Economy

Why is China No Longer a “Sleeping Giant”

Napoleon Bonaparte once pointed at China and said: “There lies a sleeping giant. Let him sleep! For when he wakes, he will shake the world.“.

China is a giant that has awaken

China is a giant that has awaken

When you think of economic powers the first countries that come to mind are: USA, the EU (European Union) as a block, India, and China. You have probably noticed that I’ve left South Africa, Brazil, Russia, and many others out of the equation. That is because I believe these countries most likely will not become global powers within the near future due to their inconsistency to deliver economic results (which is due to many reasons that range from commodity dependency to political corruption).

Looking back, the same countries seem to have held the top spot in the largest economy in the world ranking for centuries:

Year Country
1-1500 India
1500-1888 China
1888-present USA
2020-onwards China?

Although the world economic dynamics has changed dramatically in the 20th century (with the birth of the Internet), by looking at the past and analyzing current trends in the world it is reasonable to make certain predictions.

China currently has the largest population in the world, it holds the largest trade balance in goods surplus, the largest foreign reserves, and is quickly becoming one of the most important sources of foreign investment. All of these observations point at the same direction: China is well on its way to take away USA’s global power belt.

Most people would agree with that statement, however, very few could explain why.

China’s Strengths

Population

Up until 1520, India had the largest population in the world, until China took over and has been on top since then. Although population size represents a significant factor when determining a country’s global power strength, it can work against you if it is not properly controlled. And that is what happened to China, when they decided to implement the “One Child” quota throughout the country in 1979 – pushing birth rates to fall from 5.5 in the 70s down to 1.6 in 2012.

There was way too much poverty and the country was consuming alarming amounts of energy – although they continue to experience those same symptoms today. The policy was intended to alleviate social, economic, and environmental issues; however, it has caused some new problems in return. China’s population is aging, with the 25-54 age cohort representing nearly 48% of the population – in contrast with the 0-24 cohort representing only 32%. They are not replacing themselves.

Young Chinese are feeling the push and pull of family duty as they deal with aging parents. This puts a constraint in their productivity and well being.

With that, population-wise, India is forecasted to surpass China by 2030.

So, China’s population supremacy has been a two-sided sword, causing both benefits and damages to its development. But as of right now, they do possess an immense work force that willing to put in long hours, what has led China to grow its economy dramatically over the past few decades – currently second largest in the planet.

Gigantic Economy

China has a predominately goods’ – rather than services – economy. As of 2012, China had the largest trade balance in goods surplus in the world by a large margin, with Germany coming in second place – that is, when a country exports more than imports. With an increasing amount of foreign investors dumping money into Chinese companies and multinationals opening HQs in China’s largest cities, the giant of the East has proved to be a tempting place to bet your money on.

Here’s a quick overview of manifestations of global powers in the world over the centuries:

1800s-1914 1945-1990s 2000s-present
Largest Economy China until 1888, then USA USA USA (soon to be China)
Largest Trading Country UK USA China
Dominant Reserve Currency Pound Sterling Dollar Dollar and Euro

Economists forecast that China’s GDP will surpass USA’s by 2020. This is due to a changing level of play in the economic field. The effects of globalization have really benefited China, who until the 2000s had a tough time integrating its upsides with the Western world. But today, with the Internet so easily available and flights going in and out of China on an hourly basis, it has become much easier for the Chinese to offer their services to the Western economic powers.

China’s Drawbacks

Open ocean access

If you look at the global map you might notice that China does not have direct access to any ocean. Although this might seem trivial, it limits China from freely having maritime commerce, open ocean commercial fishing, and a significant navy force.

China's limited access to the ocean presents some serious economic drawbacks.

China’s limited access to the ocean presents some serious economic drawbacks.

If we look at the USA, they have direct access to the Atlantic, Pacific, and Arctic oceans. Off-shore oil drilling and goods’ exportation are only two of the many benefits the Americans experience with their geographic location. The Chinese, in the other hand, are limited to land.

This type of restriction forces the Chinese to maintain good diplomatic relationships with their land neighbors. Aside from India – which has become a strong economic partner of China over the past years leading to the so-called “Chindia” – most of the neighboring countries are economically poor, forcing China to feed the Western world with what it has to offer.

Currency convertibility

Before 2009, the Chinese government prohibited almost all export of currency or its usage in international transactions. The US Dollar – which, as of this day, still is strongly tied to the Yuan’s value – was the currency used to perform such transactions. So, with Chinese people unable to have US Dollars and the international community unable to hold the Yuan, all transactions were made through the People’s Bank of China, leading to a lot of bureaucracy.

In June of 2009, the Chinese government started a program that allowed certain places to utilize the Yuan for international transactions between certain countries, removing the hassle of converting everything to US Dollars beforehand. Nowadays, all Chinese provinces are allowed to do the same, however this type of trade is only available between certain countries: Russia, Vietnam, Sri Lanka, Thailand, and Japan.

