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China Could One Day Pass U.S. as Major Economic Power, Book Says

Published: 2004-11-08

Oded ShenkarThe rise of the Chinese economy in the 21st century is reminiscent of that of another country, says Oded Shenkar.  And that country isn't Japan or some of its Asian neighbors in the 1980s – it is the United States a century ago.

Shenkar, a professor of management and human resources at Ohio State University’s Fisher College of Business, is author of the new book The Chinese Century: The Rising Chinese Economy and its Impact on the Global Economy, The Balance of Power, and Your Job. (Wharton School Publishing, 2005).

In the book, Shenkar says too many Americans have been lulled into complacency, thinking China is another Japan, a country that will challenge America’s economy for a while, and then fade from the headlines.

“China has what it takes to challenge the U.S. economy to a greater extent than did Japan, or any other country ever has,” Shenkar said.

“This does not mean the decline of American civilization.  But we have to understand what is happening and make adjustments, because China is on the rise.”

Growing at a faster clip than any other major nation, China is on course to surpass the United States as the world’s largest economy within 20 years.  China-based factories already make 70 percent of the world’s toys, 60 percent of its bicycles, half its shoes and one-third of its luggage.

One of the major advantages China has is low wages – about 30 times lower than those in the United States.  But Shenkar said it is a mistake to think that low wages is the only advantage China has.

China already has an impressive amount of technological know-how and manufacturing capability, thanks in part to American companies that have set up operations there.  Companies from the United States, Japan and Europe have been eager to share their technology, with the hopes that they can penetrate the huge Chinese market.

“China has enormous bargaining power that Japan never had when dealing with U.S. companies,” Shenkar said.  “China has used the opening of its consumer market as a bargaining chip to get more technology from the U.S. and elsewhere.”

This inflow of technology has allowed China to develop its economy much more quickly than countries have in the past.  Japan, for example, started by selling the United States cheap, easily produced products and only very slowly started selling high-tech goods such as luxury automobiles.

China, on the other hand, is moving very quickly to produce products at all ends of the scale.

“We will continue to get the T-shirts and toys, but we will also be getting the motorcycles and cars very soon,” he said.

This means that even America’s high-tech industries will soon have serious competition.

And while China has not yet reached the stage where it can innovate and develop its own technology, companies there have no problem stealing the technology from others, Shenkar warned.

“I think Americans have grossly underestimated the problem of intellectual property rights as it applies to China,” he said.  “Until China emerged, the countries that tried to copycat technology had very limited capabilities.  But for the first time, you have a country that has the capability to copy the technology developed by others, and also a disregard for intellectual property rights that allows them to do it.”

And the issue goes beyond copying CDs and DVDs, although that in itself is a major problem.

For example, more than half of the motorcycles sold in China are knockoffs of Japanese brands such as Honda and Yamaha.  The damage extends outside China’s borders.  Yamaha estimates that every year more than 100,000-China made copies of its motorcycles make their way to overseas markets.

But the stunning growth of the Chinese economy is the result of more than just the willingness to steal technology, and other factors inside the country’s borders.  Changes in worldwide logistics, and the globalization of industry, have helped set the stage for China’s arrival as an economic power, according to Shenkar.

One reason that Chinese goods have made such inroads in the United States is the result of the influence of large retailers, particularly Wal-Mart.  Wal-Mart accounts for more than 10 percent of U.S. imports from China, and is by itself a larger importer of made-in-China products than Canada, the UK, or France.

Wal-Mart has offered huge promotions in which they have offered non-name-brand products such as televisions and DVDs at very low prices – and most of those products have come from China.

“Chinese firms have been able to enter the United States without building a brand, which has given them a big advantage,” Shenkar said.  “Americans are now willing to walk into a Wal-Mart and buy a DVD player with a brand they have never heard of before, as long as it is cheap.”

Shenkar said the growth of the Chinese economy means American firms and workers need to let go of their old assumptions about the world economy, and what it takes to get ahead and stay ahead.

For one, American companies cannot assume that China will soon join the rest of technologically advanced countries that vigorously protect intellectual property, such as technological advances.  “Right now, companies have to start thinking from the design stages about how they can design products that are difficult to copy.  We have to be much more careful about how technology and knowledge flows,” he said.

Americans can also not assume, as they have in the past, that education is a good enough defense against losing jobs to overseas competitors.  While education is important, he said, other countries are catching up to us in knowledge and education and will be able to compete with us in nearly any job category requiring advanced education.

And while Americans are properly concerned about human rights violations and artificially low wages in China, they shouldn’t think that solving these problems will make us more competitive.

“You don’t have to convince me that China doesn’t do well on human rights,” Shenkar said.  “But human rights and economic competitiveness are two separate issues.  Fixing one won’t necessarily fix the other.”

While he has many concerns about how the United States is responding to the growth of China, Shenkar said he is not necessarily pessimistic about our future.  Just because China becomes strong, doesn’t mean the United States has to become weak.  But he said Americans should be preparing for a new global order.

Among all the characteristics China has that could help it become a major economic power, Shenkar said there is one that it shares with the United States – ambition.

“China has strong aspirations to be the number one economic power,” Shenkar said.  “Hundreds of years ago China was one of the world’s leading powers and they want to be number one again.  They are very clear about it.  And I don’t think we should dismiss it out of hand, which is what most of us are doing right now.”

Written by Jeff Grabmeier, Research Communications