Worthy Notions: From The Editor
Trading Places, Revisited
Dwight Cass
09/01/2005

Is China the new Japan? Recent Chinese bids for large U.S. companies, growing frictions over the volume of its exports and its currency manipulation, and worries that it may use its vast purchases of U.S. Treasury securities as leverage in disputes all seem reminiscent of the concerns pundits and policymakers had about Japan in the late 1980s.

Of course, Japan was a long-standing ally, while China has been our adversary, more or less, for more than half a century. Japan was also a fully fledged member of the developed world, while China today remains, in the eyes of many, an “emerging” market.
 
The Reagan and first Bush administrations adhered, for the most part, to laissez-faire, free-trade diplomatic policies despite protectionist pressures in Congress inflamed by ever-more-shrill tomes by codependent U.S. and Japanese demagogues. (Remember Clyde Prestowitz, herald of hegemonic decline and author of Trading Places, and his Japanese counterpart, the fist-shaking ultranationalist Shintaro Ishihara, author of The Japan that Can Say No?) The fact that Japan and the U.S. did not trade places and have generally maintained a mutually beneficial economic relationship, indicates that the Reagan and Bush I administrations pursued the right strategy. Some make the case that it is also the right approach for dealing with China today.

Historical analogies like this may be comforting, but our country’s economic policies toward China and toward India—another target of heated antiglobalization and protectionist rhetoric—are of a vastly different nature. Unlike Japan in the 1980s, these countries really do have the world’s fastest-growing economies. And while we hope for a productive relationship with China, it remains an often brutal authoritarian state and a rival for influence in Asia and beyond.

The BRIC Block
Assume that our government restrains itself from blowing up our relationships with China and India; it ignores domestic protectionist interests, it tones down its rhetoric on exchange rates, it comes to grips with our negative savings rate and trade deficit, and it works constructively with each party to defuse regional crises (North Korea and Kashmir, for example). In the absence of a diplomatic or economic catastrophe, how should we expect these countries to develop

One increasingly popular belief is that they, along with Brazil and Russia (the BRIC countries), will continue their upward trajectory and eventually outshine the more deliberately paced G8 economies, including ours. Indeed, in a report issued in late 2003 which popularized the BRIC acronym, Goldman Sachs economists predicted that by 2050 the BRICs would comprise four of the world’s six largest economies. Other economists subsequently made similar, if slightly more conservative, projections.

According to Goldman’s report, China’s GDP will overtake the UK’s and Germany’s by 2010, Japan’s by 2016 and ours by 2041. It will be the world’s largest economy by 2050, followed by the U.S. and India. India’s economy will take a bit longer, but will have surpassed those of Italy, France and Germany by 2025 and Japan by 2035. Brazil and Russia lag behind, but Goldman forecasts that both economies will leave Germany in the dust by 2040.

These results may seem implausible to those who have negotiated India’s Byzantine bureaucracy in an attempt to establish businesses or make investments, or who have put capital in Chinese companies, only to find them stripped bare by rapacious local mandarins and hucksters. But even if Goldman’s forecast is taken as illustrative of only the best-case scenario for the BRICs, the general thesis raises interesting strategic questions for investors and entrepreneurs.

Clearly, these countries will play a crucial role in the global economy in the coming decades. Today, investors blithely put their low-risk money in 20-plus-year U.S. government debt and, in Europe, the occasional 50-year issue. Those who invest for the future in this manner should give some thought to which countries will be the best repositories for that sleep-well capital when those investments come due. Meanwhile, entrepreneurs build companies that they hope will last for decades, if not generations. If Goldman’s forecasts about the BRICs are even partially correct, those companies—and their investors—will need unprecedented flexibility to react to this shift in the macroeconomic international balance of power.