While ideological and martial elements greatly shaped the Cold War, the Sino-American Competition is primarily an economic one. Success by either side will come chiefly from adroit domestic policy and capital allocation, not a military conflict, or cunning diplomacy. Military and diplomatic labors are shaping efforts. Neither is likely to be the proximate cause of the competition’s termination, but competitors must prevent their adversary from cementing a conclusive advantage in either. Accordingly, U.S. policymakers should prioritize domestic reforms that improve capital allocation rather than those ostensibly linked to interstate competition. While the United States must strive for military superiority and influence to a degree, it is more important to reform sectors like healthcare and education in a fiscally solvent manner to ensure U.S. economic dominance.
Unlike the Soviet Union, which posed an existential threat to Western Europe, China has no territorial aspirations against the U.S. or any allies who form the core of the international order. The geographic separation of the U.S. and China (and U.S. Allies), their relative conventional military parity, and their mutual possession of nuclear weapons make a decisive conflict between the two unlikely. No state in history has succeeded in a trans-oceanic invasion against a peer power. Operation Overlord is not an example—Germany and the United States were not peers. Rather than wage a large war over an asymmetrically held interest, like Taiwanese sovereignty, the Sino-American competition will likely find martial release through proxy wars, limited naval, air, and cyber conflicts, and arms races. There are few places or reasons to fight a long war that could decide the course of the competition. The U.S. military objective vis-à-vis China should be to prevent Chinese dominance in East Asia and outside of it, not to dominate.
The Sino-American Competition is also more of a purely hegemonic contest than the Cold War. China has discarded the rigor of Communism and embraced elements of Capitalism. Ideology is not as important as pragmatism. The Chinese Communist Party (CCP) could accept liberal democracy tomorrow, but the conflicting national interests that underlie the competition would remain, only the character of the competition might change. Regardless of the political system or party in power, China and the United States will experience the tension that naturally occurs between the world’s two strongest nations.
Economic currents drive these tensions. China’s economic rise has made it a potential military peer and diplomatic challenger. Economic prosperity helps the CCP maintain internal security, and its unexportable ideology causes it to rely on financial means to gain favor more than the Soviets ever did. China’s economic growth over the past four decades is both the root and decisive aspect of the competition. The United States and China are unlikely to remove each other militarily or stop competing because of domestic political changes. The Sino-American competition will likely terminate, at least for a time, when one state reaches financial exhaustion or when one state achieves a decisive advantage in productivity.
If China can continue to grow its economy faster than the United States, it will gradually assume control of international institutions and gain global influence at U.S. expense. Conversely, if the U.S. can preserve its economic advantage, it will stay the dominant global power. If neither state can achieve a significant economic advantage, the Sino-American Competition may become a multi-century rivalry like the one that occupied Britain and France, punctuated by war but never resolved by it. The Anglo-French competition shaped European relations for over two centuries. Like the Cold War, the Sino-American Competition could have this effect globally. China, however, which avoids the worst Soviet excesses, will maintain a positive economic trajectory for longer.
China’s potential to outgrow the United States over time depends on its ability to allocate capital more efficiently, but also on its ability to avoid culminating a long-term debt cycle at an inopportune time. Capital allocation refers to how efficiently entities align capital, labor, land, natural resources, and technology to their best economic use. The better the allocation of capital, the faster the economy will grow. In contrast, poor allocation of capital retards economic growth and can lead to asset bubbles or sectorial underinvestment. The long-term debt cycle refers to every country’s propensity to accumulate a level of debt over multiple decades that requires intentional or forced deleveraging to continue economic growth. Greece, for example, culminated in a long-term debt cycle in 2009 when it could no longer service its debt. It has been deleveraging since.
The Comparative Advantage of the United States
The U.S. has a systemic advantage in any economic competition with China because of the greater role a dynamic private sector plays in its economy and the individual freedom of its workers. State-owned enterprises produce nearly 30% of Chinese GDP. Furthermore, many private firms are poorly concealed government corporations. These lackluster companies soak up productive capital, require cash injections to remain solvent, and exist as employment vehicles to prevent the instability. Moreover, the Chinese government plays a greater role in guiding economic investment, controlling private corporations, and holds an iron grip on the financial sector. The Chinese ghost cities that sprouted up after the last financial crisis are a symptom of these collective issues.
