American policy toward China depends heavily on whether national security leaders view China as ascendant relative to the United States. Though U.S. policymakers often assume that Washington will soon be eclipsed by Beijing, in truth the United States is widening the wealth gap with China, as the Chinese economy continues to flounder. This fact is frequently obscured, however, in large part because of Beijing’s successful military modernization as compared to America’s decimated global combat power. Indeed, despite the fact that it is falling even further behind the United States economically, China has managed to change Asia’s balance of power.
These military trend lines contribute to the dominant perception in American policy circles that China is on an inevitable path to overtake the United States economically and become Asia’s principal power. Without a doubt, surpassing the United States in Asia is Chinese President Xi Jinping’s aspiration. But while he inherited a China far wealthier and more powerful than it had been in decades, China’s economy is in the process of stagnating, and Beijing’s economic approach shows no signs of changing.
The idea that the 21st century would be defined by a “power transition” from American to Chinese dominance is not unreasonable. After all, China experienced dizzyingly high growth in the 1980s, ‘90s, and into the early 21st century as its economy was reforming along free market lines. This phenomenal growth made an understandable impression on American observers of China -- in no small part because of its association with a military modernization that is now bearing fruit. When a regional military balance changes, the actual economic numbers seem to matter less.
Military Modernization
China’s post-Cold War military modernization has been sweeping and comprehensive. Since 1990, China has invested in all classes of ballistic and cruise missiles under the world’s most active missile program. Its Second Artillery Force is lethal and now largely precision-guided. And China hasn’t just modernized its conventional missile forces; it has also upgraded its nuclear forces, including road-mobile, solid-fuel intercontinental ballistic missiles capable of striking anywhere in the United States. China similarly developed nuclear submarines that can deploy submarine-launched ballistic missiles.
According to the RAND Corporation’s 2015 U.S.-China military scorecard, the People's Liberation Army air force has also been the beneficiary of Beijing’s largesse: today, about half (736 of 1,432) of China’s fighters are modern, fourth-generation aircraft -- the equivalent of American F-15s, F-16s, and F/A-18s. Yet it is the improvement in the PLA Naval Air Force that has caught the attention of Asia-Pacific leaders, as RAND notes:
"Clearly, the PLA Navy’s surface fleet has made remarkable strides. As late as 2003, only about 14 percent of its destroyers and 24 percent of its frigates might have been considered modern -- capable of operations against a capable enemy. By 2015, those figures had risen to 65 percent and 69 percent, respectively."
China has been acquiring modern diesel-powered submarines at a faster clip than any other military in the world. It is now fielding modern destroyers at a rapid rate, many of them equipped with capable anti-air defenses and long-range, anti-ship cruise missiles. The PLA has also developed the world’s first anti-ship ballistic missile, specifically designed for targeting U.S. aircraft carriers. And, in a general surprise to most observers, China remains committed to building its own aircraft carriers and mastering carrier aviation.
Crucially, the PLA has also focused on improving its battle networking -- the connective military tissue that allows for command-and-control and improved targeting. In combination, these systems expand the Chinese capability to hit targets further into what is known as “the first island chain,” or the string of nearby U.S.-allied countries that includes Japan, Taiwan, and the Philippines. All of this adds up to a break in the U.S. monopoly over what Russia calls the “precision strike regime” -- the network of communications and information systems that tie together the navy, air force, and missile force capability to find, target, and destroy American and allied forces along with their military installations. The PLA can now project power throughout the South and East China seas and increasingly into the Indian Ocean.
Enabled by fast economic growth, China’s military modernization has changed the balance of power in the Asia-Pacific. Since the end of the Second World War, the United States has not had to worry about controlling the “first island chain” or about potentially hostile forces operating in the Pacific Ocean close to Guam and Hawaii. That has changed. In stark contrast to Chinese growth, during the same period, U.S. force structure was about halved. The decimation of the U.S. military, even as it has been asked to do more, is the great untold tragedy of contemporary U.S. foreign policy.
