‘Eclipse’

It has been through the peaceful victories of mercantile traffic, and not by the force of arms, that modern states have yielded to the supremacy of more successful nations.” Thus did Richard Cobden, 19th century proponent of unilateral free trade, warn his fellow countrymen that the rising prosperity of the US would soon sweep British global supremacy away.

Cobden wrote these words in the 1830s, long before the event. In this challenging new study, Arvind Subramaniam of the Peterson Institute for International Economics writes of the next transfer, that from the US to China. This one is surely closer. While Americans were prating of the “uni­polar moment”, its economic foundations were crumbling away. Properly measured, he argues, China is already its economic equal. Very soon it will be far more powerful, economically, and ultimately, also militarily.

This is a provocative thesis. Yet, since it has four times the population, China will surely eclipse the US, economically, in time. The question is rather how close that event now is.

To answer it, Mr Subramaniam constructs a simple measure of economic power, which consists of the size of economies, the scale of their trade and whether countries run current account surpluses or deficits. On this basis, he concludes that China is already an equal of the US: its economy is the same size as that of the US, at purchasing power parity; its trade is about as large; and it is a creditor. The book predicts a rapid further rise, on all three dimensions: by 2030, China should be almost as dominant as the US in the mid 20th century.

The book’s most striking prediction is that the renminbi will match, or replace, the dollar as a reserve currency by the early 2020s, far sooner than most now suppose. This is largely because China will emerge as far and away the world’s largest trading power: currency follows trade.

The thesis raises big questions.

First, is economic power correctly measured? I think not. In particular, a vast trade, relative to GDP, particularly one that includes heavy dependence on imports of raw materials, is a source of vulnerability as much as of strength. Similarly, being a creditor makes a country dependent on foreign demand. The predominant factors are economic size and technological level. Yet, while China may soon surpass the US in economic size, it is likely to lag behind on technology for a long time.

Second, how far might China soon match the range of assets possessed by the US? The answer is: it cannot. In addition to technological leadership and so a more advanced military, the US will still possess an array of world-leading companies, the world’s foremost institutions of higher learning, a powerful network of alliances, the global language and huge cultural influence, not least its values of liberty and democracy. Such assets are its to throw away. China cannot match them. China is a developing country, with huge domestic challenges, ruled by an authoritarian regime – what I call a “premature superpower”.

The constraints on the renminbi’s emergence as the world’s reserve currency are also far bigger than the book recognises. Other countries would need to trust the Chinese authorities to provide a safe currency they could use freely. China would have to liberalise and open its financial markets, exposing itself to the vagaries of world markets and the mistrust of its own people. Its government would lose control of its financial system, its most powerful economic lever. It is hard to believe Beijing would take such risks in the near future. The author even envisages a day, quite soon, when China, as the principal creditor, would dictate to an indebted US, as the US did to the UK in 1956. That should not happen, unless the US makes colossal errors.

Third, will China even continue its headlong rise? Given its population, China’s economy is indeed likely vastly to surpass that of the US in size. But the journey could be very bumpy. Linear forecasts are risky.

Fourth, what role might such a rising China seek? Might it want to replace the multilateral trading system with one based on tribute relations, with China at the centre and others defined in relation to its power? How might it use its weight to secure safe access to resources? How, not least, might it try to manage its “near abroad”? China, after all, has powerful neighbours, unlike the US.

Finally, how should the west treat the newly powerful China? The book touches the surface of this question, focusing on binding China into a functioning system of multilateral trade. I agree. But it ignores other vastly important global public goods, including the environment and security.

Nevertheless, the big point stands. The world has a new superpower. History suggests that managing the rise of new powers is hard. Let us seek the wisdom to prove history wrong.

The writer is the FT’s chief economics commentator