This type of limitation ends up restricting the usage of the Yuan, which in turn ends up having little reserve currency power.

Conclusion

To determine a country’s global power we must look at more than just economic and military factors – and the ones discussed above are just a few of them. There are two types of power resources: hard power and soft power. Hard powers are factors such as the country’s economy, territory, population, military, and finance. Soft powers are things such as knowledge, technology, and culture.

China clearly has a strong economy, currently the largest population on planet Earth, a large military, and a territory the size of the USA. However, its soft powers are weak compared to the ones of developed nations. Most of the strongest universities in the world are in the USA, Japan, and Europe – China has only 3 universities in the top 100. Technological R&D follows the same pattern.

But, Thomas Friedman once said: “When I was growing up, my parents told me, ‘Finish your dinner. People in China (and India) are starving’. I tell my daughters, ‘Finish your homework. People in China (and India) are starving for your job.’.

Don’t be fooled by their limitations. China has changed a lot. But so has the economy. I hardly believe that one single country will dominate as global power from here and on. With a much “smaller” world today, a single country cannot do anything on its own. We are already seeing a shift in mentality on how things are done economically, and this new way of thinking will be easily translated onto how global governance operates, as well.

 

PA

 

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Should U.S., Canada and Mexico merge into one?

Stephen J. Dubner, in Freakonomics Radio, has recently done a podcast where he explored the possibility of merging the U.S. with Mexico into one gigantic country. It was a 55 minute podcast where an immense flow of ideas came in and left American listeners with this hopeful fantasy of being able to have the best guacamole in the world for cheaper than ever.

NAFTA Logo

NAFTA Logo

In the other hand, one day I was looking for a new book at Chapters and I stumbled upon a book named The Merger of the Century by Diane Francis, where she discusses why Canada and America should become one country.

Now, as we have been hearing on the news lately, with Catalonia pushing for independence from Spain, California trying to split itself into 6 states, Scotland trying to become an independent sovereign state, and more, why not unify and become a super powerhouse? East and West Germany is a perfect example of why this is possible.

Here I will discuss the potential upside and downside for each of the North American countries, politically, economically, and socially, and why this is not a feasible idea.

Political

The American political system is something that not many people understand very well. Basically it is divided into a judiciary branch, which interprets the Constitution, federal laws and regulations; the legislative branch, which is vested in the two chambers of Congress, the Senate and the House of Representatives; and finally, the executive branch, which is headed by the president and is independent of the legislature.

U.S. Capitol - Legislative Branch

U.S. Capitol – Legislative Branch

Canada, in the other hand, is a constitutional monarchy that has a multi-party system and a legislature that derives from Great Britain’s Westminster Parliament.

Finally, Mexico is organized in a system that is somewhat similar to the U.S., with executive, legislative and judicial branches organized into a federal representative democratic republic.

Bringing Mexico and Canada into the equation would require some large political restructures for everyone. The U.S., being the larger country, would probably impose their system and begin electing Senators for each of the new states incorporated. Canada would need to detach completely from the U.K. and divide itself into democrats or republicans. Mexicans would more easily adapt into the new system.

Passing new bills, restructuring the new legislative system –  Canada and the U.S. derive from Common Law, with the exception of Quebec and Louisiana which, alongside Mexico, derive from Civil Law – would be harder than ever. Can you imagine the confusion this would cause to businesses and people?

Would we then have one single president who would rule the entire continent of North America? How would we determine whether he/she should be from Canadian, American, or Mexican descent? How about the changes in languages that Quebec has so hardly fought for through the implementation of the Bill 101? Would we not require ex-Mexicans to learn french and english in school? What kind of super citizen would we be breeding by mashing together all these different cultures and expecting them to become a single one?

And I will not even touch on how the militaries would unify, because this is a whole different ball game.

The bottom line is, regardless of how different these systems are, and the fact that this new gigantic country would be trilingual, this change would costs trillions of dollars and a restructuring that would take decades to be implemented, slowing down the growth of this country and potentially putting it in a hole impossible to get out of.

Economic

The benefits that businesses would get from this unification would probably be the only positive thing out of this merger.

Mexico has one of the strongest automotive industries in the world. Ford, GM, and Chrysler have been operating there since the 30s and nowadays it produces a lot of the technologies we see in our cars. Alongside the automotive industry, Mexico is the 6th largest producer of oil in the world. Their tourism is arguably the strongest in North America, being the 8th most visited country in the world with over 20,000,000 tourists per year.

Canada is as natural resources rich as Russia and is U.S.’ largest importer of oil. From the oil sands in northern Alberta, to the unexplored oil reserves in the Arctic Sea, to having the largest coast line in the world, the nation is an economic power house with a shortage of workers.

