High stakes demand restraint from China and the US
private investment as a result of intimidation by the ruling party; and a commitment to state capitalism that hampers total factor productivity growth. Chinese domestic consumption has weakened, owing to uncertainty and the lack of a broad social safety net. With deflation setting in, China now must worry about Japanification: a long period of lost growth.
Like so many emerging markets, it could end up in a “middle-income trap," rather than reaching No.1 status. While the US may have overestimated China’s potential rise, it also may have underestimated its own lead in fields like artificial intelligence, machine learning, semiconductors, quantum computing, robotics and automation, and new energy sources such as nuclear fusion. China has invested in some of these areas under its ‘Made in China 2025’ programme, but its goal of achieving near-term dominance in 10 industries of the future seems far-fetched.
American fears about China dominating Asia are also excessive. China is surrounded by almost 20 countries, many of which are strategic rivals or ‘frenemies’ ; most of the few allies it does have, like North Korea, are a drain on its resources. While its Belt and Road Initiative was supposed to make new friends and create new dependencies, it faces many challenges, including massive failed projects that are leading to debt defaults.
As much as China wants to dominate the Global South and ‘swing states’, many middle powers are resisting this ambition. The US has imposed sanctions to keep key technologies out of the Chinese military’s hands and frustrate China’s quest for dominance. But it must limit this to de-risking rather than decoupling.
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