- Become a leading outsourcing destination through low-cost labour.
- Patiently build up your cash reserve over a couple of decades.
- Through raw material subsidies and free loans, flood the global market with cheap, excess capacity so you become the primary source.
This is exactly how China became:
- a global leader in solar, steel, glass, paper and auto parts,
- the world’s largest exporter in 2009 (when it surpassed Germany),
- the world’s second largest manufacturer in 2010 (when it overtook Japan), and
- built up the largest foreign-exchange reserves in the world in that same year.
As per this recent post over on the HBR blogs on How Chinese Subsidies Changed the World, since 2001, when China joined the WTO, subsidies have financed over 20% of the expansion of the country’s manufacturing capacity. The state has willingly paid the price of economic inefficiency to accomplish political, social, economic, and diplomatic goals. As a result, huge Chinese subsidies have led to massive excess global capacity, increased exports, and depressed worldwide prices, and have hollowed out other countries’ industrial bases. For example, in 2000, China was a net importer of steel with 13% of world imports and 16% of global output. By 2007, after 27B of energy subsidies, it had become the world’s largest producer, consumer, and exporter of steel. It now produces 50% of the world’s steel, and with no scale economy or technological edge, still sells steel for 25% less than the U.S. or the EU.
This government support of private industry has helped China skyrocket to the second largest producer of GDP faster than anyone expected and will quickly propel it into the top spot. But there is hope for America. All it has to do to regain it’s glory as the largest economic superpower in the world is to:
- Take advantage of China’s rising wages and increasing unemployment and start promoting its “low cost labour”.
- Patiently wait as China, India, and other fast-growing economies follow its example and outsource everything over the next two decades, grabbing as much renminbi, rupee, and other foreign currency as it can over the next two decades.
- Subsidize raw material, manufacturing, and energy production like mad in key industries and begin the climb back up the GDP ladder.
At the rate things are going, China is going to overtake the US before Obama’s term is up, not in the 2020′s like everyone was originally predicting. There’s no stopping them. America’s only hope is to realize economies are often cyclical and take advantage of its next opportunity to get back on top.