- The dynamics noted above are disguised by their own obviousness and further concealed by the media noise surrounding global power tensions with China and Russia.
- The coming era of global technology competition and deglobalized supply chains is likely to favor the United States in ways that very few mainstream analysts expect.
- America’s unrivaled global standing and economic agility renew the promise of US technology leadership in the 21st century and beyond.
Table of Contents
- 2022: The Fall of US Tech
- The Rise of Foreign Powers
- America’s Dirty Secret
- The 21st Century Great Power Competition
- The Origin Story of US Tech
- The Steep Cost of China’s Rise
- The ‘COVID Test’ for Global Tech
- The State of Play in US-China Tech
- A Summary Assessment of China’s Power
- America’s Ecosystem Advantage
- Geography, the Hidden Kingmaker
- America’s Deglobalization Advantage
- America’s Soft Power Advantage
- How We Got the Narrative So Wrong
- The Return of the King
2022: The Fall of US Tech
The edifice of US global tech supremacy is crumbling by the day.
Look at the markets – year-to-date, the Nasdaq has dropped 22.1% on the back of declining stock values across a basket of large cap US technology companies. That’s after the recent rally.
At the time of this writing, Amazon is down 26.4% YTD, Microsoft, Apple, and Google are all down roughly 19%; and Netflix is down a breathtaking 65.8% since January 1st.
Add to those losses the additional tax of 8.5% inflation, and you start to see the historic nature of the wealth destruction that we’ve seen so far this year.
For a recent historical perspective, the last comparable decline in tech stocks was the ‘Dot Com’ crash between 2000 and 2002, when the Nasdaq lost 70% of its value across a two year period and didn’t return to its $5,000 peak from 2000 for the next fifteen years.
Inflation is here, folks, and it’s not going away anytime soon. The last era of ‘stagflation’ in the US economy saw the inflation-adjusted value of the Dow Jones decline by 73% cumulatively across a 16 year period from January 1966 to June of 1982.
Will this kind of crash happen in US tech today? It may not be likely, but it’s certainly possible.
Before discarding the possibility of a 70% decline in the Nasdaq across the next few years, you should remember that we’re only five months into the current year, and when you account for inflation, we’re almost halfway there already.
The Rise of Foreign Powers
And then there’s the war in Ukraine.
Russian aggression seems to have taken an all-or-nothing character to it these days, which is awfully inconvenient for…well, everyone.
Given the lack of border security the Russians have always had, combined with their crumbling demography and rusted-out Soviet infrastructure – expanding their territory and sphere of political influence has become a do-or-die initiative for the Russian state.
Meanwhile, the US and its allies can’t ship weapons to the Ukrainians fast enough. Because if Russia rolls over Ukraine without much resistance, Russian military ambitions will only continue from there.
Russia’s ideal western border runs well beyond Ukraine and includes nearly all of the former Soviet bloc countries in Eastern Europe (Belarus, Poland, Latvia, Lithuania, Estonia) as well as a few others whose current borders they wouldn’t mind…discussing (like Finland’s).
Only a geographic expansion of this scope would provide the natural border protection from the Baltic Sea in the north and the Black Sea in the south that the Russians would need to shore up their porous western boundary.
These expanded borders would allow for the kind of geography and population that would be required for the Russian state to have any real future beyond this century – otherwise their decline will only continue from here. And so they keep fighting.
And then there’s the Rise of China.
China was once known as the peaceful, non-threatening economic vassal state to the Americans that supplied low-cost manufactured goods to the global consumer market. China was the factory of the world.
During the 1990’s in America, ‘Made in China’ was almost an inside joke: the Chinese get to do the work, and the Americans get to live the good life.
My friends, the dynamic has changed.
China’s now emerged as a command-and-control police state backed by a resource-unconstrained Communist Party dedicated to restoring the former glory of Ancient China with only one minor contingency – you can’t ever disagree with them.
And, my oh my, look how much their economy’s grown!
Since Deng Xiaoping opened Chinese markets to international trade in 1978, China averaged more than 10% annual GDP growth for the next 35 years and actually eclipsed the United States in GDP on a purchasing power parity (PPP) basis in 2016 – when no one in America was even paying attention.
I almost forgot to mention – China’s got some shiny new tech these days. Not just long-range missile systems but lots of other fun things too. Robots, AI platforms, and Quantum Computers – good ones too.
Meanwhile, the US media stands on the balls of their feet, eager to cover the salacious details of the story, taking fastidious notes as they chronicle with great care the impending nature of America’s demise.
The media narratives of China’s technology prowess have very predictable themes. Buzzwords like “AI”, “Quantum Computing”, and “STEM graduates”; Ominous trend lines such as China’s “surpassing America”, and uncritical deference to Chinese Communist Party agendas such as their “5 year plan” and their plans to produce the “dominant technologies of the future.”
Graham Allison, Political Science Professor at Harvard Kennedy’s Belfer Center for Science and International Affairs went viral with his group’s recent position paper in December 2021 called “The Great Tech Rivalry: China vs. the U.S.”, throwing some academic kindling to stoke the media flames surrounding the China tech issue.
This juicy quote from Allison and his co-authors was copied and pasted into OpEds everywhere last winter:
“China has become a serious competitor in the foundational technologies of the 21st century…In some races it has already become No. 1. In others, on current trajectories, it will overtake the U.S. within the next decade.”
Enter Ray Dalio – the most successful market forecaster ever and founder of Bridgewater Associates, the largest and most successful hedge fund in the world – whose entire geopolitical paradigm is centered on China’s rise to global dominance.
Ray’s most recent sound byte on the power dynamics between the US and China was that China would likely become “stronger in most ways” than the United States in the coming decades.
The anecdotal proof of these statements abounds. China’s proliferation of powerhouse tech companies is well-noted: look at Alibaba – China’s Amazon. Didi – China’s Uber. TikTok? China’s Snapchat, but cooler and more widely adopted.
If the China tech sector is already growing faster than ours and their economy has already built a suite of near-peer technology companies at global scale, how are we going to compete with them fifty years from now…or even ten?
That sinking feeling you have? It’s natural. It’s what makes the story work so well, and it’s also what the media’s selling (your motivated attention, peppered with outrage, and garnished with anxiety).
The media’s just doing their job though – can’t fault them for that. The risks around the world are what they are, and no matter the lurid hue of the media’s click-driven reporting, their journalism still helps us prepare for whatever challenges we’ll face in the coming decades, China or otherwise.
The timing of all this for the American public and the international community at large is still super inconvenient though.
The American vantage point is well-noted: the tech bubble has already popped and stock prices are tumbling, China has risen to shoulder-level height with the US economy at light-switch speed and is still growing much faster, and the geopolitical tensions are greater than ever before.
Can you hear the distant drum beat?
There’s an unfamiliar feeling that comes from America’s long-term standing being threatened. Our country’s future is uncertain in ways that most Americans could never imagine just a few years ago – and unfortunately for the US economy, distant foreign powers in Asia are not even our biggest problem.
America’s Dirty Secret
America’s economy is addicted to cheap money.
This tech bubble was totally obvious, and anyone who tells you otherwise should not be giving investment advice.
The nosebleed stock prices that peaked in 2021 were created by a cocktail of artificial and unsustainable forces that led to historic inflation and irrational exuberance in US capital markets. The primary forces at work were twofold: 0% interest rates and US fiscal profligacy, both at unprecedented levels.
Life was good. For a while.
Inflation first showed up in the form of rising stock values and home prices, as well as viral mispricing of low-value assets (e.g. meme stocks, NFTs, and crypto) and high value assets alike (e.g. Netflix, DocuSign, and Zoom).
However, these paper profits were never here to stay. When the price action on Wall Street spilled over to rising prices on Main Street, the stock prices formerly associated with economic strength gave way to rising consumer costs that exposed an underlying weakness in the US economy.
The US economy’s addiction to cheap credit is real, and it’s also long in the tooth. The withdrawal symptoms that will soon bear down on our economy are likely to be of a slow and painful variety.
The effects of this tapering process (rising rates, declining stimulus) will not be fun. But tapering an addiction to cheap credit is similar to tapering any other addiction like opioids – sharp and painful at first, dull and uncomfortable for a while, and eventually, much to the benefit of anyone who desires to lead a good life in their remaining years on this earth.
The 21st Century Great Power Competition
As the United States economy begins to experience withdrawal from the monetary and fiscal stimulus that shored up its financial markets over the past fifteen years, it’s now faced with a forceful competitor in the People’s Republic of China, with long-term geopolitical ambition.
The rise of China as a global economic power will be a leading economic story, at least for the next few years. And no matter your assessment of China’s future growth prospects, it is certain that we are in the early innings of China’s emergence as a leading regional power and global technology center.
However, to fear China’s rise as a global superpower is both reactive and naive. China poses a real threat to US technology leadership in important domains such as AI and Quantum Science – no doubt – but a more balanced assessment of China’s rise requires an understanding of where the threat exists and where the threat does not.
My analysis of forward-looking economic fundamentals in China reveals a very different story than the inevitable rise to global dominance that we’ve all been led to believe.
The ‘bear case’ for China’s growth and innovation economy will be detailed later in this writing, with particular attention to the current and future state of global tech.
In the meantime – whether or not you take China’s ascent to technological supremacy as inevitable, the simple fact remains that competition with China is good for the US either way.
The reason is simple: competition breeds innovation, and complacency breeds stagnation.
A technologically-innovative America is a country that faces real threats and mobilizes international consensus to shape the future direction of our global society for the benefit of the whole.
And in order to understand America’s position as it enters the next phase of global technological development, it is essential that we remember the historical features of America’s rise to tech supremacy that got us here in the first place.
I know – history is boring. But trust me on this – a light review of US history will shed some light on some important dynamics that are still highly relevant today.
The Origin Story of US Tech
Those who assume that US tech is doomed to play second fiddle to technology industries in China may have overlooked the fundamental dynamics that forged American greatness years ago.
Remember: in the late 18th century, Great Britain was an uncontested 4-to-1 military and economic power and 20-to-1 manufacturing power relative to the fledgling American colony. The ‘America’ that existed at that time was essentially a rogue military wing of a larger and much more successful global power apparatus controlled by the British.
However, colonial America had certain gifts from the beginning: an educated and mobilized populace, an abundance of cheap land with vast natural resources, as well as a productive agricultural economy that gave the US colonies one of the highest living standards on Earth.
With exception to slavery, which we’ll discuss in a moment, America was a high income nation from the very beginning. The annual income in the American colonies in 1774 was £13.85, compared with £10-12 in Great Britain, thanks in large part to a population in the US colonies that was disproportionately well educated by global standards.
High labor costs propel technological innovation, because economies with high labor costs have greater incentives to invest in the development of labor-saving capital equipment in the form of new technology.
Conversely, low income economies face considerable inertia when it comes to innovation. For example, British mechanical spinning frames revolutionized textile production in the early 18th century and were exported globally, but these devices were not adopted in India for many years after their commercial release, despite the fact that India had been the undisputed global textile power for centuries prior.
The reason that India’s market would not accept this revolutionary tech with fundamental impact to its prized industry was simple:
The cost of Indian labor saved by the spinning frame was insufficient to offset the capital expense for their local textile companies. Their labor cost was already too cheap to make the investment in this revolutionary tool a profitable investment. Indian textile companies liked the device and had no issue paying for it – they just couldn’t make the numbers work.
This ‘low income trap’ to innovation is a fundamental and frequently-overlooked principle that largely accounts for the technological moats enjoyed by advanced western economies for the past 500 years. The process of overcoming the low-income trap faced by developing industries is why tariffs are an essential tool for economic development.
Developing countries need tariffs to protect and catalyze their fledgling industries. Implementing tariffs on mass-produced foreign goods of superior quality steers domestic consumers to buy inferior local products from the companies that are trying to get on their feet with tech-enabled production methods.
The generally-true principle is that these tariff-protected industries can create short-term profits that allow them to accumulate capital which, over time, will give them even footing with their more technologically advanced competitors abroad.
However, in the case of America, a high cost of labor was just a part of the story.
The larger story, of course, was economic freedom – first for some, and eventually for all.
The abolition of slavery with the 13th Amendment in 1865 extended citizenship to former slaves in the US south. It was always going to happen, because In addition to reflecting terrible ethics, slavery has abysmal economics too.
