Will China's Economy Fall Short? Predictions of global supremacy may be premature.

• Author: Ullmann, Owen

During the late 1980s, an economic consensus among the brightest thinkers and writers had formed around the conviction that the United States' days as the world's preeminent economic power were about to end. The new superpower inevitably would be Japan, a manufacturing and exporting juggernaut that could not be stopped. The country seemed to have found a secret sauce of cooperation between industry and government to produce high-quality, low-cost products that would dominate global markets, from cars and televisions to bicycles and portable audio players like the Walkman--the ancestor to today's smart phones.

The belief in Japanese supremacy-in-waiting was best captured in the 1988 book, Trading Places: How We Are Giving Our Future To Japan & How To Reclaim It, by former Reagan administration trade guru Clyde Prestowitz. He predicted that the American Century was giving way to an era of Japanese success that would dominate the world in the twenty-first century. "Japan has created a kind of automatic wealth machine, perhaps the first since King Midas," he wrote. Other influential thinkers such as economist Lester Thurow agreed, citing Japan's low levels of unemployment and poverty and high rates of life expectancy and education. Many saw a strengthening yen becoming the world's main reserve currency, replacing a dollar often crippled by inflation and trade deficits. Some even predicted the two World War II adversaries would engage in another conflict to determine who would be the economic top dog. Well, we know now how spectacularly wrong those predictions were. After a buying spree that snapped up American companies and real estate during the 1980s, fueled by skyrocketing stock and real estate prices, Japan's bubble burst in 1991. Thirty years later, its economy still hasn't recovered. In the wake of a "lost decade" of stagnant growth, it continues to struggle with a shrinking and aging population, massive debt, slow growth, and the risk of deflation. So much for the Japanese Century.

Today, a similar consensus is emerging about the end of American economic dominance in the world. The predictions are similar to those of three decades ago if you substitute China for Japan. The thinking is remarkably similar in many respects: China is a manufacturing juggernaut, it has an efficient, state-controlled economy, and it has accumulated trillions of dollars in reserves from predatory trade practices with the rest of the world that allow it to invest in companies, iconic real estate, and joint projects everywhere. Rhetoric among American policymakers across the political spectrum has become more belligerent toward China, as many see a new cold war emerging between the two nations--and a few even warn of a future shooting war.

There also are significant differences, of course, that make China appear to be even more of a threat than Japan had been to supplant the United States as the world's most powerful economy. China's population is more than ten times that of Japan at the latter's peak, it has a powerful military in contrast to largely pacifist Japan, and the country is run by a communist dictatorship in Beijing that has its sights set on dominating the world this decade. President Xi Jinping outlined the country's ambitious "Made in China 2025" agenda in 2015. Its goal is to transform the country from a low-end manufacturer to the global leader in technology and innovation.

It certainly appears likely that China will overtake the United States as the world's largest economy when valued in nominal GDP dollars, if for no other reason than its population is four times that of the United States and the Beijing government is still investing in raising living standards for hundreds of millions of...