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Rising consumer class hints at 'China century'

Brilliant article in the IHT today, on the rise of Chinese economy. Most strikingly, China’s share of the global economic output has doubled since 1991, fast approaching EU output.

It seems like it might be China’s century, followed closely by huge growth rates in China.

For decades, the United States was the world’s only significant mass market, offering businesses more than enough consumers to buy up ever greater volumes of their merchandise and services.

To gain access to all these consumers, companies had to operate inside the country. And they could do so very profitably because they benefited from economies of scale, meaning that each item coming off an assembly line was less expensive to produce than the one before.

The wealth generated, in profits and wages, has made the United States far and away the world’s most powerful nation for nearly a century. No one else had ever been able to match the American achievement. But now the world is witnessing the birth of a mass market in China, whose 1.2 billion people hold the promise of consumption on a much greater scale than in the United States.

That prospect is still a generation or two away, economists say, and assumes that political or economic disruptions do not derail it. But a consumer class is rising fast. The Chinese are buying cellphones, refrigerators, computers, cars, toys, furniture, television sets, airliners and designer clothing in ever greater numbers.

As this mass market asserts itself, China becomes a problem for the United States not just for the exodus of tens of thousands of American jobs but also for the potential to use economies of scale to keep those jobs, even if Chinese wages rise to American levels.

“The notion that God intended for Americans to be permanently wealthier than the rest of the world, that gets less and less likely as time goes on,” said Robert Solow, the Nobel laureate in economics.

This sense of entitlement to pre-eminent wealth and world power has been a national characteristic stretching back to Theodore Roosevelt and Woodrow Wilson. Now China is undermining that singular influence More and more, it can defy American demands and worry less about the economic effects. Last week, for example, Prime Minister Wen Jiabao, visiting the White House, again ignored President George W. Bush’s pleas to increase the value of the Chinese currency. A stronger yuan would make it more expensive for American manufacturers to shift operations and jobs to China.

In Asia, China is supplanting the United States as the principal trading partner for several countries, including South Korea. This influence reduces U.S. power in the region, not only economically but also militarily. China’s power seems certain to increase as it develops its mass market, chipping away at the American role as the world’s buyer of last resort, the only nation capable of bolstering other countries’ economies with its vast purchases of their goods and services. For 60 years, that purchasing power has made America the unchallenged leader in trade negotiations and political influence, a leadership now gradually eroding.

A big stick in this leadership, apart from military might, has been the threat of tariffs and import quotas – of cutting off the golden American consumer from outsiders. But with the rise of China as an alternative mass market, American restrictions on European steel imports or Brazilian citrus, for example, lose potency. Why worry that much about being kept out of the United States when China provides more than enough buyers?

Mass markets were critically important in inflating America’s sense of itself. As the economic historian Alfred Chandler has pointed out, Microsoft and Intel grow rich today on economies of scale just as Ford Motor did nearly a century ago with the assembly line. A thousand copies of Microsoft Word or a thousand Intel computer chips role off the line in little more time than the first 100, adding only pennies to the cost of the initial production. Invention and development are already paid for, and also most of the labor.

That makes selling all this output critically important. If sales rise 20 percent a year in the Chinese mass market and only 5 percent in the much older, more saturated American market, then the pressure builds on Microsoft and Intel to make China the center of production, not merely the site of many factories, and to export to the United States as a secondary market.

In this new arrangement, the American mass market survives and grows, but China’s grows more quickly – holding Microsoft and Intel in place there even as Chinese wages rise to the U.S. level. The productivity that results from economies of scale – that is, rising output per worker – generates more than enough revenue to pay the higher wages and also fattens profits, a compelling reason to stay put rather than move on to a country with even lower wages. Pressure mounts to shift research and marketing from the United States to China.

“As the Chinese become richer and their tastes move closer to those of the higher-income world, then companies that put their plants in China basically to export from there will find themselves increasingly producing for that market,” said Richard Nelson, an economist at Columbia University. “That seems to be what is beginning to happen now.”

China’s share of the world’s output of goods and services has nearly doubled since 1991, to 12.7 percent, closing in on the European Union’s 15.7 percent and approaching America’s 21 percent, according to the International Monetary Fund.

No other nation comes close to China’s explosive expansion, all of it generating purchasing power for a rapidly growing work force.

India has increased its share by 33 percent since 1991 but still accounts for a meager 4.8 percent of total global output. The American share, although clearly the largest, has not changed since 1980.

As dramatic as these developments are, the tipping point is a long way off, said Stephen Roach, chief economist at Morgan Stanley.

“The Chinese are producers now, and they will become mass-market consumers, but only after a long lag,” Roach said. “And the reason is lack of income. The Chinese are still firing eight or nine million workers a year as part of their reforming of state-owned enterprises, and those workers don’t have a safety net” – much less a wage.

Even so, it is no longer possible for the United States to regain the special access to income and profits that its mass market made possible, Solow argues.

America, like everyone else, must get used to being a loser as well as a gainer in the global economy.

In the end, the 21st century is unlikely to be the American Century.

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