Free labor works well for the business owner, sure, but not for the economy at large.
The no-cost slave labor in the American South meant that their low-skill labor market lacked price discovery, and thus the South’s finite supply of workers pooled into agriculture instead of other more profitable and labor-constrained industries like manufacturing and services, where incremental labor training would provide surplus value to workers, business owners, and the economy at large.
Beyond that, a lack of income meant that slaves could not deploy their savings into capital investment, nor could their consumption demand catalyze the growth of America’s service and manufacturing sectors.
A lack of freedom for slaves meant that opportunities to educate, upskill, and generate more income were off the table entirely, which dampens labor productivity and economic output short-term and long-term.
And for the American South, the negative effects of this moral quandary far exceeded the positive effects to their plantation owners’ bottom line.
In fact, the Confederacy’s insistence on slavery sealed their fate, and Robert E. Lee’s surrender to Union forces at Appomattox was merely the shadow of a definitive moral failure that took place many years prior.
The economic and moral sedative that slavery provided the Confederate economy was the primary labor market force that prevented the South from industrializing. Their resulting defeat in the Civil War was the inevitable result of their inability to ship metal to the battlefield to match the Union army’s war machine.
Over 500,000 slaves fled to the North during the Civil War, and roughly 100,000 of them joined the Union Army during the team when the Union economy had a better than 9-to-1 manufacturing advantage over the south across the board and most notably with regard to guns.
Slavery was never going to last because in America because, beyond its obvious evils, it doesn’t work on any level. It’s a non-viable economic model for any country that seeks to grow and compete in the global marketplace, because slavery impairs the competitiveness of an economy in ways that constrain development.
Skeptics of American freedom highlight the hypocrisy of slavery as proof of root-and-stem impurity in America’s founding that negates the long-term credibility of American freedom today. There’s a central truth to that assessment, but it also glosses over a deeper historical context that bears consideration.
The hypocrisy of “all men are created equal” was well understood by Washington, Jefferson, and many other Founding Fathers who owned slaves at the time of American’s founding.
They knew that slavery was evil and put the whole nation at risk to the extent that it continued at all, and they said so in many private letters that are well documented in historical record.
Sad to say – the early American colonists had to make difficult choices. The important point here: colonial America wasn’t so much in the slave business as it was in the survival business. In the late 17th and early 18th centuries, the Brits were out for American blood. American colonists nervously surveyed the Atlantic horizon every day with the knowledge that the Royal Navy would arrive at any minute.
The begrudging tolerance of slavery in the South by leaders in the North enabled the fledgling colonies to survive as a consolidated military force in multiple wars with the British, first in the American Revolution and again in the War of 1812.
America’s need to survive as a unified nation was the main reason that slavery lasted as long as it did in the States. The British abolished slavery at home and in nearly all of their colonies by 1833, years before the Americans did, and the uneasy truce between the Northern and Southern US States extended the longevity of slavery in America due to a larger survival motive that constrained the moral imperative of abolition.
In a post-reconstruction America, individual freedoms were enshrined not just because they helped the individual but also because they were an essential competitive advantage for the nation as a whole.
In America’s nascent economy, a liberal market system created a natural incentive for the development of ever-more efficient capital equipment – not just the labor cost incentive to drive the investment but also the property rights to protect the investors that helped drive innovation.
When it comes to the wealth of nations, freedom’s the motor, and tyranny’s the parking brake – history shows this with great clarity, and American history is just one of many examples.
In the world we live in, profits aren’t evil – they’re necessary. Growth and survival depend on profit, both in business as well as the natural world that surrounds us.
Nature’s accounting system is energy.
In nature, ‘profit’ means that hunters return with more calories in the venison they captured than the calories they lost by chasing the deer all day through the woods. “Loss” means you returned home without making a kill, starved and exhausted and less able to hunt the next day.
Modern financial markets are merely an epiphenomenon of nature – they’re created by humans, after all.
In nature as in markets, “profit and loss” translates roughly to “life and death,” and so capital creation is everything.
With exception to military, public infrastructure, and judicial systems, it tends to be freedom that drives profitable growth – not regulation.
All information is local, and the ability for local businesses to identify market-level needs enables them to deliver value-added products and services to local consumers at profit. Businesses that assess their markets incorrectly will fail, and the successful ones grow and evolve in a sustainable way without external support.
On the other hand, excessive regulation and centrally-planned economic development tend to stifle technological growth, while creating a platform for politicians to take credit for the heavy-lifting of private enterprise that breaks through the growth barriers the politicians created.
When governments create jobs, they appropriate finite resources in the form of capital and labor that would be deployed elsewhere absent their intervention. Governments tout the jobs they create but tend to ignore the jobs they destroy. The jobs the government destroys tend to be greater in number due to the government’s mostly-unprofitable allocation of capital that constrains the capital base that can support other, more profitable industries with larger growth potential.
America’s economic freedom was the first real ace up its sleeve, and the 19th century kings and despots across Europe and Asia had almost no choice but to invest their capital into US industry to maintain the level of wealth required to enforce their autocratic power domestically.
America provided greater capital protection and better returns, not in spite of its freedoms but because of them.
From the period of 1863 to 1913, there were no 0% interest rates in the US. In fact, there was no Central Bank at all. A nationally-regulated but largely decentralized banking system provided the necessary liquidity to fund the greatest period of innovation-led economic growth in modern history, when US real interest rates averaged between 3.5% and 4% nationally and US bank notes were convertible on demand to physical gold.
Absent the Federal Reserve system, gold-based fractional reserve requirements were the economic chaperone that kept the banks in check with market-driven lending standards and a lack of top-down intervention that would be totally unrecognizable in modern day America.
There was no ‘Too Big To Fail.’
Failing banks and failing enterprises were shut down, and the finite resources of capital and labor that were deployed unprofitably in these enterprises was reallocated to other emerging industries that promised better returns.
Yet it was during this post-reconstruction era from 1863 to 1913 that America’s GDP per capita (2013 $USD) grew from $3,893.19 to $8,563.40 while aggregate GDP increased by over 500%.
Seminal technologies such as the telephone, phonograph, and lightbulb were developed in the United States and the US emerged as the premier global power on the back and shoulders of laissez-faire capitalism and highly-efficient regulation.
There’s nothing special in the water here. Does anyone really think Americans are smarter and harder working than their counterparts across the world? Is there some special gift or esoteric knowledge we’ve been given that’s somehow been withheld from our counterparts that live in less fortunate countries?
Not really. It was its well-educated and highly productive workforce, unmatched economic freedom, and highly progressive immigration policies that bred the modern technology leadership of the United States.
Despite the mostly false narrative of American decline, those same core principles power the US economy today, and they provide the durable advantages that underpin the proven innovation system enjoyed by US tech.
If you question America’s freedom advantage in light of Communist China’s “Economic Miracle”, you should remember that China’s growth came from westernizing their market policies in 1978 and absorbing the pent-up effects of vastly superior western technologies that washed throughout their economy for several decades after.
China’s growth did not come from innovation – it came from globalizing the innovation that originated elsewhere. And the true costs of China’s growth up to this point have not yet been paid.
Unfortunately for the current Chinese economy, their credit card bill is already in the mail, and the numbers on the statement balance are not looking great.
The Steep Cost of China’s Rise
In the aftermath of World War II, China had a baby boom too. And much like their counterparts in the United States, China’s baby boomers had children. A lot of children actually. From 1962 to 1973, China averaged more than 26 million live births per year.
In the agricultural society China had in the mid 20th century, children are an irreplaceable resource. Young families with children benefit from the free labor provided by children on the farm, and the more children you have on farm the more productive your farm operation can be.
In exchange, children on the farm learn the family business early on. They spare their aging parents of back-breaking labor and prepare to have families of their own so that their farm operation can grow and continue to be productive for generations to come.
However, by the year 1980, China’s economic development involved unprecedented migration to urban centers because low-cost manufacturing that occurred in the coastal cities was the comparative advantage that China held against the prevailing western economies of the time. According to Chinese national statistics in 1980, 19.39% of China’s population lived in urban centers, and as of 2021 that number grew to almost 65%.
In the city, the home economics changed. In the city, young children are not a resource – they’re a bottomless cost center. And China’s impoverished urban workers quickly discovered that the cost of raising children was much greater than what their limited incomes could bear.
Seeing a risk of overpopulation that threatened the prosperity of their citizens and the manufacturing strategy that was central to their economic model, the Chinese Communist Party responded swiftly to address the issue.
In 1980, the One Child Policy came into effect, and by 1982 it was codified into law. Families in China were allowed only one child, and this Policy was enforced by the Party with brutal effect.
For young Chinese families, difficult decisions had to be made.
Sons were preferred over daughters. Garden variety gender bias was surely a part of this preference, but there was an economic preference too. Married daughters were incorporated into their husband’s family and no longer provided financial support to their aging parents.
It was the sons that supported their aging parents and not the daughters, and therefore daughters represented an additional economic cost for low-income Chinese families of this era that many families simply could not afford.
Many newborn daughters were simply abandoned in the streets. Some orphaned daughters were taken in by local elders for food and shelter, but many others were left in wicker baskets and swaddling cloths to sit and cry in the sun.
In local hospitals and community health centers, children born in violation of this policy were routinely euthanized. It was for the greater good, you see, and any child born in contravention of the law threatened the well-being of society at large.
Many millions of births were prevented through effective contraception, but many children born into healthy conditions had a tendency to just…disappear.
Families that did not comply with the One Child Policy were brought in line.
Kidnapping and forced sterilizations of women were just another day in the office for the CCP. Propaganda posters were strewn in the cities and country roads, and Chinese families were forced to perform their solemn duty.
From 1980 to 2015, the CCP official data indicate that the One Child Policy prevented or terminated 400 million births.
The legacy of this oppressive policy looms large today, and China now holds the distinction of having the worst demography on the planet. A terminal demography, in fact.
The children who survived the One Child Policy are now adults of child-bearing age, but there are far fewer of them, and these would-be parents have incorporated an urbanized preference for smaller families of 1-2 children, if any children at all.
In 2010, Chinese government statistics showed more than 17.9 million live births, but the recent census in 2021 showed 10.8 million – a decline of 7.1 million births in just eleven years.
Still, throughout China’s recent economic rise, their labor force was always growing. An influx of ever-increasing workers throughout the 20th century was the fuel to China’s economic fire.
But that trend has permanently reversed. Recent World Bank data indicate that the Chinese labor force peaked in 2019 and is set to decline every year for as far as the eye can see.
China’s labor force is now in free fall.
According to data from the Shanghai Academy of Sciences – from a peak of ~800 million workers, China is projected to lose approximately 140 million workers in the next 20 years and 500 million workers in the next 80 years. The total population is projected to drop from 1.4B to approximately 700 million by the end of the century.
To complicate matters further, the Chinese baby boomers are now retiring in record numbers.
What productivity remains in the Chinese economy must now be generated by ever-fewer workers, whose tax revenue will increasingly be shifted to retirement subsidies of the baby boomers whose continued well-being is the social glue to the Party’s Orwellien system of control.
The CCP can’t just ignore the social welfare and healthcare costs associated with the generation of workers that built modern China. It would be a political ‘loser’ for them.
Within the next twenty years, there will be two pensioners for every one worker in the Chinese economy, and the trend will only worsen from there – an ever-declining labor force supporting an ever-increasing cost center of CCP pension commitments.
Among its other numerous effects, this demographic crunch in China will restrict the Party’s ability to invest in further economic development and education programs that are essential to its modernization strategy.
To the extent that the CCP skimps on retirement benefits, the shrinking class of adult children of retired boomers will have to chip in, which further diminishes investment capital in China’s insular domestic market.
The declining population of young people in China also constrains demand for domestic consumption, as the bulk of any economy’s consumption is borne by young people who require basic economic inputs to grow and thrive. The transition to a modern, tech-enabled consumer economy is China’s ultimate goal.
And yet the prevailing historic numbers that show a current population of 1.4B may not even be accurate.
Yi Fuxian, a demographer at University of Wisconsin-Madison who’s researched this topic exhaustively, estimates that China’s been overstating its population data for the last 30 years. He further estimates that the CCP has overstated its population to the tune of 130 million residents and that the real population may be roughly 1.28B today. Even worse – he thinks the bulk of the overstated population applies to the youngest segment of China’s demography, residents of 0 to 30 years of age.