The U.S.’ financial markets account to nearly 45% of the world’s market and has an immensely diversified economy. From the tech hub located in the Silicon Valley, to the off shore oil explorations in Louisiana, to their internal real estate dynamics, the country represents 22% of the nominal global GDP, being the strongest economy in the world.

If these three countries unified, the final result would account to a GDP of over $20.6476 trillion.

But how beneficial would this unification really be? By summing up the numbers everything indicates that it would be a great idea, however we need to take into account the different legislations that govern these economies, which allow them to flourish in the way they do.

The different currencies would present an issue

The different currencies would present an issue

The North American Free Trade Agreement (NAFTA) was created for the strengthening of each country’s economy without interfering with the way the countries are ran. Since the dynamics of an economy are highly tied to the country’s politics, changing the internal legislation of each nation to accommodate this North American merger would affect a lot more than just the economy. What about the currency? The Canadian dollar is lower than the American right now, and the Mexican peso is worth nearly $0.07. How would this new country compensate for the financial shift that would occur?

That is why NAFTA is such an asset to these countries, because it allows them to become a trilateral economy (free trade and exchange of workforce with TN Visas) without compromising their independence and currencies.

And let’s not forget about the darkside of Mexico. The cartels run large drug trafficking operations from South America (where they get a lot of their drugs) all the way to the U.S. (who are their largest consumers). Although the DEA works hard to keep things in order in the Southwest (Braking Bad will show you exactly how), becoming one gigantic country would enable drug lords to move illicit drugs across North America with much more ease than ever before, now that they don’t need to go around borders anymore.

Therefore, the economical upside isn’t as good as we would have thought, since there already is a great agreement in place that allows these three countries to operate in a trilateral economy.

Social

The social changes from a merger would be unimaginable.

Canada U.S. Mexico
Population 35.16 million 320.05 million 122.33 million
Area 9,984,670 km2 9,857,306 km2 1,972,550 km2
Unemployment (%) 6.4% 5.9% 5.2%
GDP per capita $40,588 $50,859 $16,143
Life Expectancy 81 years od 79 years old 78 years old
Water System Excellent Excellent Poor

From looking at the data above we can conclude a few things:

  1. Canada has a lot of uninhabited land
  2. The U.S. has an immense amount of people (who make good money)
  3. The average Mexican makes barely enough money to pay rent

Now, with all the immigration issues that the U.S. has with Mexico, it would be safe to say that once these nations merged, a large chunk of the Mexican population would migrate to the U.S.’ current land to look for jobs. The Mexican work force is a lot younger than the U.S.’ and is used to get paid a lot less. This would bring the minimum wage down across this new gigantic nation, bringing down with it the GDP per capita.

Americans would not be very happy about that, and would start moving up to Canadian lands to work in the oil sands (more than they do now). This increased workforce competitiveness would increase the unemployment rate in the northern part of the territory and Canadians would not be happy about that.

A few Canadians would then move down to warmer regions, such as Arizona and California, and eventually move back after suffering from severe sun burns.

Jokes aside, this new nation would cause an immense amount of inland migration leading to severe impacts on unemployment rates and lowered average income, causing the nation to collapse. Plus, the government would need to find a way to standardize and restructure Mexico’s water treating system.

Another big issue to consider is how would this new nation deal with the elderly. Nowadays, Connecticut pays for a large amount of elderly compensation across the U.S., whereas poorer states, such as Mississippi, need a lot more compensation than other states. Bringing in Mexican retired people, who live under the American poverty line, would require this new nation to compensate the southern territory with larger retirement checks, leading income taxes across the country to sky rocket.

Finally, these are only a few of my social predictions from this unification, and I am sure that there are a million other scenarios that we could think of that would lead to a million more, and so on. The bottom line is, merging these three countries into a single one with a population of almost half a billion people would require a lot of governmental changes to compensate for the inequality that would result from this.

Plausible Solution?

Mexicans are very proud of their culture and are not willing to melt into a single nation identity. Canadians are on the same boat, they are proud of the maple leaf and would never want to unify their hockey team with the Americans’ (I cannot imagine Mexicans playing hockey, I’m sorry). So the Americans are standing in the middle with their hands in the air thinking: what do we have to gain from this?

The North American Union would be extremely large

The North American Union would be extremely large

One possible dream that Mexico’s ex-president Vicente Fox proposed on Freakonomics Radio was to create a union, such as the European Union, where countries are independent but people do not need a passport to move around the continent or live somewhere else.

This would be called the North American Union and would potentially bring a lot of benefits to the continent. However, Europe has shown us that it is not all sunshine and rainbows; when one country struggles, the others suffer from it too, leading to inland migration to the countries that are doing well, increasing unemployment rates, and so on. The repercussions from such a Union would be somewhat similar to a merger.

Dreaming is fun, but maybe things should just remain the way they are.

 

PA