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Elliott Morss | July 27th, 2017

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China, Russia, and the United States: Are They Superpowers?

China, Russia, and the United States: Are They Superpowers?
© Elliott R. Morss, Ph.D.

Introduction

Every so often, it is worth standing back and asking where is the world going. A recent book and set of interesting articles on global futures by Dr. Frank Li provides a good starting point. Li focuses on three “kingdoms” – China, Russia and the US. He argues they are the most important global players. A good starting point but worth exploring further.

The Three Kingdoms

Table 1 provides data on Li’s three kingdoms along with data on the European Union and India.

Table 1. – Socioeconomic Indicators, 2017

Source: IMF

I believe Europe remains important. Problems in Europe started the two world wars. The creation of the European Union was intended to prevent that from ever happening again. But as I have written, Britain is apparently leaving the Union. And problems with Greece and the other “weak” sisters might result in its complete demise.

India is dangerous because of its population size and form of governance. India’s population is expected to surpass China’s in the next decade. And its democratic government has caused stasis on actions needed i.e., infrastructure improvements to make it a 21st Century country. Most people do not realize just how serious India’s water shortages are. And it has a border with Pakistan where water shortages also exist. Both countries have nuclear weapons….

I offer one other point on kingdoms. Back in 1991, I wrote a piece arguing:

The era in which nations ruled the world is over. With the information revolution and the demise of the United States as the dominant world power, three groups have joined nations as important global players: transnational corporations, international organizations, and special interest groups.

Granted, nations are still extremely important, but these other entities are growing in power.

Let’s now consider each of Li’s “kingdoms” in greater detail.

Russia

Russia has high quality scientists and oil. The scientists make good military weapons. But ultimately, Russia depends on its oil exports to survive. Assuming Russia continues to consume and export its oil reserves at today’s rates, it has only about 20 years of reserves left.

In 2014, 30% of Russian exports were oil. With the oil price declines, its oil exports fell by 41% in 2015. For many years, it has been understood that such dependence on a single export causes real problems for a country. Known as “The Dutch Disease”, the currency inflows from oil sales lead to currency appreciation, making Russia’s other products less price competitive on world markets.

Russia now has more deployed nuclear warheads than the U.S. Does it matter? Each “kingdom” – China, Russia and the US – has enough nuclear warheads to destroy the world several times over. They know that if they attack with these weapons, there will be a counter-attack and that will end everything. Consequently, it is extremely unlikely that they will use them. In my view, the biggest nuclear worries are North Korea and/or India going to war with Pakistan.

Russia has other problems. For 20 years, I had a Chinese business partner. Zhu Jia-Ming got his Economics Ph.D. in Russia. He noted that there has never been a time in Russian history that the country used market mechanisms for anything. It has always been central planning from the top. The US did not win the Cold War. The economy of the USSR collapsed. Some former members of the USSR now have market economies and are doing well. Not Russia. Without oil, one wonders how Russia could survive. Ten years ago, I edited a book speculating on what would be the great cities of the 21st Century. I was thinking St. Petersburg might become a northern global financial center. That all changed when we held a conference on the book in St. Petersburg. The visit convinced me that mind sets are too fixed: we control from the top. Beyond oil and military weapons, Russia will never be able to compete in the global economy.

China

Look again at Table 1. Nobody can debate how miraculous China’s growth has been over the last few decades. China figured out what the West wanted and provided it in spades. China used to have a reputation of providing cheap and flimsy products. That has not been the case now for more than 25 years. And the Chinese government during this growth, built out China’s infrastructure so that today, it has better railroad and highway systems than the US.

But what do we see in the future? There are a number of serious challenges. China’s exports will remain high, but the era of explosive growth is pretty much over. And even when I was working in China a decade back, Chinese entrepreneurs were moving their production to other countries because of growing labor costs in China. China’s economic challenges today include:

  • How to convert an export-driven economy to one that satisfies the demands of a rapidly growing middle class.
  • In stark contrast to Russia and the US, China is extremely resource poor.

To make up the resource gap, Li says having a close relationship with Russia will help. It might, but much more is needed. Table 2 gives data on China’s largest import partners. Russia is 10th on the list. It is not just oil that China needs. It needs foods and other primary products as well. China is investing heavily overseas in hopes of locking in the resources it will need going forward.

Table 2. – China Imports by Country, 2015

Source: UN Comtrade

In the past, claims were made that China was buying dollars to reduce the value of the RMB to make its exports more competitive. The situation has reversed. World financial markets are starting to wonder how China is going to pull off this transition. And as a result, China has recently been using its reserves to buy dollars.

China’s Communist Party is facing political challenges going forward. Both Russia and China are dictator states. But unlike the situation in Russia where the people are apparently awed by Putin, things are quite different in China. The Chinese have taken to the Internet with a vengeance and their use of social media exceeds that of the US. My impression is that unlike the US government, the Chinese leadership has been doing all it can to satisfy its citizens for more than a decade. The question going forward is whether the Party can do enough to stay in power or be forced to hold elections. It will be interesting to watch.