Chinese census workers get paid on the basis of the number of citizens counted in their geography, and this kind of corrupt statistical reporting system permeates provincial leadership systems that aggregate Chinese statistics. You get what you pay for, I suppose.
In the case of China, they may not have the consumer economy they need to backfill the exports they stand to lose from deglobalization. The estrangement of foreign buyers and the declining youth demographic create the perfect storm that China’s export-led consumer economy will have to endure.
A recent analysis from Gartner indicates that a full ⅓ of supply chain leaders within multinational companies are planning to remove at least some of their manufacturing out of China prior to 2023. The trend is already in motion and has a lot further to run.
Remember – China’s economic model was and still is built on low- and medium-value manufacturing at scale. Meanwhile, China’s foreign investors are moving their factories at the same time that China’s consumer demand is evaporating.
Meanwhile, China is far from being a ‘wealthy’ country by global standards.
Despite their continued push toward robotics and AI, Chinese labor productivity growth is declining. To ensure China’s forward looking GDP targets of 5%+ requires acceleration of its labor productivity gains well above current trends, which seems to require a touch of wishful thinking on the part of economic forecasters.
The CCP’s response to COVID has only accelerated this trend.
Sinopharm’s COVID vaccine has proven to be unreliable, so the next best public health tool for the CCP’s Zero COVID policy is lockdowns – enforced by local leadership, of course.
Chinese lockdowns involve forced, ad hoc closure of businesses and industry – with no notice at all – creating a loss of confidence from foreign investors during a time when foreign capital is already leaving the country in droves.
And that’s before you account for the reputational hit that China took from COVID globally.
In 2020, the highest number of daily COVID cases reported from China was less than 5,000. Just a peak of 5,000 per day in April 2020 – the Party seemed to have the situation well in hand. Or so we thought.
But wait – this was during the same calendar year that the United States was reporting 200,000 new cases per day across a population that is roughly 25% of China’s. Plus, the whole news cycle on COVID was based on the premise that the pandemic started in China.
Did China forget to report their COVID numbers during the outbreak of a global pandemic that started in China? And if the COVID numbers from China are not being reported accurately, what other Chinese statistics might be misrepresented as well?
Turns out – all of them.
Let’s just take a look at China’s housing market, because the overpricing in this sector is so obvious that you can literally see it from outer space.
China’s GDP numbers are 25-30% driven by housing and industries directly tied to housing. Remember – housing was the central driver in China’s economic growth and urbanization strategy. Big apartments were the bedrock for the whole growth playbook that enabled their urbanization strategy and manufacturing sector in the first place. In China’s economy, housing was everything.
Today, an estimated 25% of all housing in China is vacant, and that’s before you take into account their demand-side effects of their population collapse, which is already well underway.
In case the hue of China’s housing market isn’t ghastly enough, there’s the added element that some of the housing developments are haunted.
The interior of China is littered with “Ghost Cities” – urban centers with streets of large monolithic apartments and commercial real estate developments designed for a million residents or more. Most are on the outskirts of larger urban centers, and others are cities unto themselves.
But now – the only signs of life in several dozen of these Ghost Cities are the occasional flickering lights in government buildings. No one else is home.
The driver of China’s house of cards in housing? Chinese people love real estate – to a fault.
Why, you ask?
Well, the CCP is not exactly a world-renowned provider of ‘options’.
The CCP restricts Chinese residents from moving money out of the country with its insular Renminbi currency regime, so the Chinese have very few choices when it comes to investing for the future.
The Chinese stock market is seen as too risky and unpredictable, and bonds are seen as having very low returns and less optionality than cash – but housing? Housing’s the best of both worlds.
Most of the vacant apartments in ghost cities are owned by Chinese citizens, who have saved for most of their lives to buy them. Many Chinese apartment buyers own 2 or 3. Not to live there, and not to rent them out for ancillary income (there’s no demand) – but for investment.
Since housing is seen as the surest bet for future wealth in China, the cheap credit supplied by the government for the last 30 years meant that housing prices in China have been going up, up, and up.
Today – as we live and breathe – the average apartment in China costs 50 times the average annual salary in China’s economy.
Sounds a little steep, but get this: that is five times the relative cost of housing in Manhattan, where the average condo costs about 10 times the average salary of local workers, and New York City isn’t exactly known for giving away condos to folks on the cheap.
Unfortunately for the Chinese economic system, their fixation on the housing market has created the biggest misallocation of capital the world has ever seen. And it’s only getting worse.
Fueled by the trend of mass migration to eastern coastal cities, doused with the fuel of artificial investment demand, Chinese property developers such as Evergrande just kept. on. building. Despite the recent housing slowdown, they still haven’t stopped – they’re still building.
Evergrande has become world famous for borrowing money from government-sponsored lenders to build huge apartments, which they pre-sold to Chinese housing investors. Some of the apartments even got built. Many recent developments did not.
For the pre-sold construction that was stymied due to cash flow issues, home buyers in these developments are starting to wonder whether they’ll even get their money back.
I mean – at the very least, Chinese investors should get the cash-flow-negative apartments they paid for, right? So you would think.
The investors are trying to work it out with the insolvent developers, and it’s been a little touch and go so far.
Evergrande owes its creditors $300B and is struggling to even service the interest payments, let alone repay the principal. And remember – that’s just the developer you know about.
Meanwhile, the collapse in Chinese housing prices is no longer speculative. It’s already happening. Year-over-year change in Chinese housing prices was +12% as recent as May of 2021, and the most recent print from April 2022 was -9.1% and is trending much lower. For the Chinese housing crisis, this is just the prelude – the crescendo is yet to come.
On a mark-to-market basis, these non-performing housing developments shouldn’t even be counted to GDP, because there’s no need for them. Jerome Powell can pay me in newly-printed cash to dig some ditches in my backyard, but let’s not confuse that with growth.
If western GAAP accounting standards were applied to China’s economic data, a much bleaker view of China’s output would almost certainly be revealed.
And if Chinese housing developers have been such a poor steward of capital, is it possible to think that there might be some issues below the surface of this wonderful Chinese technology sector we’ve been hearing so much about?
China has the mother of all debt problems in their corporate sector – let’s not forget about that. Their corporate debt level sits at $27T, which is more than 160% of GDP, but that’s not even the issue.
Not all debt is created equal – it’s really the bad debt you have to worry about.
Prevailing estimates place the level of non-performing debt in the Chinese economy at roughly $2-6T, which is a vastly greater number than the $626B in bailout money that stabilized the mortgage crisis in 2008 that almost brought the US economy to its knees.
The effects of China’s crumbling demography, declining labor force, and unhealthy corporate sector are all coming to a head. But the bad economics don’t stop there, because you have to remember, on top of it all – China is governed by an authoritarian Communist regime.
For most countries, having a Communist government is an immediate disqualifier for any serious conversation about global technology leadership.
“Global technology leader” and “Communist government” tend not to mix. It’s just not really a thing. Maybe this time will be the exception – I guess we’ll have to wait and see.
Even weirder – when you weigh the features of China’s crumbling growth narrative, it’s hard to say if their police-and-control government even rates as a top 3 issue.
The brute force nature of the CCP’s involvement in the economy, with heavy R&D focus, at least points their economy in the right direction, but the material facts of their ‘rise’ to global technology leadership to date have been vastly overstated by market commentators.
Any incremental evidence of progress in China’s technology sector will be PR’ed in western media, while the mountains of corruption and waste in their system will be brushed under the nearest available carpet.
The reason you know that the China tech narrative is overhyped is Japan.
Do you really think that China holds a candle to Japan in terms of robotics, automation, labor efficiency, and technology prowess in general?
Of course not – you just don’t hear about Japan because there’s no longer a drumbeat narrative about them being a threat to America. Japan was a much more sophisticated technology market ten years ago than China is today.
‘90’s kids’ like me remember – Microsoft XBox came out in 2000. Prior to that there were no gaming systems developed in America at all. The only discussion was “Nintendo or Playstation”, but these systems were such a part of our culture that they were every bit as ‘American’ as McDonald’s or Michael Jordan.
Meanwhile, the bear case for China is the only forecast that ties with the facts, and the foundation of China’s system is much more vulnerable than what we’ve all been led to believe.
And that statement only includes the problems that the Chinese leadership created by choice, without reference to the external geopolitical chess pieces that bear down on them from every direction – those will be discussed shortly.
For now – I think a 20% markdown in their historic GDP gets us closer to a reliable number on the gross output side.
If you don’t mark down their GDP in light of the facts that we know today, then public markets will adjust for it anyway in the form of gradually declining prices and multiple-compression when the overpricing of Chinese assets becomes impossible to ignore.
Then once you properly mark their historical data, I estimate China’s forward looking GDP growth will be range-bound between 2-4% for the foreseeable future, with regression toward the lower end of that range as we move through time.
For the Chinese Party’s economic narrative, ‘technology’ is all they can hang their hat on. And as COVID revealed, the Chinese innovation economy may not be ready for showtime just yet.
The ‘COVID Test’ for Global Tech
The COVID pandemic was a recent litmus test, because it worked as a sprint to see which country could work within its public-private innovation ecosystem to produce the fastest, safest, and most effective vaccine – all from scratch, all at once.
There were only four vaccines for COVID that have the features of safety, long-term efficacy, and widespread international adoption.
US pharma companies (Pfizer, Moderna, J&J) shipped three of them, and AstraZeneca (UK) shipped the fourth.
Sinopharm and Sinovac (China) came to market early with a set of COVID vaccine candidates. Several showed safety and efficacy in short-term trials and got shipped out faster than the vaccines mentioned above. Did the Chinese biotech sector show up its western peers in its sprint to develop the new COVID vaccine?
After hundreds of millions of Chinese vaccines were distributed and jabbed across the globe, something interesting happened – the vaccine stopped working.
When Sinopharm’s flagship product showed inferior head-to-head efficacy than Pfizer’s BioNTech as measured by antibody response in a 2021 study, it still showed a reasonably strong antibody profile. At first.
But efficacy in China’s global COVID vaccines doesn’t appear to last – long term efficacy is insignificant if there’s any long-term efficacy at all. Perhaps more importantly, they don’t appear to prevent mortality in the elderly and immunocompromised populations most affected by COVID.
Success and failure on the global stage of COVID vaccine development is a shadow of AI sophistication too, because AI software is used routinely in the R&D divisions of all global pharmaceutical companies. Chinese tech companies didn’t discover AI. Global pharmaceutical companies use AI as a routine component of their therapeutic targeting and drug development processes, and that’s not exactly a late-breaking development.
The COVID vaccine sprint speaks volumes about where the technical quality lies – both in terms of AI and biotech, to say nothing of the regulatory quality control that governs them. It should be no surprise that in this innovation sprint, the biotech companies that showed their strength were the ones that had been doing the push-ups for longer. Who would have guessed?
This is the Chinese technology sector’s dirty secret – they do quantity well, but quality has never been their focus – and now, they’re trying to compete in the quality game for the first time on the global stage. And the quality game is hard.
China has a reputation for “low-value” manufacturing that they’re desperately trying to shed, both in the culture and in the numbers. But the cliche comes from its descriptive accuracy along with decades of Chinese overpromising followed promptly by Chinese underdelivering when it comes to tech.
Some recent examples come to mind.
Sinovac beats its western rivals to a commercial COVID vaccine that ships millions of units at home and abroad – then the long-term observational data hits the tape, and the vaccine’s not what we thought it was.
Chinese naval ships have sturdy hulls, fresh paint, and pretty good missiles, but they lack blue ocean range and experienced generals needed to secure the shipping lanes that are the lifeline for China’s security policy.
The Saudi oil flows they enjoy today were only possible by the security guarantees enabled by the US Navy that enabled modernized global trade – America’s Navy enforced these shipping lanes 70 years ago, yet the Chinese navy can’t secure these same shipping lanes today.
China’s AI and Robotics research put them at the frontiers of the field, but they lack the self-sufficiency to produce the chips that these advanced systems depend on.
The list just keeps going.
