U.S.-China rivalry has upsides for the world

Government and business leaders these days frequently speculate on which side will win the face-off between the U.S. and China, as if it were a boxing match between Muhammad Ali and Joe Frazier and will end with one lifting his arms victorious while the other lies chastened on the mat.

What these leaders are missing is that in fact both China and the U.S. will be winners from this confrontation. Like many great sports rivalries — think of the professional men’s tennis trio of Roger Federer, Rafael Nadal and Novak Djokovic — intense competitors raise their game to take on each other, usually at the expense of lesser rivals.

China and the U.S. are already the two largest economies in the world, with a combined gross domestic product four times that of the third- and fourth-largest economies — Japan and Germany, respectively — together. Their scale allows them to sustain extraordinary levels of investment in research, education, innovation and new business formation.

The lead of the U.S. and China is set to increase.

A comprehensive study earlier this year by the Australian Strategic Policy Institute looked at high-impact research across 44 critical technologies, including advanced materials, mineral extraction and processing, blockchain, data analytics, high-performance computing, green hydrogen, electric batteries, nuclear energy, synthetic biology and quantum computing.

Among these fields, the study found that China leads in 37 and the U.S. in seven. No other country led in any and only in three fields was another country even in second place.

The same story is repeated in other areas, whether the market capitalization of technology-centric companies, the availability and deployment of venture capital, the number of billion-dollar unicorns in the startup landscape or the global market share of leading companies in different technology sectors.

Regardless of the approach, the answer is the same: The U.S. and China are running away from the rest of the field.

China’s extraordinary progress over the last 40 years has been explained by many observers as a function of not playing by the rules.

Some unfair play has contributed to the rate of progress in certain areas, but from my experience, the dominant driver of China’s progress has been the innovation resulting from intense competition — between provincial governments, between businesses and between students.

Provinces compete fiercely with each other in high-growth segments using all the tools at their disposal: subsidies, land allotment and partnerships with universities and state-owned enterprises. While the national government may protect selected sectors from foreign competition, the market is large enough that domestic competition results in a Darwinian struggle in industries like mobile phones, e-commerce, bike sharing, solar panels and electric vehicles.

The competition between students to gain admission into top universities borders on gladiatorial. While Xi Jinping’s China has been more active in shifting investment toward hard technologies, execution continues to rely heavily on competition between the beneficiaries of subsidies and other state largesse.

The space launch sector illustrates how the U.S. has benefited from Chinese competition. As exhilaration from the Apollo moon landings in the late 1960s and early 1970s faded, the U.S. space program declined. China then began to invest heavily to close the gap with U.S. launch capabilities.

In 1999, NASA had three consecutive failures with its Atlas launch vehicle. Companies seeking to launch commercial satellites then began to seek out cheaper Russian and Chinese alternatives that might be more reliable. The U.S. then changed its state-led approach, backing a new set of private-sector players, including SpaceX and Blue Origin, which have since redefined the satellite launch industry.

Detractors will say that the U.S.-China rivalry produces wasteful duplication. The International Monetary Fund has estimated that efforts to redraw supply chains will cost the global economy $1.4 trillion, or 1.5% of global gross national product.

But seeing this as a negative misses the importance of competition as a driver of innovation. The world will benefit from “excess,” duplicative investment in semiconductors, solar panels, batteries, wind turbines and next-generation power transmission by the two rivals.

Thinking back to the Cold War era, many worry that the U.S.-China rivalry risks splitting the world into two camps. But with the exception of a few countries that are deeply dependent on either China or the U.S., most of the world will simply refuse to choose just one of the rivals, instead maximizing spillover benefits from both.

China is the largest trading partner of most countries in the world. The U.S. simply has little way to reduce this engagement in all but a few highly sensitive areas where it can make a case that there are worrying security implications, as seen with its difficulty in convincing even its closest allies to shun low-cost equipment from Huawei Telecommunications and drones from DJI.

Of course, both countries have domestic challenges to deal with. China faces demographic decline, a significant property bubble overhang and worrying efforts to rein in technology entrepreneurs. The U.S. has a badly polarized sociopolitical landscape, a failing public school system and a manufacturing sector that cannot compete with the best in the world.

A possible war over Taiwan would be a disaster for all involved, just as all recent wars have been. But it is hard to find an up-and-coming rival to China or the U.S. that is not beset by equally significant challenges.

There are many negatives in the U.S.-China rivalry, such as the potential for direct nuclear conflict, the wasteful rise in defense spending and the reduction in relatively free flows of goods, services, capital and manpower between markets.

But the silver lining will be faster innovation and technology spillover to the rest of the world. Potential breakthroughs in clean technologies, nuclear fusion, quantum computing and biomedicine could change the world. As the leading innovators, the U.S. and China — like Nadal, Federer and Djokovic — are likely to walk away with most of the prize money.

This article was first published in Nikkei Asia.