The US

 I have a lot of sympathy with numerous things Li says about the US. But before getting to them, let me highlight a few places where we differ.

a. US Wars

Li says “…the U.S. is the only superpower on earth today.” I do not agree. Since WWII, the US has allowed itself to be dragged into wars all over the world that it does not win. And the cost has been staggering. I quote Robert Borosage:

The country finds itself constantly at war. New presidents inherit the wars of their predecessors. They are faced not with deciding to go to war, but whether to accept defeat in one already in progress….And slowly, the great power declines from the inside out. The wars are costly, running up national debts. Vital investments are put off. Schools decline. Sewers leak. For a long time, circuses distract from the spreading ruin….Other societies become productive centers, capturing the new industries. Some begin providing better education for their citizens, better support for their citizens. Their taxes, not drained by the cost of wars past and present, can be devoted to what we used to call ‘domestic improvements.’

This is a very rich country…. But even wealthy countries must choose. We can afford to police the world – to sustain 800 bases across the globe, to station troops in Korea, in Japan, in Bosnia, in Europe, fight wars in Iraq and Afghanistan, sustain fleets to police the seas….South Waziristan, Yemen, Somalia, Kosovo, the Taiwan straits, the North Korean border, the seven seas – we can do this. But the result is that we are continually at war. And the wars cost – in money, in lives, in attention. And inevitably, domestic priorities, as well as emerging security threats that have no military answers, get ignored. A rich country, Adam Smith wrote, has a lot of ruin in it. We seem intent on testing the limits of that proposition.”

US wars lacking merit have been tragic for the world.

b. US Finances

 Li says: “Fiscally, America is already insolvent, because of our huge national debt, which can’t be possibly paid off without massively irresponsible money printing.”

I do not agree. US government debt, both currency and interest bearing) plays a unique role in world affairs. Aside from gold, it serves as the leading risk-free asset. Whenever something troubling happens, people world-wide buy US debt. As I have suggested, it is perhaps best to think of US debt and its equities as two of the US’s leading exports. Of course this could all change. But when I consider alternatives, I do not see changes occurring soon.

c. Currency Manipulation

Li: “America is the largest currency manipulator in the world, having printed more than $4 trillion over the past decade, mostly at the expense of its creditors (e.g. China and Japan)!”

Two points here:

  • In the past, market-driven currency rate changes kept the US competitive with Japan. The dollar weakened from (¥360/$ in 1971 to ¥120/$ in 2015). This resulted from a trade imbalance driving down the value of the dollar and not from US currency manipulations. And that change made Japanese goods three times more expensive to Americans.
  • China and Japan have purchased nearly $2 trillion in US government securities to promote their exports. Trade manipulation? Yes, by Japan and China.

d. US Political Problems

I agree with Li that there are serious problems with the US political system. At the heart of the problem is lobbying. Table 3 provides data on 2016 lobbying. These data do not include campaign contributions. The bottom line is that government decisions depend largely on what these groups want.

Table 3. – Lobbying Expenses by Industry, 2016

Source: Open Secrets

I have no solution. In democracies, the special interests will work harder and spend more to get what they want than the general populace.

A couple of more points on the US:

  • No country in the world can commercialize ideas as quickly as the US. A friend of mine works for a major Boston hospital. Her job is to get retainers for her hospital and all of its doctors for rights of first refusal on their research discoveries. One of my partners in Shanghai was the Huashan Hospital, one of the largest in China. Like the US, their doctors make discoveries, but they do not have the linkages to investment funds that are available in the US. And in the US, these linkages are available for all types of scientific research.
  • Li says “America needs China for everyday things, from toilet paper to clothing.” Oh? It is not as if this is a real problem: if China does not provide them, we will get them from another country or produce them ourselves.

e. US Foreign Policies

Li and I agree on many points here. China, Russia, and the US should have their own spheres of influence without being threatened by the others. Let Russia have The Ukraine (a wretchedly corrupt Russian outpost). And as an American, I do not care who controls the South China Sea. One problem I have with China not mentioned by Li: why has it not reined in North Korea?

Li and I agree:

  • Syria: Leave it to President Assad and Russia.
  • Iraq: Withdraw all our troops as soon as possible. Let the Iraqi government and Iran take care of ISIS.
  • Iran: Leave it alone. The Iran nuclear deal framework is already in place. It’s better than nothing.
  • Afghanistan: No justification for remaining. Get out ASAP.
  • Saudi Arabia: Keep our military commitment to the minimum.

Trump

Too early to tell. His staff made a mess of the first immigration order and the Yemen attack did not go well. Hopefully, he will learn from these miscues. And I remain guardedly optimistic. Relations between China, Russia and the US needed a reset and Trump will provide one.

Comments

  1. Stephen P. Foley

    Refreshing analysis. It is nice to see the application by a high-order intellect of FACTS to an issue. Should be required reading in Washington DC (good luck).

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