Most recently, the CCP warned western leaders that ‘decoupling’ will cause harm to their technology companies, and yet for decades the Chinese government stole western IP with Swiss-watch consistency and Las Vegas poker faces. What do you expect?
Other than semiconductors, critical technology bottlenecks pervade key sectors in China’s economy. Some of their most severe domestic constraints are operating systems (Windows, iOS, Android are the global incumbents), transmission electron microscopes (TEMs) that are essential for basic science research across a range of domains (Thermo Fisher is the player), and aviation design software and high-grade steel that forms modern aircraft (both systems come from the US and Europe).
Dependence on foreign tech is rampant in China’s economy, where many domestic project managers for key projects like oil pipelines and technology infrastructure don’t trust the Chinese component parts to hold up in the do-or-die standards of the long-term projects they’re tasked with completing.
Meanwhile, across the pacific, quality is America’s strength – the upstream R&D, ‘hard science’, and design is our bread, butter, and coffee.
American companies tend to get bored with quantity, so they delegate the mass production of their proprietary concepts to lower-cost markets abroad and still own the value chains that generate the profit.
A bit of IP theft and a boatload of research funding gives Chinese enterprises a foothold here and there, but it’s often the truth that the American tech companies have already summited the technical heights that their Chinese rivals have only seen in pictures.
This is the cultural root of the technology gap that Chinese companies have to overcome, and COVID provided a salient reminder that overpromising about AI and biotech in the future does not get you a quality vaccine in the present.
The State of Play in US-China Tech
If China lacks domestic self-sufficiency across several key industries, then why does the ‘Tech War’ merit serious discussion? It’s an important question that needs to be answered in order to understand the stakes of the US-China conflict.
For context, China’s proven its ability to innovate in technology – beyond a doubt – but so have many other countries that have not received the same level of skepticism as the Chinese have.
The issue with China is that their system won’t tolerate freedom of expression – the basis for open exchange that developed nations require to maintain economic freedom and human rights. So the global expansion of China’s system beyond its borders carries risks that go without saying.
The rising China of today has a rich economic warchest that is the basis of its global power structure, which it has increasingly used to exert its economic influence – some say to the detriment of the foreign nations across the negotiating table. And yet, China’s economic power today was built on a globalized system of democratic markets that enabled their rise – the same system of western judicial systems, international business standards, and IP protection that they now exploit to their benefit.
The problem is – the CCP wants to have the cake and eat it too.
China’s theft of international IP comprises a sophisticated, multi-pronged strategy that includes elements of cyber espionage, forced technology transfers, data sharing requirements, and double standards that unevenly enforce IP protections to the benefit of Chinese companies. Meanwhile, Chinese companies receive even-handed legal protections in the foreign markets in which they operate, which is where the issue of ‘fairness’ arises.
A 2021 FBI report estimates that the ongoing annual value of Chinese-stolen IP from American companies amounts to between $225B and $600B per year. Cumulatively, the value of Chinese IP theft is on the order of double-digit trillions.
Despite modest reforms in recent years, China’s system has been antithetical to fairness, openness, and freedom, and so China’s rise to global power presents manifold risks to the same global system that’s enabled their rise.
Now that the stage is properly set, we can turn to the state of play in tech between the US and China as it stands today.
As COVID illuminated, American biotechnology leadership is uncontested. Add to that list aerospace, nanotechnology, semiconductors, and medicine.
Within the smaller set of contested industries, the United States finds itself on a short list of leaders in all industries of the future from renewable energy to artificial intelligence and quantum computing.
Several large-cap technology companies in the United States such as Apple, Microsoft, and Amazon, have very few rivals in the global market, and none of these rivals compete on even footing with the US tech giants.
Still, there’s little doubt that US global technological leadership is eroding in relative terms. China’s become a near-peer competitor to the United States in AI and has arguably taken the lead in a few key technologies such as FinTech, commercial shipbuilding, and 5G.
However, as we’ve learned about China’s economic rise, appearances can often deceive.
Generally speaking, China’s technological edge in global terms is narrowly-focused on intangible database-level software systems in industries where the foundational upstream IP – most notably semiconductor chips – is often developed in technology ecosystems dominated by the United States and its democratic allies.
American tech companies, most notably Intel, own 49% of the semiconductor value chain on the basis of world-leading design, compared to a paltry 5% of the value chain controlled by China, which comes from high-value assembly.
There’s a lot of talk about Chinese advancement in AI and quantum computing, and these advancements are very real.
However – Quantum computing is nowhere close to commercial showtime, and the ‘AI’ that’s discussed around China is ‘applied’ AI.
Applied AI exercises limited-scope, domain-specific computer intelligence in stereotyped tasks such as manufacturing and gaming. The AI you’re worried about is ‘general’ AI, which is several decades away from being a practical reality.
Even if China were to establish, maintain, and defend a global advantage in any meaningful domain of ‘future tech’, this would represent a significant but incremental gain that does little to loosen the grip of their binding geostrategic straightjacket.
There’s a reason that media analysis of Chinese tech focuses on Robotics, AI, and Quantum Science – it’s because many of their other industries aren’t even PR-able yet.
In some industries like medical devices, nanotech, and aerospace (to name just a few) the leading Chinese companies are a decade or two behind their western counterparts in terms of basic research – forget about their objective of self-sufficiency from design to production.
One such example is semiconductors.
When you assess the market presence of Intel (US) with TSMC (Taiwan) and Samsung (Japan), you quickly see that the US and its high technology allies in Taiwan and Japan have near-complete control over this crucial technology and own an innovation ecosystem in the hardware components that make advanced computing and AI development possible.
China’s lack of self-sufficiency in this crucial technology set is symptomatic of a broader array of technical issues that China faces, the resolution of which cannot be measured on the order of single digit years, even if everything goes according to the CCP’s ambitious plans.
Yes – China is part of the semiconductor production process, but their comparative advantage is in low-cost assembly, after most of the value-added work has been done in the upstream value chain controlled by Intel, Samsung, and TSMC.
Being the leader in high tech assembly is a good thing – in 1980 – but today’s technology game is all about controlling and expanding the underlying hardware designs that loosen the bottlenecks to create scale and capacity in the downstream devices they power.
When you can design the machine from scratch and delegate the production process, investing in newer and better designs is a more profitable deployment of capital than that of producing the designs you already established.
In almost any field of science, when you go all the way to the upstream constraints at the top of the value chain, you’re looking at technology companies headquartered in the US, Japan, Korea, Taiwan, and Europe. In this audience, China’s barely even allowed to sit down at the same lunch table. Not because it’s an exclusive crowd but because many of China’s tech companies just aren’t there yet.
Is this dynamic shifting in China’s favor? Yes – just not fast enough for the Chinese to overcome the enormity of the headwinds they face at home and abroad.
And for them to keep gaining ground on American tech, China’s economy has to shoulder diminishing R&D returns while also overcoming a series of increasingly large and well-fortified moats that power the whole American tech economy they intend to surpass.
Remember – the tech is the fish, but the tech ecosystem is the rod, the bait, the hook, and the pond all together.
Before we turn to America’s suite of geopolitical and technological advantages, it’s important to understand the contextual basis of China’s power today.
A Summary Assessment of China’s Power: Strategic Advantages and Constraints
Understanding the inevitable long-term decline of China’s power is very different from dismissing China’s power today.
To understand the modern day context of China’s economy, let’s start with a summary of China’s strengths and limitations, first on the economic and technology front, then on the military front, and finally with regard to their history and culture.
Perhaps China’s biggest economic edge is the sheer size of its market, the ambition of its national vision, and the tough-as-nails Chinese citizens who do the work that powers their economic machine.
In the 20th century, few people have endured more pain and sacrifice than the Chinese.
The twenty-odd years of the Chinese Civil War led to the political takeover of the Chinese Communist Party in mainland China in 1947 after their defeat of the Kuomintang. The CCP’s rise to power presented both opportunities and challenges.
Having established control of the Chinese economy after World War II, the CCP had ambitious plans for the nation’s economy.
The PRC’s strategic pivot toward industrialization in the 1950s and 1960s was conducted in classic Communist style – political suppression, forced migration, famine, and death were the price of admission for the Chinese people.
Rather than paint the picture in detail, just imagine a cascade of centralized Communist decisions of varying effectiveness that led to forced labor camps, uprooting of rural families, mass political interrogation and imprisonment, as well as untested restructuring of China’s agricultural base – all with industrialization in mind.
The side-effects of the CCP’s destabilizing rise to power were mass famine and death of 60 million Chinese – a number that stands apart from the previously-noted effects of the One Child Policy that came a few years later.
The broad strokes described above break out into eras of tragedy that resulted in consolidation of Communist power. The eras have names: “Totalization Period”, “The Great Leap Forward”, “The Great Famine”, and “The Cultural Revolution”.
When it comes to following the rules of Communist leadership, citizens under Communist regimes face an ever-present choice: take the silver or take the lead. Those who choose to defy their leaders have an odd way of disappearing – some for a few weeks and others on a more permanent basis.
In the mid 20th century, forced disruption of China’s agricultural system upset the apple cart of food distribution, and mismanagement of food stores led to famine and death on the order of tens of millions.
Political ‘purges’ throughout the period were a hallmark of CCP’s leadership. A few bad apples can spoil the whole bunch, and Mao Zedong’s CCP was focused on protecting the bunch – so discarding a few of the bad ones was merely a necessary evil to protect the society at large.
The Chinese that survived the Communist transition proved to be some of the most resilient and hard-working people on earth.
China’s culture reflects this modest toughness, and its culture’s focus on intact families and educational opportunities provided the edge that the Chinese economy needed. The Chinese work, and the Chinese work hard.
Fast forward to now, the Chinese labor force boasts a greater number of STEM graduates than any other country on the planet.
In 2019, Chinese universities produced roughly 50,000 PhD STEM graduates, compared to just 34,000 in the United States. Georgetown University estimates that this gap will expand in the near-term, and in 2025 Chinese universities will graduate 77,000 STEM PhDs, compared to 40,000 in the US.
Despite their questionable preference for institutionalized IP theft, you have to admit – the Chinese government knows how to put points on the board. It’s hard to imagine that China’s growth is a total mirage – it’s not. China’s advancement to date would be impossible without the wealth of technical talent they clearly possess in their economy.
The technological growth underpinning China’s GDP growth is obvious, and the continuation of their development has lifted hundreds of millions of Chinese out of extreme poverty. These results should be commended, and the continued improvement in quality of life for Chinese citizens should be the hope of anyone who values human advancement.
China’s rising sophistication and expanded industrial base have benefited western economies over the course of several decades, most notably America.
“The factory of the world” represented by China improved the living standards at home and everywhere else – and the cheap manufacturing costs in Chinese factories served to subsidize living costs for everyone, everywhere for the past 50 years.
An industrial China allowed capital-rich western economies like the US, western Europe, and Japan to delegate low-skill manufacturing and focus their resources on high-value research and design. The cheap consumer products produces by China created a huge buoyancy to living standards around the world for years. Let’s not forget about what China’s given us, and let’s not be ungrateful for it either.
China’s industrial economy has made them competitive, and now their economy is more competitive than ever. Crackdowns on internal corruption means that Chinese public R&D spending will be deployed more efficiently, and their gross GDP volume means that the Chinese government will have a war chest that’s aimed at the country’s next phase of development.
“Huawei” can’t be faked, and the telecom giant’s sophistication in 5G technology systems is a warning shot to western economies that think they can sleep on the Chinese system.
“Huawei” doesn’t translate to “Johnny Come Lately” either. The Chinese telecom giant was founded in 1987 and became the largest telecommunications equipment manufacturer in the world as recently as 2012. Trump Administration sanctions resulted in part from Huawei’s enablement of the PRC surveillance state but also from western underpricing of Huawei’s global relevance in preceding years.
Alibaba is a global e-commerce giant second only to Amazon, with over $60B in annual profit and significant moats in China’s domestic consumer economy – the largest in Asia.
Tencent is almost as large as Alibaba and is arguably more global in scope – with diversified business lines from AI to gaming, publishing, financial services, and software. The jewel in Tencent’s crown is WeChat – the ‘app for everything’ with over a billion active users.
Deglobalization will strain the Chinese economy, and the housing collapse is likely to strain the economy further. However, the Chinese nation is no stranger to challenge, and the challenge they face is likely to inspire a new phase of invention. How could it not?
