First, there are indications that China has peaked as a manufacturing hub and that manufacturing is returning to the United States. I have written about the advances in robotics, artificial intelligence, and 3D printing that will erode and ultimately eliminate China’s labor-cost advantage. Even before these advances change the manufacturing industry, American companies are realizing that they may have overestimated the cost savings of doing business with China and are increasingly concerned by the intellectual property theft. Now, companies are looking for ways to bring manufacturing back to the United States. General Electric, for example, has again started manufacturing some appliances at Appliance Park, in Louisville, Ky. and is looking to expand its workforce there. Meanwhile, Apple CEO Tim Cook is talking about bringing manufacturing jobs back to the United States. Even Taiwan’s Foxconn says it is looking to expand into the U.S.
Expect this trickle to become a flood over the next 5-to-7 years as key parts of the supply chain move West, automation technologies advance, and as American workers develop the skills needed for running advanced manufacturing plants. This is also likely to wreak havoc on the growing, albeit struggling Chinese economy.
Second, China has spent hundreds of billions of dollars on infrastructure and commercial construction projects. Real-estate bubbles, an ocean of bad debt, inflation, and soaring wages have resulted. The government has also made big bets on last-generation technologies in solar, transportation, and batteries. Imagine a hundred Solyandras in nearly every industry — bad investments that are coming home to roost.
Finally, Chinese society is rapidly changing. Internet connectivity and social media are informing the populace of abuses of power, corruption, a growing wealth gap and the harm being done to the environment. Unrest is building and mass-protests are becoming more common.
It used to be that only the elite had access to Web-connected computers with video capability while the government’s propaganda machine controlled information and told the public what to believe. Over the last few years, the prices of tablet computers in China have dropped significantly, making them affordable for the majority of the population, leading to a dramatic increase in Internet usage. Now, a technologically savvy populace is working around the government’s firewalls and becoming aware of world events. They are also learning what their fellow countrymen really think.
Put all these factors together, and the risks that China faces become apparent: increasing unemployment, a slowing economy, and growing unrest. If past is prologue, China will resort to protectionist measures. It will try to manipulate its currency perhaps, generating a backlash from the international community. Then, it will likely try to erect greater trade barriers, with the potential weapon in such a trade war being its patents.
Encouraged by misguided U.S. policy makers, who have long touted the patent system as an enabler of innovation, China started amassing a large portfolio of patents roughly a decade ago. It provided academics, companies, and individuals significant incentives to patent ideas, including those copied from the West. With higher numbers of patent filings, professors in universities gain tenure, workers and students are granted residence permits to live in desirable cities, corporate income tax is reduced, and companies are offered lucrative government contracts. In 2011, 526,000 patent applications were filed in China—one quarter of all the filings in the world and more than the 503,582 filed in the U.S. that year. Many of these patents in China, when awarded, provide little more utility than extorting licensing fees from foreign companies that do business there.
Then there’s the problem of escalating nationalism. Just as China escalated its nationalist rhetoric against Japan over the Senkaku Islands (called the Diaoyu by the Chinese), it may try to divert attention from economic problems by fermenting a nationalist fervor against the West. There is a big unknown in what this escalation of propaganda might do should it occur.
There is also the question of China’s young people and the effects of the one-child policy. Nearly all children and young adults in China — an overwhelming majority of whom are male — have grown up without siblings. They have received the almost undivided attention of their parents, and have been raised with the expectation that they will support their parents and grandparents. This means there is an all but nonexistent social safety net in China. But this new generation is better educated and connected than any before. This means there is reason to hope that they will rise up and demand freedom and democracy, eroding the power of the Communist Party. But this is the first sibling-less generation in history, making an accurate prediction as to what they will or won’t d impossible.
So, does China own the future – or does the U.S.? Given the intricate web of economic, political and social factors, the answer is more complicated than what’s presented in straight-line projections. The most likely scenario is that Chinese growth stalls and its government faces major unrest. I expect the United States, even though it will face greater trade and foreign policy challenges, will still come out ahead — far ahead.