In contrast, the greater free-market orientation of the U.S. economy allocates capital well because it incentivizes corporations and individuals to pursue efficiencies for their benefit with minimal central direction. Despite the impression provided by China’s current rate of GDP growth, the United States maintains a persistent advantage in capital allocation. China’s GDP growth will continue to decline as it nears high-income status because capital has diminishing returns on productivity; i.e., the creation of a nation’s initial power grid is more important economically than modernizing that power grid. China continues to post sizable GDP growth because it is so far behind developed nations—the average American worker is six times as productive economically. Shanghai skylines impress, but nearly one-quarter of China lacked access to improved sanitation as of 2015, i.e., indoor plumbing.
Unfortunately, free-market economies create inequality as an externality, and inequality endangers political stability if unaddressed. When most of a country’s population receives similar opportunities, but possesses unequal talents, unequal outcomes result. Both the U.S. and China have inequality, but the issue is nearing a boiling point in the U.S. If policymakers do not act, voters may demand rapid policy changes which temporarily mitigate inequality at an unnecessary expense to efficiency and harm the United States’ ability to triumph in the Sino-American Competition. Adjustments to the U.S. tax code, wealth redistribution, and other prospective policies designed to achieve more equal outcomes could harm the United States’ comparative advantage in allocating capital and allow China to control a greater portion of global production.
Healthcare and Education
Healthcare and education are two sectors of the U.S. economy that inflame class tensions and allocate capital poorly. Policymakers can kill two birds with one stone if they place money in these sectors to better use, and reform them to reduce unequal outcomes.
The United States spends nearly twice as much as comparable nations on healthcare but does not achieve superior outcomes. There are numerous reasons. Insurance and pharmaceutical companies exercise cartel-like control over healthcare costs, often artificially setting prices beyond affordability to encourage individuals to buy insurance. Consumers with good insurance (and medical providers) have little reason to ration healthcare because they bear the costs indirectly and without price transparency. Organizations like the American Medical Association reduce the supply of doctors by lobbying for licensing laws that increase education costs. American doctors make more than their OECD peers in part because they have passed the price of their training to consumers.
Adopting a single-payer healthcare system may mitigate some of the inequality of the U.S. system but would not end the inefficiencies that drive costs skywards. Even Medicare spends more than double the amount per enrollee as other developed nations spend on healthcare per capita. The U.S. Government needs to examine how it can disrupt institutional manipulation of healthcare costs and licensing, improve price transparency, incentivize patients and doctors to optimize healthcare services, and encourage the population to reduce its need for medical care. Policy solutions in these areas have little to do with China directly, but reducing the 17.7% of the gross domestic product (GDP) that the U.S. spends on healthcare could impact the trajectory of the Sino-American Competition if the country allocated that recovered capital more efficiently.
The United States Education System, like healthcare, also inefficiently allocates capital compared to peers. The U.S. spent an average of $14,100 per elementary and secondary student in 2017, compared to the Organization for Economic Cooperation and Development (OECD) average of $10,300. For post-secondary education (college), the United States spends 93% more than the OECD average.
Yet, the worst part of U.S. education is not the cost. It is its single-track nature. The U.S. system emphasizes using secondary school to prepare students for college no matter their talents or aspirations. Sixty-three percent of U.S. high school students proceeded directly from high school to college in 2018. Roughly 40% of these will fail to complete their college degree by 2024. The United States forces individuals who will go onto profitable careers as plumbers, electricians, welders, etc., to sit through trigonometry instead of preparing them for work. Then, the U.S. encourages individuals who are unsuited for immediate attendance at college to take on debt that will plague them for decades. Sixty-five percent of student debt defaulters owe less than $10,000. Most of them are college dropouts. The U.S. secondary education system benefits the 35 to 40% who will attend and graduate college. It inefficiently invests in the other 60%.
Sending a higher percentage of high school graduates to college has also increased collegiate costs. As the number of attendees has increased, state spending per student has fallen and colleges have passed the burden to the student by raising tuition substantially faster than inflation since 1980. Universities and colleges can raise tuition rapidly because students have access to nearly unconditional lines of credit in the form of federally subsidized loans. Furthermore, students pay identical interest regardless of employment prospects after graduation. A computer science student at Stanford pays the same rate as a student at the least prestigious university despite their lower risk of defaulting on loan debt. High-performing students with financially prosperous majors subsidize the rest.