China’s electric vehicle market is second to none and produces 53% of global EVs, with a firm grip on the industry’s key raw materials. SAIC is the second-largest producer of EVs in the world right behind Tesla. But Tesla’s commitment to the Chinese market is large: its Shanghai Gigafactory produces 2,600 cars per day, and Tesla’s strategic roadmap includes original engineering of Tesla products in the Chinese and US divisions alike.
The best technology companies have global scope, and just as Tesla designs and produces in China, Chinese companies such as Tencent and Lenovo create high-paying jobs in America.
Shenzhen is a technology manufacturing hub the likes of which the world has never seen. There are heaps of western-headquartered technology startups whose founders choose to incubate their companies in Shenzhen’s ecosystem. Its labor is cheap and bountiful, its electronic component parts are , and the pace of its system runs at ‘Shenzhen’ speed.
The world’s largest electronics market, Huaquianbei, is based in Shenzhen and has the look and feel of a 1990s technology expo on Acid. It’s the bustling storefront for many globally-focused, low- to medium- value tech manufacturers whose booths are bursting with component parts that local companies can source in real time at their fingertips.
With local ecosystems like this, it’s no surprise that Shenzhen has earned its stripes in the eyes of cost-constrained entrepreneurs seeking rapid market entry with hardware-focused devices.
China’s mobilized labor force, with a focus on education and advancement generated a kind of economic growth that is totally unprecedented. In present-day dollars, China’s GDP went from $59.7B in 1960 to $14.7T in 2014, growth of almost 250 times its 1960 level. GDP per capita during this time went from $90 per year to $10,500, a difference of 117 times baseline.
China deserves to be proud, and any country that produced this kind of growth has earned it. A critique of the Chinese system takes nothing away from the extraordinary efforts of the Chinese people, and that is an important distinction to make.
For the Chinese economy, many challenges have been overcome, and yet many challenges remain.
Despite the advancement of several key industries in China, domestic self-sufficiency remains a broader question for many others. Despite domestic design weaknesses in several key industries in China, the next innings of global power dynamics will require a kind of internal development that Chinese workers are capable of delivering – in time.
Meanwhile, China’s demographic storm clouds are looming, and the doppler forecast promises to challenge the growth story in China’s economy that’s always relied on strength in numbers.
A declining labor force, matched with an escalating pension crisis means that China’s developments in robotics and AI are no longer for show. They’re for survival. The recent growth in technology development conceals a devastating reliance on these crucial systems for China’s economy to weather the coming storm.
China’s great hope for their economy is automation of jobs – and their plan will show some results. Diffusion of technology will bolster China’s GDP in coming years, while declines in its labor force can be comfortably buttressed by productivity gains afforded by new technology
Doubling of average incomes for Chinese labor from 2011 to 2021 have produced increases in standards of living, yet the productivity gains across this same period have slightly lagged the rising incomes.
This implies an important truth: despite compounding advances in automation, China’s market is already labor-constrained, and this shortage of labor will only get worse in the future.
The demographic writing is on the wall, and to continue to flourish the Chinese economy will have to surpass its historic trajectory of diminishing labor productivity growth in an environment where demographic inertia makes productivity gains increasingly hard to achieve.
Again, China’s aging demography means that tax revenue deployed to capital improvements will increasingly be shifted to supporting its pensioners, and the falling number of working-age citizens will need to make up the difference with ever-greater output per capita.
Propaganda campaigns designed to lift the birth rate will fall on deaf ears and empty wallets. The population collapse is already here, and its path of progress cannot be reversed.
To understand what the future holds for China’s economy, we can turn to the most recent example of demographic decline and its associated effects on growth – Japan.
In 1980s Japan, times were good, the economy was booming, and its society was on the rise.
Americans who lived during the 80’s remember that Japan was the new global superpower – whose dominance of American economic might was only a matter of time.
Japan’s market peak in 1990 was also its demographic peak, and its demographic decline was the end of Japan’s status as an inevitable superpower. Japan’s population decelerated starting in 1990, peaked around 2008, and has declined ever since. Even more significant – Japan’s retirement population hovered around 12% of its population in 1990 but has reached over 28% of its population today.
The 1990s became known as the “Lost Decade” in Japan, but the ‘decade’ has lasted ever since and may continue forever.
From 1990 on, Japan’s GDP and GDP per capita followed the same curve – a flat one.
In 1990, Japan and the US were in similar places technologically – but their rising gap in total output resulted from the underlying gap in demographics. Japan was declining, and America was rising, yet their GDP per capita grew at similar rates.
To describe the two key forces in China’s economic rise, labor productivity gains were ‘Robin’, but their booming labor force was Batman – and now China’s demographic spotlight is beginning to flicker and fade over the Gotham City skyline.
China’s demography today is even worse than Japan’s was in 1990, and as a result the deceleration in China’s growth is likely to be much more disorderly and severe over the long-run.
The productivity gains in China’s recent past have not shown up in rising GDP growth in its present, and therefore its productivity gains in the future may mean that rising GDP in China may be an artifact of the past.
Everything happens at the margins. And when global markets and rival nations see the long-term picture of China’s demography, the entire power dynamic changes forever.
As demographics drive economies, economies drive militaries, and in spite of its headwinds China’s economy will still be large for some time.
While the military power dynamic in China is an important topic, it’s also too complex to discuss in great detail here – so we’ll touch on the high level points.
China’s military force is large, but its range of effectiveness is limited – the PLA-N (People’s Liberation Army – Navy) lacks range, and its missiles will find no easy target outside the 500-1,000 mile radius of China’s shores.
The general power dynamic around the PLA is interesting and complex, but the gist is that the PLA can deliver a huge punch in the South China Sea but cannot project power beyond its immediate security envelope.
However, Taiwan lies deep within the PLA’s reach, which makes potential conflict in the Taiwanese Strait a serious matter.
We’ll briefly touch on Taiwan later in the article, but for now you should remember that China has been threatening invasion for over 70 years and has not taken action for very compelling reasons that still hold true today.
The long arc of China’s military story is that the military is big, the quality of their equipment is variable (some is really good – mainly missiles – most of the rest is OK or subpar – think fighter jets and naval hardware respectively). However, China has plenty of reasons to invest in their military that have nothing to do with American influence.
Mainland China has been invaded a bunch, most recently by the Japanese and the Russians but also a slew of European Imperial Powers before them – Great Britain, Germany, France, and Portugal. The impact of Imperial power on Chinese culture was so traumatic in China that it’s referred to the imperial era from the early 18th century to the early 19th century as the “Century of Humiliation.”
The fact is – China needs a military to prevent itself from being dominated by outside powers in the future the way it was dominated by outside powers in the past.
In this light, China’s military investments are reasonable, especially when you consider that China has never been an expansionist power in the past – expansion beyond its borders has never been important to the Chinese, because China’s size, population, and biodiversity makes China a ‘world’ to itself.
The problem the PLA faces is not its inability to deter external forces but more so its inability to prevent China’s fall from forces that lie within.
The ‘monolith’ that people perceive in the PRC is not as monolithic as it appears.
China is much more culturally diverse than people realize. There are six major dialects in China other than Mandarin – dialects and cultures that are so diverse that northern Chinese travelers who visit the south can’t understand the words of non-Mandarin speakers who pack the streets and markets of southeastern coastal cities.
A tour of Chinese history refers to various eras: “Sixteen States”, “Five Dynasties”, “Ten Kingdoms”, “Northern Dynasty”, “Southern Dynasty”, etc.
The story these eras imply is that the Chinese nation goes through long cycles of disunification into smaller city-states and reunification into a consolidated nation identity, over and over and over.
The force of the CCP’s grip is not optimized to dominate global affairs but rather to maintain control of society at home. Recent evidence suggests that the CCP’s control may be increasingly difficult to maintain in the years to come.
The economic growth story of China is the feather in the CCP’s cap, and rising levels of income and national relevance have provided the benefit of the doubt that secures its citizens’ tenuous acceptance of its police-state management style.
When China’s growth begins to decelerate and eventually decline, the CCP’s credibility will take a serious hit – how can the CCP take credit for growth but not take credit for the avoidable decline their policies created?
Complicating matters further, the economic fissures in China’s economy don’t require a long-term demographic transition to be exposed. Housing prices in China’s economy are likely to decline by 40-60% over the medium term, and the ‘reverse wealth effect’ this creates will generate desperation and strife, long before the country’s population decline hits the tape.
A depressed Chinese economy with rising unemployment, declining wealth, and historic debt levels mean that recovery will be sluggish and painful and long.
And China’s labor markets are far from efficient today. According to China’s National Bureau of Statistics, approximately half (47%) of China’s recent university graduates in 2021 did not receive a single job offer, and the unemployment rate of 16-24 year old Chinese workers rose to over 16% last year.
What will happen when China’s economy really gets bad and its youth population has nothing to do but stay home and read western media on their VPNs?
And if the ineffectiveness of CCP’s economic planning is held to the light today, will the Chinese be confident that the CCP has the right plan to secure their future tomorrow?
The glitz of China’s tech economy belies a sinking feeling of stagnation felt across their labor force – most notably in tech. The ‘lying flat’ movement took off last year as a passive form of protest directed at working conditions in China’s economy and is part of a longer trend of skepticism felt by China’s youth.
The brutal work hours and tremendous personal sacrifices have not led to the rewards that China’s tech workers were promised. China’s tech workers have responded – the ‘Lying flat’ movement in China’s high-skill labor force prescribes minimum effort and maximum downtime at work and non-participation in China’s consumer economy and housing investment sectors, which are the blueprint for China’s next phase of growth.
The consumerization of China’s economy is the ‘north star’ for Chinese leaders, and rising living standards for high-tech workers have been the ‘carrot’ in their financial incentive system that powers their tech economy. But now, China’s tech workers are finding that money is not the only form of wealth that matters.
‘Lying flat’ bears the same effect as ‘opting out’ – but without the explicit actions that would invoke a penalty from government leaders. This form of complacent resistance to unsustainable working conditions seems to be gaining ground in today’s modern and western-leaning Chinese technology sector.
The younger Chinese are more curious than their parents, and their curiosity leads them to question the assumptions they’ve been given about the prestige of the Chinese system today.
Unlike their American peers, Chinese youth have no real choice but to stay in the city, where all of the country’s tech companies are located, because employment alternatives are modest and sparse.
American homesteaders can live ‘off the grid’, but the Chinese have discovered no such luxury. As the Chinese have begun to appreciate – their grid goes on forever.
All digital communications on WeChat are tracked and scored by the CCP, and pervasive facial recognition software in Chinese streets means that no one in China can hide – they know where you are all the time. Infractions as minor as jaywalking generates deductions in social credit scores, and when the Chinese government issues a fine they don’t have to ask when they take it.
China’s payment systems are entirely digital, and ‘cash’ is gradually being withdrawn from circulation. The Chinese government’s hold on its domestic private payment systems means that fines can automatically be deducted from its citizens’ accounts, without their permission or knowledge – and they are.
A gunless and cashless society creates a very different kind of ‘safety’, and the wide-eyed youth of China are discovering that the safety they’ve been assigned may not be the safety they would have chosen, if they were ever given the choice.
A Communist society is governed by men but skinned with laws applied at government discretion. Beijing’s constitution offers citizens the right to issue complaints, but the act of doing so removes points from your credit score and adds your name to government watch lists.
The Chinese citizens are free: they can do whatever they want – as long as they never disagree with their government.
Communism can’t open the floors for discussion, because if they did the discussion would only go further and further towards liberalization and freedom that erode the Communist premise. So in China, the government is discussed as little as possible – they’re always there, and they’re always listening.
Without care for economics, many educated commentators see a strong leader in Xi Jinping with a track record of geometric GDP growth and soaring ambitions for China’s future, and they make the mistake of thinking that it was the man who built the country and not the people.
However, economists know that economic propaganda does not create economic truth – it’s the businesses and their workers that mine raw materials to invent the labor-saving technologies that create the wealth of nations.
The people of China are beginning to wonder whether the future of China relies on government planners in Beijing at all – why would the CCP go to such great lengths to censor speech if they weren’t somehow vulnerable to the truth?
