China to Overtake U.S. as World Economic Power - Now What?

Someday, China will overtake America as the world's largest economy. That appears to be a safe bet.

As for when it will happen, what are the implications, and what America's political and corporate leaders should do about it, that's a bit more complicated. Or is it?

Citing a "bombshell" report by the International Monetary Fund, WSJ MarketWatch columnist Brett Arends says that monumental event will occur in just five years. He calls it the End of the Age of America and provides some disconcerting insight into what the Age of China might be like.

Rather than give into all the hyperbole - as everyone did over global warming, for example - I prefer to break these big hairy issues down as follows:

1. What are the facts?
2. What are the implications?
3. What, if anything, should we do about it? What is The Plan?

And while we won't know how today's analysis of this frightening situation will turn out until I'm done writing and you're done reading, I suspect my conclusion will be somewhat contrary to conventional wisdom. We'll see.

So, beyond the hyperbole, here's ...

China to Overtake U.S. as World Economic Power - Now What?
The Facts
Arends's conclusions are based on using PPP, or "purchase power parity," which compares what people earn and spend in their domestic economies. PPP isn't subject to widely varying exchange rates or currency manipulation.

The IMF says the more appropriate comparison is by GDP - Gross Domestic Product. At current market exchange rates, the crossover would then be at least a decade away. Arendas agrees that, "No one measure is perfect. All statistics need caveats."

To me, the whole "crossover" thing is only relevant to the extent that it lights a fire under a nation that's been lulled to sleep by too many decades of thinking it's economically invincible. One would hope that our current economic climate and national indebtedness to China would have already accomplished that, but a little extra incentive certainly couldn't hurt.

That aside, the fact is that China is growing rapidly and America isn't. That long-term, ongoing trend means crossover is inevitable. To me, that's the issue, not whether crossover occurs in five or ten years. Who cares?

The Implications
Whenever that crossover does occur, I'm sure we can all agree that China ...

• Is a not-so-benevolent country with leaders who play by their own rules which are decidedly different from our "life, liberty and the pursuit of happiness."
• Was under communist rule until its leaders reached the brilliant conclusion that some form of capitalism would make them even more rich and powerful.
• Will sometime in the not-too-distant future become the wealthiest nation and most dominant economic, political, and military force on earth.

In all likelihood, the U.S. will someday be to China as the U.K. currently is to the U.S. Largely irrelevant. A has-been empire from another time that people can barely recall. The only difference is that we're a relatively friendly nation that sticks to its own borders, more or less.

As Arends puts it, "Both those countries (U.S. and U.K.) live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different."

The Plan
Well, when market-leading corporations - like IBM, Apple, or Intel, for example - realize they're on a path to losing their leadership position and all their market power with it, they typically put their smartest people in a room and don't let them out until they've come up with some new ideas.

And if those new ideas don't include gut-wrenching changes, you can be damn-sure that nothing much will change and they're going down the tubes, as many companies have before them. With that in mind, we have surprisingly few options:

Option 1. Just keep plodding along on our current trajectory, arguing about whether China kicks our butts in five years or ten, keep piling up a mountain of debt - primarily to China, which is more or less like throwing salt on someone who's dying of thirst - learn to speak Mandarin, and hope our Chinese overlords are good to us.

Option 2. Get serious about understanding how we got here and get ourselves on a different path, pronto. There's a relatively straightforward method for accomplishing that and, in all cases, it comes down to three necessary ingredients. Here they are:

• Great Leadership. When the aforementioned companies realized they were on a deteriorating path that would eventually lead to their destruction, the first step to fixing the problem was to admit there was one. In all cases, the board found itself a new leader who agreed there was a problem and dedicated himself to leading the company out of it.
• Great Plan. Solicit ideas from the smartest people in the land, choose the smartest ones that make the most sense and have the highest probability of success, make that The Plan, and begin the process of executing The Plan with a sense of urgency appropriate to the severity of the problem, meaning like our butts are on fire and The Plan will take us to water.
• Execution: Whether they agree with every detail of The Plan or not, every man, woman, and child in America gets behind this new leader and The Plan and does his or her part by doing what John F. Kennedy suggested a long time ago, "Ask not what your country can do for you, ask what you can do for your country."

Honestly, I was one of the folks who thought that, as long as America maintains its leadership in intellectual capital - the engine that drives what we used to boastfully refer to as the new economy - a little bit of outsourcing of manufacturing to lower-cost labor pools wouldn't materially harm the nation.

Well, I was wrong. That's because outsourcing doesn't stop with "a little." It's a slippery slope that gets slipperier if we let it and that's exactly what we've done. According to Grove, America needs new, job-centric leadership and incentives, specifically for manufacturing sectors, to stop the slide and expand the U.S. employment base.

He presents what I think is a brilliant explanation of how we got into this mess and an innovative plan for getting us out of it in a Business Week article entitled Andy Grove: How America Can Create Jobs. Check it out, but first, a warning. It's a protectionist plan. If I thought that was avoidable, I wouldn't suggest it.

So keep an open mind, at least until we have The Plan. Then we all need to get behind it and push. As hard as we can. I don't know about you, but I'm a little too old to learn a new language.

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