Is the USA in 'irreversible decline'?

I've been hearing about the imminent collapse of the United States for 50 years. Yet here we are in 2012 and the US is still, for the moment at least, the world's dominant power. Under the circumstances you'll pardon a little scepticism on my part. On reading his obituary Mark Twain famously said "The reports of my death are greatly exaggerated." I'm beginning to wonder whether the same may be said of the supposed death of the USA.

In my lifetime doom saying about the USA has gone through three major phases. The first was the Soviet Union phase. When I started at the University of Cape Town most of the student body took the eventual triumph of that clunky totalitarian monstrosity for granted. Those few of us who thought the very notion of the Soviet Union ever surpassing the US was crazy were dismissed as dimwits.

That being said we recognised the Soviet Union was dangerous. The real worry was that the Soviet Empire, in its death throes, might ignite an all-out nuclear war.

By the 1980s, when it had become evident that the Soviet Union was a dinosaur albeit a dangerous one, Japan was the country that was supposed to supplant the USA. This was the era of articles in Foreign Affairs Magazine about the "emerging Japanese superstate."

Japan was no more likely to supplant the USA than the Soviet Union but this era was more fun. The Japanese were not going to start a nuclear war and they produced cool stuff like well-made affordable cars and the Sony Walkman. I am an unabashed Toyota fan. Being threatened with a better car was preferable to being threatened with intercontinental ballistic missiles.

And now we are in the third phase where China is presented as the great challenger to the United States.

Unlike the Soviet Union and Japan, China is a credible challenger. I thought the very idea of the Soviet Union or Japan supplanting America was inherently preposterous. I would not say that about China. China could supplant the USA. For reasons which I shall explain below I don't think it will; but it could.

But first let me explain what I mean by "China." I am using the word "China" to mean China under the current Communist Party regime.

It is always possible that China, like Taiwan and South Korea before it, morphs from dictatorship into a decent democracy. If that happens all bets are off. I think a China that follows the Taiwanese / South Korean trajectory of increasing prosperity and then a transition to democracy could well supplant the USA as the world's dominant country. The probability of China following that trajectory is a separate issue.

I don't doubt that China will overtake the USA in the size of its economy. It does, after all, have four times the population. Even with an economy twice the size of the USA it would in per capita terms be only half as well-off as the United States. It should get there at an easy canter in a couple of decades.

In the international sphere size matters. In per capita terms New Zealand has a larger economy than China but is hardly a contender for global dominance. Once China has an economy twice the size of the next biggest country it will have enormous clout in the international arena even if its populace is still relatively poor. It is also likely that by then China will have a very capable military.

But this is where matters get more interesting and to explain why I need to explode a two myths about China and the USA.

Myth 1: America doesn't manufacture anything anymore.

There is no dearth of manufacturing activity in the US. There is, however, a dearth of manufacturing jobs. Let's see what has happened to manufacturing output in the US over the past three decades.

The low figure for the last decade reflects a fall in the years 2008-2009 and a rebound in 2010. So even during a catastrophic decade US manufacturing grew by 1.6%.

Now let's see what happened to manufacturing employment during that period.

Even as manufacturing output was growing employment in manufacturing was shrinking. Putting the data from the two tables together this is what it means for US manufacturing productivity.

Note that these figures are cumulative. Over the period 1980-2010 manufacturing output per employee increased threefold. In 2010 11.6 million manufacturing workers were producing almost twice as much as 18.7 million people in 1980.

To put this in perspective manufacturing productivity in China has not quite reached the levels of the USA in 1980.

The process is ongoing. The deployment of technologies already in the pipeline could see US manufacturing productivity grow by another fifty per cent in the coming decade. According to the Economist magazine manufacturing productivity in the US is between three and four times that of China.

This quote from the economist sums it up:

Despite China's rapid rise, America remains a formidable production power. Its manufacturing output in dollar terms is now about the same as China's, but it achieves this with only 10% of the workforce deployed by China,…

(See: http://www.economist.com/node/21552899)

Updating the story, in the year to May 2012 America's manufacturing output grew by 4.7%, Japan's by 6.2% and China's by 9.6%. By contrast manufacturing output in the Euro area shrunk by 2.8% with German output flat.

Myth 2: China is a great manufacturing power.

…One former [Apple] executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone's screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company's dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

"The speed and flexibility is breathtaking," the executive said. "There's no American plant that can match that."

(How the U.S. Lost Out on iPhone Work, NY Times, 21 January 2012).

If you have a skilled and disciplined labour force willing to live in company dormitories and work long hours for low wages you can do things which would be impossible in any rich country. Is this a sustainable model going forward?