As with all things in China, these questions will be for the Chinese to decide. Political systems aside, it seems that the winning strategy for China’s future involves investment in education, expansion of R&D, and continued embrace of the liberalized market system that has enabled their growth in the past.
China’s system runs differently than America’s does – that much we know. But when you take a wider view of the US-China Tech War, you start to see something interesting – the American advantage may be larger than it appears at first glance.
As we begin to contrast China’s system with that of America, it’s important to understand the features of America’s unique ecosystem that produces world-leading tech on its shores.
America’s Ecosystem Advantage
Despite their current disadvantages, China should be commended for the economic progress they’ve made – and they’re not out of the innovation game just yet.
We’ve noted that China now produces far more STEM graduates than the US. Furthermore, the ‘Greater Bay Area’ surrounding Shenzhen and Hong Kong promises to be a major ecosystem for the future of technological innovation in Asia and a likely thorn in the side of Silicon Valley as it seeks to maintain its position as the primary venue for world-class technology development.
To appreciate the advantages held by the American technology ecosystem, the logical place to start is the Silicon Valley venture capital engine that powers it.
The American venture capital ecosystem is the rocket fuel that helps the whole US technology system run without constant intervention from government actors. This advantage shows up in the numbers.
A 2019 study by Brookings showed that VC investment in US tech firms amounts to between 0.1% and 0.2% of US GDP per year. These same VC-backed companies represent 11% of the private workforce, grow 50% faster than the broader market, and posted revenues on the order of 21% of total GDP.
According to the Economist Magazine, since 1995, 76% of the market cap of the US equities comes from companies that begin as venture-backed startups, and according to a 2015 Stanford University study venture-backed firms represent 82% of R&D funding for US public companies all together.
The effectiveness of America’s VC economy is on full display, and privatizing the kind of R&D investment that used to be the sole domain of government is a key feature of America’s economic agility.
The lack of constant government involvement in America’s private R&D ecosystem forms an advantage – it means that good things tend to happen automatically.
There’s no waiting for grant approval, there’s no trading political favors – it’s just survival of the fittest, where the best ideas get funded, and the winner takes all.
On the other hand, analysts point to relative declines in public R&D funding in the US compared to its international peers, and I think that’s an important issue that needs to be assessed by US policymakers in the coming years – and it already is.
However, America still outspends China in public R&D ($656B vs. $526B). But the important distinction here is that most of America’s total R&D is funded by the private sector – which outweighs public R&D funding on a 3-to-1 basis. When you add in private R&D, America’s annual spending on basic research exceeds $2.4T. China’s private R&D is estimated at $400B, which means that their total R&D spend (~$926B) is less than half of America’s.
But what about the public side – isn’t that more important?
Many sophisticated analysts pose the important question: without robust public funding, how will American maintain its edge in capital intensive, slower-payback industries like aerospace, big data, and energy?
You mean – the same US industries of SpaceX, Palantir, and Exxon?
According to Crunchbase, SpaceX raised $9.3B in funding to date, and almost half of their capital (47%) came from private investors, not just government grants.
Palantir, the publicly-traded big data juggernaut, was started with $3B in private VC funding, and now the federal government is a client because Palantir provides informatics that the government can’t source anywhere else.
The Feds aren’t even Palantir’s fastest-growing client segment – that’s their commercial clients that are growing at 54% YoY in revenue terms, while their government book only grows at 16%.
Exxon is the largest energy company in the United States and the second largest energy company in the world. Its name is a symbol of American strength, and its shale fields drip with a surplus of Texas crude that assures American energy sovereignty as far as the eye can see.
Exxon receives considerable subsidies from the US government today, but that is largely for energy security purposes that would be impossible for Exxon to deliver if it weren’t already bootstrapped in the private market. Where was public R&D funding in Exxon’s humble beginnings, when the company was privately founded in 1863 by a guy named John who lived in Ohio?
Gosh, I can’t remember the guy’s last name…if you give me a minute I’m sure I’ll remember it.
Anyway, the point here was about the diversification and efficacy of public-private R&D, so on that score let’s take a closer look at the R&D landscape between the US and China.
Corruption and misappropriation of public funds in China’s R&D ecosystem is old news. A recent white paper written by the China Center for Economic Research estimates that from the period of 2001 – 2011 the R&D subsidies from the Chinese government to Chinese enterprises were misused for non-R&D purposes at a level of 42%.
But at the beginning of the reporting period in 2001, the level was 81%, which declined to just 18% in 2011 as a result of 2006 reforms that promoted accountability in China’s R&D system. The story here isn’t the improvement in efficiency but more so the nature of the position that the Chinese research system is trying to dig itself out of.
A white paper from Georgetown University’s Center for Security and Emerging Technology (CSET) published in 2019 estimated with a degree of confidence that the actual Chinese AI R&D spend is overstated by market analysts and is unlikely to dramatically exceed the gross R&D spend associated with American AI research.
They further posited that the Chinese AI research primarily focuses on applied AI and research design, rather than the basic research that’s more fundamental to understanding the horizons of various research scenarios that drive higher-order R&D resource allocation. And this is in light of AI being China’s flagship venue of research.
A recently-published assessment of China’s military AI strategy showed that much of the hardware they buy is equipped with chips from Nvidia and Intel, because America never bothered to institute export controls on sensitive tech. Don’t worry – this is being addressed, and its effects will undoubtedly slow the pace of China’s military AI in the coming years.
Zooming out from the small-picture of AI, America’s dollar-for-dollar R&D spending is still much more effective than China’s.
China’s R&D spend is largely focused on creating non-existent innovation systems, many of which the US built as early as the 19th century.
Stanford’s lecture halls have been packed with world-class PHD researchers for decades, and American R&D spend goes directly into a fertile innovation landscape that China doesn’t currently have at scale and, in some sectors, doesn’t have at all.
To use a naval analogy to describe the general state of competition in US-China R&D, China is (literally and figuratively) reverse engineering a decommissioned Soviet aircraft carrier that was retired in the 80s, stripped for parts in the early 90s, and bought by the Chinese in ‘98 to be refitted in the early 2000s – lacking in operational range and combat experience.
Meanwhile, the Americans have ten Nimitz-class supercarriers adorned with dozens of F-35s on a flat deck, powered by a nuclear engine that means their carriers can run for 20 years without refueling.
And the Nimitz-class carriers are being replaced because there’s a new model that’s supposedly way better now (the Gerald Ford). No other nation has more than 2 carriers, but the US has 11 supercarriers, and the Americans couldn’t have fewer than 11 even if they wanted to because it’s literally against the law.
If the Chinese haven’t got their hands around vaccines and chips yet – have fun with aircraft carriers. The tech is way harder.
The next generation of US military tech is already baked. The DOD already cut the purchase order to Lockheed for a steady drip of F-35s through the year 2044 that will be in service until 2070. And that’s just the old stuff – America’s military R&D is for the new stuff.
Oh – Rockefeller! I knew I’d remember it eventually. Gosh, that was so distracting. Anyway:
America’s overall labor force is much better educated than China’s. Better than 40% of US workers have a college education, where less than 20% of China’s workforce have the same level of college education as their American peers. The numbers are even more stark for high school graduates: almost 90% of US workers have high school diplomas and yet roughly 30% of China’s labor force can say the same.
And everyone in America thinks our public education system is bad, because it kind of is. But it has the advantage of fostering intuitive, open-ended problem solving over the mechanical rote memorization associated with the Chinese system.
China’s citizens that graduate from high school generally do go to college, but more than half of US high school graduates do not. A primary reason?
US students who skip college go into high-skill trades, where they specialize in the deployment of cutting edge capital equipment in automotive tech, HVAC, metallurgy, among other productive high-income jobs that don’t require college.
Without disrespecting the hard-working Chinese, it’s also worth noting that the 70% of their labor force that lacks education can often be seen working with their bare hands in fields and markets. They don’t have the education to ride the technology train, and they often don’t have high tech vocational training we take for granted in America either.
Bolstering the ecosystem advantage held by the US is its ability to attract and retain world-class tech talent.
Remember – in the words of JFK, America is a ‘nation of immigrants,’ and he was right.
High-talent immigrants from across the planet overwhelmingly prefer to move to the United States, and it’s not even close.
Technological innovation is forever and always a talent acquisition game where quality beats quantity, and the contest for global talent acquisition dramatically favors the United States in the future the same way it has in the past.
International PhD level AI engineers that study in the US tend not to leave. America’s brain ‘gain’ in AI is often China’s loss – 90% of Chinese AI engineers who get their PhD in the states choose to stay in America.
This asymmetric advantage for the US largely accounts for its ability to out-innovate other countries that have numerical advantages in STEM talent – American tech companies prefer quality talent, and they’ll pay above market rates to attract these coveted workers.
America has one of the best demographics in the developed world, and its liberal immigration policies smooth out its demographic cracks and ensure that its population will grow steadily well into the future due to net immigration of roughly 1 million new residents per year.
Back to quality – the private innovation ecosystem in Silicon Valley and the standards to which early stage startups are held in the United States is something that you have to see up close to fully appreciate. US tech companies are held to the highest standards of governance in the world, and everybody knows it.
Despite the popularity of WeChat in China, its broader adoption of next generation payment systems, and the prevailing media narratives of the technological air of Chinese society, the value of China’s digital economy pales in comparison to that of America – $5.4T compared to $13.6T.
Meanwhile, China is already producing all the advanced tech that they can, while fighting massive resistance to climb towards the top of the technological value chain no matter the cost or inefficiency. I don’t blame them at all for this.
Chinese tech companies are doing the right thing to try to summit the heights of global tech, but what the Chinese have realized long ago is that the Americans planted their flag there many years ago.
On top of that – America’s innovation economy is so powerful and self-sufficient, it barely even needs Silicon Valley at all.
Modern day American tech could languish without VC investment for a decade, and once the capital networks sprouted back up (probably in Florida, Texas, and Cali), the high-impact research and product playbooks would already be ready to go and a half a generation of R&D would have been bootstrapped through corporate profits.
American tech doesn’t need the PR, because American tech is obvious – and that’s why the truth of America’s leadership in tech has been so effectively concealed.
But the technology ecosystem’s just one thing. America has another weapon – a secret weapon – that offers a deeper and much more powerful advantage than Silicon Valley can ever hope to be.
Geography, The Hidden Kingmaker
Great Britain and the United States were the only nations ever to achieve global superpower status.
These two nations’ spectrum of power extended to all aspects of global affairs – best-in-class naval forces, centricity to global trade, successful currency regimes, security guarantees for foreign nations, and the list goes on from there.
But still, I always used to wonder: why Britain? Why not France, Germany, or Spain? Why not other rival European powers of similar stature?
They all seem to have similar characteristics – strong military and political leaders, liberal market systems, similar population size, similar geographic size, and similar proximity to resources and shipping lanes.
And yet it was Britain that somehow emerged from a crowded field to become the dominant global force for multiple centuries.
But why? There had to be a defining feature, a distinctive characteristic that gave the British an edge over their peer rivals on the European continent.
And as fate would have it, there was.
Great Britain is an island. And being an island, the British held a natural geographic advantage that none of the other great powers in Europe could claim.
And for the British, being an island changed everything.
Their natural inclination to the seas catalyzed their deep water navigation, which led to the creation of a British Navy that was the envy of the world.
But even more powerful: the natural defense of their island borders did not require a constant military force to defend. The English Channel, their rocky beaches, and their steep cliffs did most of the deterrence for them.
Having a high labor cost, the British found manual labor to be costly and inefficient. And kind of boring too. So wealthy investors in Britain invented the assembly line and modern industrial manufacturing to address the problem at hand.
The economic expense the British were spared in the form of their natural military defense allowed them to accumulate capital more profitably elsewhere – and accumulate capital they did.
Absent Great Britain’s defining geographic feature, the island, the industrial revolution may have occurred elsewhere. However, it occurred in Britain because their natural geographic protection enabled them to concentrate their forces more effectively than their rivals – first in building out its world-leading industrial capacity and navy and later on projecting its undisputed power across the globe.
The British colonies in India, Africa, Hong Kong, and beyond were governed by force, and the territories under British global control provided a steady flow of raw materials that fed the value-added British industrial machine.
