Should America Root for a Reforming China?

Xi might try making the PRC's economy more competitive. Good for the U.S.? It's complicated...

The Chinese Communist Party will hold plenary meetings in a few weeks, taking up the matter of renewed reform in the world’s second most important economy. While a grandiose announcement is guaranteed, China must have authentic and powerful economic reform to trigger another generation of rising wealth.

The catch is that what would be good for the People’s Republic of China (PRC) is not necessarily good for the United States. There are important ways in which the United States might be better off if the Party loses its nerve and economic reform is a fraud.

In the run up to the plenum, there has been plenty of debate over whether Party General Secretary Xi Jinping and the top leadership have the vision and authority to implement real reform. They will be opposed by the likes of extremely rich senior officers of state-owned enterprises, who also happen to be extremely rich senior members of the Communist Party. A question rarely asked is: whom should the United States root for?

The reflex answer is for the reformers. The American business community noticed the absence of reform about five years late but is now crowing for it. More important, a more market-oriented Chinese economy means a good deal more market-oriented competition in the global economy.

Much as we sometimes dislike it, tough commercial competition—untouched by political intervention—is what creates prosperity. It improves quality, drives down prices, and spurs productivity and innovation. A genuinely competitive China will be good for the world.

Much as we sometimes forget it, the United States is not the world. A reforming China would help the world economy if its workers, firms and industries were successful in competing, without state assistance, in world markets. The benefits would come from these (as yet non-existent) superior workers, firms and industries displacing inferior ones, some of which would be American.

How important are the workers, firms and industries we could lose? The answer is somewhat worrisome. The United States has long taken for granted our leadership in technology, and innovation more broadly. In the areas where we have been challenged, it’s always been by friends in West Europe or East Asia. The Soviet Union, for example, was nowhere close to a peer competitor in innovation.

The PRC is not anywhere close yet, either. It has been unable to assume a leadership role beyond a few, very narrow areas. Instead, it has imported, copied, bought and all too often stolen foreign technology.

To now. Another decade or two of true market reform could make China a competitor of the United States at the high end, over the next breakthroughs in telecom, biotechnology and energy. And China would be bigger economically than Japan or Germany, so competition would be broader. American consumers, and thus the American economy, would benefit from the new kinds of goods and services. This is no small development. But the American position at the top of the global economic, and perhaps military, heap would be seriously threatened for the first time in seventy years. It’s not obvious this is such a good thing.

The flip side is China fails to reform. The PRC today remains poorer and more vulnerable than perceived in the United States.

On official statistics, Chinese urban residents had close to $4,000 disposable income per person in 2012. For rural residents, it was in the neighborhood of $1,300. American personal disposable income was about $39,000 last year. It is true that prices are lower in China than the United States, but they’re not much lower anymore in many Chinese cities