U.S. Forces on the Decline
According to RAND, the U.S. Army has already shed six of its 18 divisions after the Cold War and has lost another two since. The U.S. Navy has lost three more carriers and cannot maintain a simultaneous presence in the Middle East and in the western Pacific. The United States Marine Corps dropped from 39 amphibious ships to 31, but its requirement remains 38. U.S. Air Force bomber and fighter force structure has also been roughly halved since the mid-1990s. The Navy’s submarine force dropped from 82 to 59 over the same time period, and it will continue to fall below requirements through the 2030s. The loss of fighters, bombers, and submarines is particularly worrying for U.S. force posture in the western Pacific. While their quality has improved -- the aircraft the United States purchases today are much more capable fifth-generation aircraft, such as F-35As -- the decreased number of fighters is having a major impact on U.S. defense and deterrent capabilities. Furthermore, the Air Force’s long-standing bomber replacement program (B-21 Raider) is now on track, but won’t deliver its first aircraft until the mid-2020s.
The U.S. Navy is the clearest example of American military shrinkage, which most directly hurts U.S. power projection in Asia. Though the number of ships was cut after the Cold War, the United States still had a fleet of more than 400 ships in the early 1990s, the years in which China began increasing its procurements. By contrast, as Sen. Jim Talent (R-Mo.) wrote in 2015, “Today’s Navy is smaller than at any time since before World War I. It struggles to maintain a fleet of 272 deployable battle force ships and is expected under the current sequester baseline to shrink to between 240-260 ships.”
U.S. Beats China in Wealth
What does all of this have to do with the reality of greater American wealth and power? It makes it harder to see that China’s economic numbers relative to the United States are still quite low. One thing is clear: China’s relative gains in military strength are not a result of it becoming wealthier than the United States. On the contrary, China’s economic vulnerabilities are only growing. And in terms of available wealth, the United States is in fact significantly outpacing the Chinese economy.
As my colleague Derek Scissors has pointed out, wealth is a more relevant measurement of national economic power than gross domestic product. Gross domestic product measures annual economic activity, not the amount of resources a country has to draw on to support its military in peace or war. Wealth numbers tell a far different story than the conventional one: Credit Suisse estimates American net private wealth at $84.8 trillion and Chinese private wealth at $23.4 trillion as of mid-2016. And the gap is widening. With $60 trillion less in private wealth than the United States, China’s global economic leadership is ephemeral. And, while both economies now face mountains of public or semi-public debt, a rough calculation puts the wealth gap, including public sector net assets, at more than $45 trillion.
The trend lines are also surprising. China’s level of private wealth actually fell from mid-2015, both in amount and in global share. This decline is consistent with heavy capital outflows and indebtedness. On the other hand, Credit Suisse shows U.S. private wealth adding $1.7 trillion over the previous year, expanding its enormous lead over China. On the public sector side, surging debt at state-owned enterprises is eroding China’s vast public sector assets even as the U.S. public debt growth has stabilized after 2009’s sharp increase.
A key change in these trends was the slowing of the Chinese economy that started to show at the end of 2013. For at least a decade prior to 2010, China did outpace the United States in growing its net wealth. But for the past six years, the United States has matched China in wealth growth, and for the past three years, it has outpaced it. The big question for policymakers is: Why does it still feel like China is gaining on the United States?
A big reason is that unlike China, the United States chose to reduce its military power particularly in the domains that matter most in the Asia-Pacific. Despite a bipartisan consensus that China’s gains should be countered, America remains unwilling to spend adequate resources on defense. Even worse, the entitlement state has even greater claims on the government’s spending -- more than 70 percent of all budgetary outlays fund Medicare, Medicaid, Social Security, and interest on the national debt. As the United States continues to age, increasingly the main role of the U.S. government will be the intergenerational transfer of wealth and not on resourcing national security.
Therefore, those who believe in an inevitable Chinese takeover of Asia may not be wholly wrong. But that is not because China is overtaking the United States in wealth generation; far from it. Rather, it is because Beijing is taking advantage of an American political system unwilling to deal with its fiscal problems and provide for the common defense against the country’s most challenging threats.