The U.S. Education System also encourages a portion of the population to take on unproductive debt that inhibits household formation, business formation and reduces consumption; all harm economic growth. The benefit of education is difficult to quantify but does not have to be impoverishing. It has never been easier to self-educate. Anyone with an internet connection has superior educational resources than any previous generation. Secondary and post-secondary education must adapt.
China has large market inefficiencies and weaknesses of its own. Its population is rapidly aging. The inequality between urban and rural dwarfs anything imaginable in the United States, and its environmental issues will cause increasing societal ill with time. Unfortunately, the U.S. Government can do little to exacerbate China’s domestic weaknesses. If one state cannot forcefully remove the other, interstate competitions become more like a race than a wrestling match. Long-term competitions are less about imposing your will than optimizing performance; competitors should run their best race and hope systemic issues cause their competitors to trip.
Regardless of how the United States addresses its inefficient sectors, it must avoid adding additional liabilities to the U.S. Treasury. Policies like student loan forgiveness alleviate concerns for debt holders, but do nothing to fix the system that increased the cost of education. Both the United States and China have accumulated large debts during the first two decades of the 21st century. In the last ten years, Chinese corporate and household debts have driven China’s overall debt level from 179% of GDP to approximately 318% of GDP in 2020. In the United States, a doubling of federal debt between 2010 and 2020 has pushed its overall debt level from roughly 365% of GDP to approximately 398% of GDP in 2020. Both countries need to deleverage to support economic growth over a longer horizon. Debt deleveraging can occur haphazardly or it can occur in a balanced, organized manner—something Ray Dahlio refers to as beautiful deleveraging.
A haphazard or drawn-out deleveraging by the U.S. or China could allow one state to cement a lasting advantage in the competition. The culmination of Japan’s 1991 asset bubble and subsequent deleveraging transformed the island nation from an economic marvel to a stagnant economy. An unsuccessful or ill-timed deleveraging by the U.S. or China could cause either to temporarily withdraw from the competition as it deals with the crisis and aftershocks. If both states underwent rapid deleveraging due to a global recession or depression, China would likely gain a temporary advantage. It is inherently cheaper for China to project power in the Indo-Pacific because of its geographic proximity.
The U.S. (and China) have many options for deleveraging public debt. The United States could raise taxes and decrease federal spending at the cost of economic growth. It could expand the money supply or even default on a portion of its debt at risk of currency devaluation, inflation, and interest rate spikes. The combination of tools the U.S. selects, their employment, and the overall debt level of the U.S. when deleveraging begins will determine whether the deleveraging is “beautiful” or catastrophic. Regardless, continued public debt accumulation at a faster rate than GDP growth makes deleveraging increasingly perilous.
Debt is already affecting the United States’ ability to compete. At present, the United States has nearly $28 trillion in federal debt—nearly 15 times annual income tax revenues. In 2020, the U.S. paid $345 billion in interest on this sum, roughly equivalent to 47% of the U.S. Defense Budget. If treasury yields return to their historical mean/median near four percent, annual interest payments could begin to rival Federal discretionary spending ($1.3 Trillion in 2019). This pressure on the Federal budget will manifest in the competition as downward pressure on economic growth and reduced spending on diplomatic and military efforts. Policymakers must make every effort to prevent the debt from growing further relative to GDP.
Paradoxically, the key to winning the Sino-American Competition is a matter of domestic policy reform. Reforms that reduce inequality, improve capital allocation, and reduce debt accumulation in areas like healthcare and education should be central to the U.S. strategic approach. Military and diplomatic efforts, fighting espionage, preserving technological superiority, and protecting intellectual property are all important, but a strategy must prioritize efforts and resources. Improved capital allocation will enhance the U.S. ability to do all the above by increasing the resources available.
U.S. policymakers must thread the needle to address inequality while simultaneously building on the U.S. advantage in capital allocation to terminate the Sino-American Competition on favorable terms. They must also avoid growing the national debt faster than GDP. The United States must continue to resource its foreign policy and defense apparatus, but should not fool itself into thinking they offer likely paths to victory in the Sino-American Competition. Foreign policy and defense policy are shaping efforts, not decisive ones. The path to victory lies in growing the nation’s economic edge and protecting its free-market orientation.
Jules “Jay” Hurst is an Army Strategist. The views expressed are those of the author and do not necessarily reflect the official policy or position of the Department of the Army, Department of Defense, or the U.S. government.