But labour costs are growing less and less important: a $499 first-generation iPad included only about $33 of manufacturing labour, of which the final assembly in China accounted for just $8. Offshore production is increasingly moving back to rich countries not because Chinese wages are rising, but because companies now want to be closer to their customers so that they can respond more quickly to changes in demand. And some products are so sophisticated that it helps to have the people who design them and the people who make them in the same place. The Boston Consulting Group reckons that in areas such as transport, computers, fabricated metals and machinery, 10-30% of the goods that America now imports from China could be made at home by 2020, boosting American output by $20 billion-55 billion a year.

(The third industrial revolution The Economist, 21 April 2012)

Put bluntly new manufacturing technologies, especially 3D printing, are smashing China's low wage business model. Yes Chinese manufacturing will continue to grow; but not manufacturing employment which, according to the Economist, peaked in 2009. Chinese companies, like their rich-country counterparts, are being forced to automate more and more. However China has a long way to go before it matches US manufacturing productivity.

But why do I say that China is not a manufacturing power? Maybe its productivity is lagging but it manufactures an awful lot.

The reason is that very often Chinese companies do not own the intellectual property for the items they manufacture. Rich country manufacturers from the US, South Korea, Taiwan, UK, Japan and others use China as a "manufacturing platform" to capitalise on low wages and a disciplined labour force. But most of the profits accrue to the rich country companies. For example, ARM, the company that designs some of the chips in the iPhone, makes a greater profit from each iPhone than any company based in China.

Of course this is changing. Chinese companies are investing increasing sums in R & D. They are moving up the value chain. Chinese companies like Huawei are already world-class.

But this process of developing intellectual property is a much slower than simply being a manufacturing base. I have no doubt that in time China will become a genuine manufacturing giant; but they're there yet.

Because of the importance of the American market inventors outside the US usually register patents on what they consider to be commercially valuable inventions with the US Patent Office. Foreign patents granted in the US have become a popular indicator of a country's innovativeness.

So let's see how China ranks. Look at the table below. It shows the number of patents registered with the US Patent Office in the year 2011 for selected countries.

(Source: United States Patent Office)

Recall that China has now overtaken Japan as the world's number two economy. It has almost ten times Japan's population. Yet it lags even behind Taiwan in terms of patents registered.

Note also that the traditional European innovation powerhouses, Germany, France and the UK, all file more patents than China despite having smaller economies and populations.

China is great manufacturing platform. It is not yet a great manufacturing power. Only when it owns the intellectual property will it become a manufacturing power.

Question:

Can an authoritarian regime nurture the sort of creativity that is needed to transform China from a manufacturing platform into a manufacturing power?

If the experience of Taiwan and South Korea is any guide the answer is "Yes, up to a point." After that things get tricky.

With those myths out of the way, what do the brightest and best of China's people think about the USA?

In 2011 723,277 foreign students enrolled in US universities. Of these 157,588 were from China, an increase of 23% on the previous year. Other popular countries of origin were India (103,895) and South Korea (73,351). Most Chinese students were studying STEM (science, technology, engineering, mathematics) disciplines.

(See: Chinese students enroll in record numbers at U.S. colleges, Washington Post, 14 November 2011)

Not all, but the majority, of Chinese students stay on in the US after graduation and build their lives there. For a country supposedly in terminal decline the USA seems to be awfully attractive to the brightest and best from its major strategic rival.

(See: China fears brain drain as its overseas students stay put The Guardian, 2 June 2007)

So, to repeat my question:

Can an authoritarian regime nurture the sort of creativity that is needed to transform China from a manufacturing platform into a manufacturing power?

I think the answer is probably not on a sustainable basis while the US and others provide such attractive alternatives.

And this brings me to what I would regard as one of America's greatest strengths, its unparalleled network of top ranking universities, well-funded national laboratories and dynamic industrial research labs that act as a magnet for the brightest and best scientists and engineers. The US is as close to being STEM paradise as you can get.

Shanghai Jiaotong University publishes the annual Academic Ranking of World Universities (ARWU). It is probably the most widely used of the international rankings systems especially when considering STEM disciplines. According to the 2011 ARWU, 53 of the world's top 100 universities are in the USA. (Most of the rest are in Western countries. Australia has 4 in the top 100.)

I could write much more such as how new technology is decreasing America's reliance on imported energy or how nervousness about China is causing many of China's neighbours- notably Vietnam, Philippines, Japan and, to some extent, India – to do their best to keep the USA engaged in Asia. They recognise that America is the only possible counterweight to China.

I could also write about demographics - especially China's rapidly aging population and shrinking labour force. China may get old before it gets rich.

But this will do for now.

I am well aware of America's many massive problems. In many ways America's worst enemy is America. But looking at the totality of the evidence, America does not seem to me to be a nation in irreversible decline. Neither, apparently, does it seem that way to the hundreds of thousands of China's brightest and best who are migrating there.