Did the Brits have a larger economy than the Chinese nation they pushed around during and after the Opium Wars? Not at all – Oxford University historians estimate that China had a 7-to-1 GDP output compared to Great Britain in the early 19th century. The Chinese just didn’t have the steam ships, muskets, and steel plated armor of the Royal Navy – and that made all the difference.
19th century Chinese provincial governors in Chinese coastal cities saw British steamships that moved unabated upriver, beached wherever they chose, and dropped the hatch to a crew of armored infantry with muskets. The provincial leaders understood the power dynamic immediately, but they were afraid to notify Beijing because they knew the Chinese Emperor would dismiss the news out of hand. It just wasn’t even real, so how could anyone believe it?
Fast forwarding to the early 20th century, Great Britain’s colonial empire was already in decline. However, they discovered a hardy and loyal ally in the United States, and the British-American coalition won two world wars and established a peacetime status quo that led to the greatest period of economic development in world history after World War II.
After the war ended, the handoff of global power from the British to the Americans was a peaceful one – Britain saw America as a vastly superior power that was also sympathetic to British interests and national security, and this partnership remains the strongest and most important military alliance on the global stage today.
But this section is about geography – what about American geography? After all, the US isn’t an island like Great Britain is.
America’s geography is actually much better. Its neighbors to the north and south, Canada and Mexico, are faithful economic partners that benefit tremendously from the proximity to the United States – both in terms of security and trade.
In this model, America is insulated from foreign incursion on all sides while also controlling the choice cut of the North American continent, which also happens to be the most valuable real estate on earth.
When it comes to a foreign incursion of American territory, first of all – you can’t get to it. No foreign power today can project any real naval power within 2,000 miles of the continental United States.
Then once the shipwrecked survivors arrive, they’re met with a host of natural fortifications – beaches, mountains, and desert to break up the advancement of foreign troops, while also creating a natural defensive position for US armed forces.
America’s inland waterways boast deep channels that facilitate trade and access to key urban centers, and the interior of the continent offers vast open plains that make for low-cost ground transportation and low-cost development.
That lovely green area across the eastern portion of the US – that’s the Mississippi River Basin, and there’s nothing like it anywhere else in the world.
According to UN data, the United States has 20,650 miles of year-round intracoastal waterways with at least 9 feet of depth and 9 or more months of annual navigability – by this same metric, China has only 1,950 miles, Germany has 2,400 miles, and Russia has 0, as many of its rivers are frozen for much of the year.
The upshot? Transportation costs are more than 10x cheaper by water than by land, and the Mississippi River connects a whole inland network of economic centers that can distribute goods cheaply via natural waterways.
America’s navigable river system naturally allows it to accumulate capital faster than its rivals, due to the lower capital cost associated with transportation of goods across the interior of its country, which creates a natural buoyancy for development that no one else has.
Another feature of the mighty Mississippi: America has 152.3 million hectares of arable land, which is the most in the world in absolute terms and, in the case of America today, more unused agricultural capacity of any country on the planet – by far.
American shale oil represents an economic revolution of the highest importance and a security moat for the US nation that analysts have not fully priced into the global power equation.
Recent breakthroughs in shale technology mean that the US can now produce oil for as low as $25 per barrel, which is a cost of production at or below the production costs of Russia and Saudi Arabia, the heretofore cost leaders.
America’s net oil imports are so low at this point, that it can flip the switch and become energy independent whenever it wants to, and the US produces so much crude to service its domestic market that US oil market can actually be severed from the global oil market with different market prices and more advantageous subsidies to expand production.
In a world fraught with severed supply chains and international tension, America can be both food- and energy-independent, with impenetrable borders, a private militia with 300 million guns (not counting the real military), and a mountain of proprietary tech and world-leading R&D infrastructure that no one else has.
Are you starting to see the picture?
When it comes to our foreign rivals – Russia has slightly less arable land than the United States but more arable land per capita due to its lower population, the latter of which is by no means an advantage to the Russians that already face a shorter growing season than the one enjoyed by American ag.
The other drawback for Russian ag is that it lacks the year round river system to cheaply distribute their agricultural products, but this doesn’t even rate on the list of problems Russia currently faces at home.
There are severe demographic, public health, and education issues in Russia that lurk in the background, but we can leave this note here for anyone who’s interested in recommendations for further reading.
A much more urgent problem for Russia is the integrity of its border. Russia’s borders require constant military vigilance, and its border insecurity is so severe that it’s threatening to create a global war out of the Ukraine conflict, ostensibly for no good reason at all.
Back to China.
China is neither food- nor energy-independent – far from it. China imports 72% of its oil and 85% of the agricultural inputs needed to produce its food.
China’s basic insecurity around its fundamental economic inputs is so significant that interruption of Saudi and Russian oil flows would mean that China may not even be able to keep the lights on. In this environment, the only decision of importance for the Chinese government is which lights they allow to go out first.
The risk of famine in China is an ever-present reality, and the Chinese leadership understands this acutely. It’s not a stretch of the imagination to envision a world where restricted supply chains interrupt the flow of calories to China’s massive and far-flung population.
There’s even a world of restricted supply chains and famine where in the next 3-5 years, America and its allies are dropping humanitarian aid packages from military supply planes into the interior of China. This is not a joke – and it’s not intended to be funny. It’s a very real scenario that China has to plan for in the years to come.
China is the dominant producer of rare earth materials, but that’s not a card they can hold over America for two reasons – one is that it’s an old industry for America that its domestic companies stopped prioritizing years ago and can get back online within a few years whenever they want (and they will).
Also, America still produces 15% of the global supply of rare earths, and America’s more important security in food and energy means that it will be able to pay more to import rare earths from China or Australia whenever they need – the US wants rare earths, but the Chinese need oil.
China and Russia own most of the supply chain for green energy inputs, but green energy is less than 5% of the grid. It’s not there yet. For at least the next thirty years, if the bombs start dropping, all that matters is oil.
China’s border security is even worse than Russia’s. Russia and China have traded blows at their border and are likely to do so again. Putin has even told President Xi that China’s military numbers mean nothing, because Chinese incursion to Russia will be met with ICBMs – not troops. At the end of the day, these two nations completely despise one another.
And then there’s the matter of India.
India and China are skirmishing over the Aksai Chin region of western China that’s administered by the Xinjiang Uygur Autonomous Region of the CCP (remember the Uygurs?).
India and China border patrols shoot guns at each other occasionally, but they try to keep it pretty civil for the most part. For now, at least.
Then, at China’s neck, you have a developed Korea that stopped being a pushover thirty years ago and an ultramodern Japan that has much better blue ocean naval capabilities and is loaded up with US naval bases and 24/7 disregard for Chinese well-being. Fun times.
The bulk of China’s oil flows from the Saudis, through shipping lanes in the Indian Ocean that India could stop with its fingers whenever it wanted to. Their next chunk of oil comes down from Siberia by train lines and pipes that wouldn’t withstand a single missile strike. Meanwhile, imported oil is the ‘oxygen’ for the entire Chinese industrial economy.
Japanese naval ships (forget the Nimitz), with their superior open ocean range and air support, could interrupt critical supply lines that China requires for energy security. China’s counter-defense to this is a new long-range, satellite-guided missile system that Japan most likely (and its allies most certainly) has the space capability to neutralize.
And then you have Taiwan – a militarized and technologically advanced island with coastal fortifications and tooth-and-nail commitment to defending itself from Chinese invasion.
All of TSMC’s chip designs would be gone by the time the PLA arrives, and it’s unclear if China has the technical skills to operate these factories even if the red carpet was rolled across the Taiwan Strait.
None of this commentary is meant to be glib about the obvious risks in the Indo-Pacific region that stand today. Taiwan remains a potential flashpoint for military escalation, and the risk of conflict will only escalate throughout the current decade as Chinese leaders see the whites of the eyes of their declining power and the closing window of ‘opportunity’ it represents.
However, the game theory of military invasion of Taiwan shows that a Chinese invasion, while certainly possible, is unlikely for a few important reasons.
First is that the CCP has seen the irrecoverable reputational damage incurred by Russia’s invasion of Ukraine and the economic damage incurred by US-led sanctions, and on both fronts the Chinese have a lot to lose – most notably in the form of vital food and energy inputs from abroad, the continuity of which would be threatened by US sanctions that would immediately be applied in response to Chinese aggression towards Taiwan.
Second, the logistics of an amphibious assault on Taiwan are horrific and complex – the PLA would need to bring a force between one and two million troops to tilt the odds in their favor, and an effective assault would require a similar-sized force to occupy and control the island indefinitely. This would spread their forces thin and leave them vulnerable to counterattack, internal insurgency, or both.
Third and perhaps most obviously, the CCP’s biggest priority is ‘holding the center’ at home – China’s housing bubble threatens to bring down their domestic economy at any moment, and the specter of external military conflict of unclear scope, timeline, and cost can be the catalyst to a disorderly market selloff which could rapidly degrade the PRC’s ability to maintain the internal control that’s much more vital to their political interests.
Remember – China’s political elite have been threatening a Taiwan invasion for 70 years. Its risk bears more relevance now because China’s military force is much greater, but the deeper math requires tremendous sacrifice and existential risk for CCP leaders, whose political stability has largely resulted from their military restraint on the Taiwan issue.
Annexation of Taiwan would not come as good news for the Rules-Based Order or the balance of power in the region. However, PLA assault on Taiwan – if successful – is unlikely to improve the arc of China’s economic development and is much more likely to be an accelerant of their demise instead.
The go-forward dynamic on the Taiwan Strait is likely to take the form of a ‘Cold War’ non-shooting power struggle that over time will decrease the odds of PLA success while also increasing the cost of PLA incursion in Taiwan. The west is vigilant, and the west comprises a stronger force across military, economic, and cultural spheres of influence – any of which can pose existential risk to the PRC.
Notwithstanding these external military risks, the PRC’s fate has already been sealed through a series of oppressive decisions headlined by the One Child Policy that serve to guarantee the ever-declining effectiveness of their economic power structure as we head further into the 21st century.
At this point, global tech leadership seems to be a distant and fading dream for the Chinese leaders, and now it’s a matter of US-led diplomatic measures to counter China’s cresting influence and allowing the CCP to manage their massive domestic challenges with dignity and respect for the citizens of China.
The Americans and their allies may not hold all the cards, but they certainly hold enough of the cards that matter. The Rules-Based Order will prevail in the Indo Pacific – not because of naive hope or evergreen optimism but because of its unparalleled strength, resilience, and track record of success.
If you’ll allow me a sports analogy: it’s never smart to bet against Floyd “Money” Mayweather – not because he’s fun to watch, not because he’s bigger than the other guy, and not because he can’t possibly lose. You never bet against Mayweather because he always wins.
There’s an old saying that it never pays to bet against the Americans, and that’s never been more true than it is today.
The orderly conditions of globalized trade that China depends on are an artifact of American global security guarantees. And despite all their saber-rattling, the Chinese leadership knows this better than anyone.
At the end of the day, the United States will still remain the lone superpower, with a scale and breadth of influence much larger than it seems, but American power can only remain concealed for so long.
From strength and not weakness, America can choose to retrench and refocus on building our country’s future rather than engaging in foreign entanglements. Its advantages remain deep and numerous, and America has everything it needs right at home.
In its retrenchment from global affairs, within the confines of impassable borders, the American tech community is building the next generation of world-class innovation, and production is right on schedule.
America’s Deglobalization Advantage
The world is moving away from globalism, and now we can see that a deglobalized world accelerates the fundamental advantages already held by the Americans, even though this will still be a slow and painful process that will evolve over the next few decades.
A key element of the globalized world that we’re retreating from is manufacturing, where the US is no longer the leading manufacturer. For now, that distinction belongs to China, whose manufacturing output totals roughly $3.8T per year.
However, when it comes to production, the United States isn’t exactly a slouch.
Despite prevailing (and true) narratives of American offshoring of low-cost production, the United States ranks second in manufacturing globally at approximately $2.3T, and America’s gross manufacturing output is greater today than any other time in its history.
The offshoring of US manufacturing was a feature, not a bug. In the US-led global order that began in Bretton Woods in 1944, the dollar’s status as the centerpiece of global trade meant that its value was artificially strengthened by constant global dollar demand.
