China or NAFTA: the world's largest market in the 21st century?

ABSTRACT

This paper addresses the economic role of these two countries: Will the Chinese economy, as many suggest, continue its strong economic advance under its system of "undemocratic capitalism" and surpass in size the United States and its economically-integrated partners (currently NAFTA), or will China convulse and stagnate? This paper explores the scenario that the United States will see its destiny at the heart of a Free-Trade Area of the Atlantic with an economy significantly greater than China's and with even a larger population. China will remain the dominant Asian economy, but independently and not part of a regional economic union.

MARKET AND POLITICS

World economies strongly affect international politics. At present, about 210 national economies interact on the world political and economic stages. This interaction raises important questions: Will the United States maintain not only military superiority, but also its economic dominance in the world? Will any country or group of countries challenge the U.S. as the superpower? Will the reconfiguration of the world market in the 21st century mean peace or war? Will it mean the "clash of civilizations," or the "end of history?"

Many books and articles have sprung up, suggesting that China will become the world's largest market (Lin and Robinson, 1994; Henderson, 1999; Foy and Maddison, 1999; Hines, 1997). The same kind of predictions were made back in the 1970s, when Japan's economy was growing 7 percent annually and very soon, according to some writers, would become the number one economy in the world.

However, since 1989 the Japanese economy has stagnated, real estate and stock markets have imploded, and the Japanese government has been unwilling, if not unable, to tend to its wounds. Japan's role in the world has contracted.

In the 1980s, when the Asian Tigers were also growing at 7 percent, a few writers even predicted that sooner or later they would become the largest economy. However, these implausible predictions were not fulfilled. The Asian crisis in 1997 proved that the Asian Tigers had switched to a restricted "diet" as the region passed through a disastrous economic contraction. It has become evident that the Asian Tigers are more economically dependent on the West than vice-versa. Both the "Tigers," collectively, and Japan, individually, are too small to become the world's dominant economy.

The People's Republic of China is the only economy that has the economic potential to possibly challenge the U.S. for economic leadership in the next generation. The question, however, is whether China can actually fulfill that potential. A related issue is whether, in an era of regional economic integration, the United States will become the heart of an even larger economic group than the current North American Free-Trade Area (NAFTA) during this decade. Current trends could well see NAFTA (comprised of the United States, Canada and Mexico) expanding to encompass most of the Americas (the Free-Trade Area of the Americas--FTAA). An even grander, but still very plausible, scenario could see the Americas plus most of Europe (perhaps to be called the Free-Trade Area of the Atlantic--FTAAT), unite into a massive free trade area.

That economic integration, coupled with the economic dynamics resulting from that process, would likely maintain the American economic predominance. This process could integrate as many as fifty to sixty Western-Civilization countries and create the world's largest market by 2020. It would have even more consumers than China and include almost half of the world's gross national product in 2020.

This development could lead to a continuation of the long dominance by Western Civilization but it could also lead to a "clash of civilizations" between east and west. Much will depend upon the country that will possibly be the dominant Asian country in the first third of the 21st Century: China. By 2020, China could be either at its economic peak and a serious challenge to American economic hegemony, or in political transition, characterized by some degree of chaos. But only China could possibly be able to challenge the U.S.--due to its determination, massive population, large economy and military potential. Furthermore, Russia and China together as "Euro-Asia" are capable of starting World War III (Clover, 1999). In December 1999, during a trip to China, a sick Boris Yeltsin reminded the West that "Russia is (still) a nuclear superpower." This admonition was reinforced by Russia's test of a new generation of intercontinental missiles in the same period.

THE WORLD'S LARGEST MARKET

The world's largest market is currently NAFTA (TABLE 1, Column 2), which has 26 percent of the world's GNP (Column 4), followed by the European Union (22 percent), China (11 percent) and Japan (8 percent). The remaining 187 countries, including the Asian Tigers, India and Brazil, have only a 33 percent share of the world market.

Noteworthy is the vast disparity in the annual rates of economic growth (Column 3). China's rate of growth far exceeds that of any other. China's economy (Column 2) is already the second largest in the world, although, its GNP/capita is only one-seventh the size of that of Japan or Germany or most of the other EU economies.

THE CHINA CHALLENGE

From 1949-1979 China practiced a planned economy in which the country became a state mono-corporation where quantity rather than quality or profit became the guiding strategy. This period was punctuated by two calamitous periods: The Great Leap Forward from 1958-62, and the infamous Cultural Revolution from 1966-76. In 1978 Deng Xiao Ping declared major economic reforms under his so-called "Open Door" policy. This meant a gradual reversal of Mao Tse Tung's isolationist, anti-capitalist, autocratic economic ideology of nearly three decades. The new Chinese leader declared that "To get rich is glorious!"

In 1979, the Chinese government passed a law permitting foreigners to enter into joint ventures with Chinese companies. As a consequence of this open Chinese stance towards joint ventures, thousands of non-Chinese firms started operations in China, usually with a state-run company as a partner. In 1992, the concept of the "socialist market" economy was incorporated into the Chinese constitution. This continued the long march towards a market economy by encouraging more autonomy for state-owned enterprises, which were given increased responsibility for planning and control, purchase and supply, price-setting, investment decisions, and financing. Since then, the government intervention has been greatly reduced. The state is now perceived as an investor in the enterprise and manages only the macro-economy rather than both the macro and micro-economies. 10,000s of government companies have been privatized and now almost 50 percent of the Chinese economy is in the private sector.

The foreign direct investment (FDI) strategy was introduced as a necessary engine for China's growth and modernization. In the 1980s, foreign direct investors injected $20 billion into the Chinese economy. In the 1990s, more than $200 billion was invested in joint ventures. Firms with foreign investors are now responsible for over 13 percent of the country's national tax revenues and more than two-fifths of its exports (1)!

From 1981-1990, China's official GNP growth rate averaged about 10.3 percent annually (in some years even reported at 12 percent or higher), up from 4.4 percent in the two decades before reform (2). As shall be shown later, all of these numbers are suspect. They are rather inflated and not fully comparable with western estimates. However, there is no doubt that the Chinese growth has been very impressive--even unprecedented, for such a large country. China's emergence as the world's fastest-growing economy has both raised hopes that East Asia's giant can join the ranks of modernizing nations and that can fuel the fragile equilibrium of global markets and institutions. As noted above, many experts predict that if China's economy continues to grow at even a somewhat slower rate for the foreseeable future, China is well on the way to becoming the world's largest economy within the next 15 to 20 years. Simple extrapolation supports those predictions, however many developments could, and very likely will, upset the significance of such projections.

How soon the Chinese economy becomes number one depends first upon whether, or for how long, it can keep up its extraordinary growth. For example, if one could accept the 10 percent figure, China's GNP in 2010 would exceed of $12 trillion and in 2025 exceed $39 billion (both in 1998 terms). This means that China could be the world's largest market as early as 2010 and very dominant by 2020. But to assume a steady annual growth of 10 percent throughout the next 10 to 25 years is closer to fantasy than to a political and economic reality. However, even assuming a growth rate of only half that rate (5 percent), China's economy will be larger than the current NAFTA's combined economies by the year 2015!

Like earlier assumptions involving Japan, this projection assumes that the rest of the world will be static. It also assumes the domestic Chinese economic and political progressions to be linear. As will be discussed below, neither is likely. The world's economy has seldom been less static. One of the probable changes is very likely to be a much broader integration in the Western Hemisphere, perhaps joining with Europe. As will be discussed later, China is unlikely to share comparable integration with neighboring countries.