The international trade value of the dollar allowed the US market to cheaply import low-value-added consumer goods made abroad, run deficits denominated in a currency they could print, and keep their eyes focused on the vistas of cutting-edge tech all the while. The system worked because both the US and its trading partners got wealthier, and ships and goods flowed across international borders like never before. Everybody won.
The American-led globalized order enabled the United States to delegate its low-cost, low-value manufacturing abroad while still keeping a lot of the good stuff at home: petrochemicals, computer and electronic components, and aerospace rank among the strongest sectors of American manufacturing, where high value-added production lines provide a comparative advantage against foreign economies to this day.
The COVID experience showed America that there are some chinks in the armor when it comes to America’s ability to source consumables domestically (think: toilet paper and baby formula), and this was a vivid example of the need to reshore manufacturing to ensure that the American consumer is not overly dependent on foreign producers.
The US still has some work to do to prepare for decoupling, but America’s economic foothold is much higher up the mountain than that of its global rivals, and America is already the major global power whose economy is least integrated into foreign trade networks. This was, of course, intentional.
That’s not to say the US economy is perfectly self-sufficient.
The necessary process of reshoring manufacturing to the United State will be a painful and capital-intensive process that may take 5-10 years to complete.
But if America’s economy already produces technology at the frontiers of science, then reintroducing the basic industrial processes that it abandoned 30 years ago by choice seems like the better problem to have.
In a deglobalized world, America can supply more of its critical economic inputs than any other country on earth and build on top of a self-sufficient foundation.
In this environment, America can manufacture both low-tech and high-tech products cheaper than what is currently produced abroad, due to the much higher productivity of our labor force and the reduction in energy and shipping costs associated with domestic production.
Security, education, and self-sufficiency are the basis of the economies of scale that any country needs to even have a tech ecosystem over the long-run.
Technological development is the last piece of the economy you get to build – it sits on top of everything else, from agriculture to energy to manufacturing to finance. And the US has all of it.
America has the strongest bottom-to-top domestic self-sufficiency of any major country in the world, and this is the crux of the reason that the United States will be the long-term winner in 21st century technological development – America has the all-weather economy that will enable it to weather the storms of the future better than any other country on earth.
Once again, the media narratives have changed, but the economic fundamentals are right where we left them.
America’s Soft Power Advantage
The Internet Age is here to stay, and the natural diffusion of technology and information in the 21st century will make it more difficult for any technology leader to maintain their advantage in the form of intellectual property and trade secrets.
In this way, the internet has also created a new era of accountability in the marketplace of ideas. Everything you say and do on the internet is recorded and archived forever.
Skeptics of technology’s impact on society will bemoan our lack of privacy online, but my response to them is simple: isn’t this how nature works already? Isn’t everything we say or think recorded somewhere, and aren’t we held accountable for our thoughts and actions, even when no one is looking?
Social media shines a critical light on human rights abuses abroad, and the immediate spread of information through the global internet plays right into America’s hand.
Foreign countries trust the US and overwhelmingly prefer a US-led global system compared to a global system led by China, that’s not exactly a recent trend.
This trust will manifest in renewed ability for the United States to establish the next generation of legal and judicial standards that will apply to next generation technology, whether or not that innovation emanates from the US market.
A quick word on ‘hegemony’:
People mistakenly equate American power with American hegemony, and it leads them to the wrong conclusions when they perceive US ‘hegemony’ eroding.
In geopolitics ‘hegemony’ essentially means that a nation brings a gun to every other nation’s knife fight. It’s sort of a tough standard to expect out of a country these days.
Britain had it for a while though, as exemplified in colonial China and India and its string of global colonies that accepted British terms carte blanche.
The British had steamships and muskets, and their colonial subjects had spears and arrows – the knife fight analogy describes the power dynamic quite well actually.
On the other hand, America never had that kind of hegemony and it certainly doesn’t now.
RAND Corporation’s Taiwan war game scenarios from a few years ago made news, because the war game pitted American naval forces against China’s war machine in the South China sea and showed uncertain results for the Americans and a higher probability of victory for the Chinese.
Implied in the ‘war game’ analysis is something incredibly astonishing that was somehow never explicitly discussed.
With a shoestring supply line extending out of a forward operating base in Japan – 6,500 miles from the beaches of California – the US Naval force is still a near-peer military force to China, even within 100 miles of China’s beaches.
Imagine – linking arms with a small island nation in Taiwan, facing down China’s brand new coastal missile defenses, the full force of China’s PLA backed with ground-based rail-powered supply lines, pumping equipment from the largest manufacturing base in the history of the world, supported by a domestic population of 1.4 billion.
Then as soon as the American Military shows up – it’s practically a coin toss.
Outside the 500 mile security envelope of China’s shores, the conversation takes a different tone entirely – and it’s in this peripheral venue where American countermeasures can be applied most efficiently to erode China’s power – militarily or otherwise.
Even so, China remains a real power with significant relevance to the global order. They’re stronger and more relevant than ever, and the geopolitical stakes require greater vigilance for the US and its allies to maintain security in the region.
I’m not throwing the baby out with the bathwater on the Chinese tech story either – I see a useful sparring partner in China that will galvanize US tech companies, researchers, and public officials to reach for greater heights. And I think China will have some notable ‘wins’ in the form of multinational tech companies like Huawei that have global reach and defensible moats.
What I am saying however is that the US-China ‘Tech War’ narrative isn’t a fair comparison – for either side. It’s apples and oranges, because the countries are at two different stages of technological development and have a different set of opportunities in the coming decades.
Why would America’s advantage in global tech suddenly crumble to China now, when the economic forces that apply today were the same forces that led to western supremacy in tech as far back as the 18th century?
America’s power comes from a much deeper place. Its land is impenetrable, and its geopolitical standing is unassailable.
But ‘America’ isn’t even really a place – it’s an idea that shaped the growth of our modern world more than anything else.
American freedom is aspirational, and American society is far from perfect – not everyone who’s born gets dealt the same set of cards. And we have to live with that and try to level the playing field over time so everybody can have the same opportunity.
America’s moral authority comes in the form of inclusive leadership that seeks to bring everyone along for the ride, to elevate the dignity and standing of all people, and to enshrine the basic freedoms of the world that we were fortunate enough to inherit.
This is what ‘soft power’ is.
People listen to America, because they look at our country, and they see a global leader worth following. They can’t help it, and they can’t even explain it – they just know a real leader when they see one.
In the words of Antony Blinken the other night (and, surprisingly, President Trump before him), “the future belongs to those who believe in freedom.”
If that’s been true throughout all of modern history, what are the chances that it won’t be proven yet again?
In the case of China’s ‘inevitable’ rise to technological dominance, the question is not whether we overhyped it but, more importantly, how we got the narrative so wrong in the first place.
How We Got The Narrative So Wrong
The popular misconception of American decline has a few main features, and all of them are very easy to understand.
First, and perhaps most importantly, Americans crave a good story but have very little interest in anything to do with economics.
The overwhelming force of America’s labor productivity, its geographic riches, and the global power of its tech-centered public markets were always there – but understanding the impact of these advantages requires a basic appreciation of economic analysis.
Whenever such facts are discussed, most of the American public gets distracted and starts checking their iPhones and social media posts for the kind of stuff that’s worthy of their attention.
The corresponding vulnerabilities in the Chinese economic machine and the Russian one before it were equally obvious, but Americans generally prefer to feel their way through the headlines instead of analyzing the primary source data that offers the actual insight. It sounds harsh, but that’s how you know it’s true.
When Americans lack the anxiety prompted by visions of encroaching foreign powers, they’re almost pathologically unable to be happy. It’s not that we dread the ‘Rise of China’ – we actually prefer it.
The specter of foreign powers that threaten America helps to catalyze the US government’s long-term planning and resource allocation. It ends up being helpful – because in America, you don’t get to have NASA and SpaceX without a healthy dose of Sputnik every now and again.
The US military-industrial complex needs the ‘China’ narrative to play out to galvanize their strategic planning cycle – we understand the importance of the story to military planning, and we understand that the story is largely based in truth.
Still, Americans love to overestimate the power of totalitarian regimes. It’s one of our favorite pastimes.
This impulse is useful, because compelling stories about the enemy at our gates enable us to over-prepare for their arrival, even if their noisy battering rams never end up breaching the castle.
Beyond that, Americans tend to take growth, democracy, and the fruits of capitalism for granted.
We burn the candle of justice at home while ignoring news of much greater oppression abroad. We’re afraid to judge the cultural norms of people we’ve never met and places we’ve never been. It’s a noble impulse but often an immature one as well.
Deep down, Americans know that Communism doesn’t actually work, and of course, nobody knows this better than the citizens living under Communist regimes.
They leave. They leave their homes, their businesses, and their friends behind and travel thousands of miles to a place they’ve never been, with a language they’ve never read or spoken. They dream of coming to the one place that tells them something they’ve always known in their spirit was true: that dreams are real, and everyone deserves to live the life they’ve always imagined.
Americans are dreamers too, but Americans often confuse the idea of a thing with the thing itself. Look at Bitcoin, memestocks, and NFTs. A digital painting of an antique fireplace does not provide heat for your home, and not all that glitters is gold. Except for gold, that is.
The statistics we choose to read have a way of leading us to the wrong conclusions. People see the tragic effects of the geometric case count for COVID, and they think the foundation of our society is crumbling. They look at neat-and-tidy tables of bloated Chinese GDP data packaged into OpEds trumpeting American decline, and they mistakenly conclude that our fate has already been sealed.
We tend to forget our history too.
After all, history is boring and strewn with small-picture facts and obscure events that we probably won’t remember after the final exam anyway. However, these small-picture details comprise a large-picture story that reflects the virtues of our way of life and the shining achievements we’ve long since forgotten.
As with all things in nature and science, the devil resides in the details.
Over the past few years, is it possible that the importance of ‘freedom’ somehow got lost in the shuffle?
Is it possible that we’ve grown so tribal in politics that we’ve overlooked the larger values we all have in common?
And if we’re always looking for the problem and not the solution, should we ever be surprised when problems are all that we find?
Eventually you discover that the things you’re most worried about are usually a shadow of your core beliefs and values – but rarely the thing itself.
Worried about change?
Sorry to disappoint you, but the world hasn’t changed that much in the last few years. What’s changed is you.
The world of your inner thoughts and outer experience is much more plastic than you might think. If you grow and change, your world will grow and change with you, until it reflects back all the shimmering details of the life you’ve always wanted.
That’s the American Dream, at least. That’s what they used to say, and I’m not embarrassed to admit I still believe it’s true.
The Return of the King
The year 2050 promises to bring us a very different world than the one we’ve grown accustomed to.
Despite its headwinds, China’s economy may continue growing, and the US might look across the pacific to China and see a regionally dominant military power that has an economy with a larger GDP, a bottomless army, comparable computing capacity, and a string of globally-competitive tech companies.
India may surpass both the US and China in GDP and will certainly pass China in population, all while boasting a much healthier demography than any other country of its size and stature.
Ten years from now, I expect that we’ll be looking at India’s prospects for economic and technological development in the same way we’re looking at China’s today, albeit with more restrained media coverage due to India’s democratic system and American sympathies.
Nigeria will almost certainly have the best population demographic in the world and will more than double its current population to 600mm citizens by the end of the 21st century, with some estimates projecting its population as high as 1B in the year 2100.
America will retain a dominant grip in most of its flagship industries, lose its grip on a few, and develop new and world-shaping technologies that won’t be found anywhere else – just like it always has.
The diffusion of global innovation and military power in the current century will be unprecedented, and the US faces some growing pains at home.
Century-old social contracts in the form of entitlement benefits will almost certainly be restructured either by inflation, policy reform, or most likely a combination of both. This process is sure to be painful and politically-divisive, but America’s seen worse.
Change will be hard but necessary, and American society will have to change in order to thrive in the deglobalized world that stares us back in the face and promises a once-in-a-lifetime restructuring to global trade.
Global trade will remain a democratic, market driven system as it was before. But in the case of global tech – another form of government applies.
Global tech is a monarchy. And monarchies work a little bit differently than the democratic systems we’ve grown accustomed to.
You see – in a monarchy there can only ever be one King, and the case of global tech is no exception.
While some things have changed, others have stayed the same.
When it comes to global tech – the King then is still the King now.
Long may he reign.