After China surpassed Japan as the world's second largest economy in 2011, many have pondered when China will overtake the United States to become number one.Footnote ¹ The author of this book, a senior fellow at the Peterson Institute for International Economics, believes that China is already the largest economy in purchase-power-parity (PPP) terms. Using GDP, trade and creditor-debtor status to devise a ‘new index of economic dominance’, the author demonstrates how these three factors determined economic dominance of the United Kingdom and the United States historically. Using the same three factors to project forward, the author concludes that China's dominance is not only more imminent, but also broader in scope, and much larger in magnitude, than is currently imagined. More precisely, China will become economically dominant by 2030 when it is about half as rich as the United States, measured by per capita GDP in PPP terms.

By ‘economic dominance’, the author means the ability of a country to shape and change the overall economic, trade and financial system of the world. The economic preeminence of the United States in the postwar period, for example, has been manifested in its ability to ‘define the rules and exceptions of the system and change them when its perceived interests have so dictated’ (p. 16). The book recalls America's decisive role in creating and shaping the current world trade system, including setting the terms of China's historical accession to the World Trade Organization over a decade ago. It also recounts how the United States prevailed over the United Kingdom in the design of the rules for the International Monetary Fund (IMF), how it was able unilaterally to destroy the Bretton Woods system of fixed exchange rates in the early 1970s when fixed rates no longer suited its domestic needs, and how it successfully forced Japan to appreciate its currency sharply in the 1980s when Japan was the equivalent of the current Chinese export juggernaut. In contrast, in recent years the United States has not been able to make China significantly change its exchange rate policy, a clear sign of its declining clout.

Through quantification of economic power and historical comparisons, the author presents a plausible case for the inevitability of China's economic dominance. His prediction that such dominance will occur in the next 20 years is of course conditional. Among other things, it is based on the projection that China will internationalize its currency within the next few years, which in the author's view will prepare the way for the renminbi to attain the status of a reserve currency. The author is aware of the many imbalances and distortions in the Chinese economy, as well as the danger of political instability. His prediction assumes there will be no political upheaval during this period. This assumption, however, is not a small one. Political instability becomes a major concern when income disparity, corruption and local injustices incite tens of thousands of mass protests each year. China today spends more on internal security than on its military budget,Footnote ² a telltale sign of government's assessment of its political vulnerability.

While the bulk of the book is devoted to quantitative analyses of power, it also conveys the author's policy messages to the United States and China's other trading partners. For the former, the author wishes to sound a ‘loud wake-up call’. Thus, he opens the book with a dramatic scene: on a cold, blustery morning in February 2021, the US president is on his way to the office of the Chinese managing director of the IMF to sign the agreement under which the IMF will provide $3 trillion in emergency financing to the United States and the conditionality to which the United States must adhere. Although this imagined scenario is still a low-probability one, the author warns that strange things do happen, as the recent global financial crisis has shown. In any event, America cannot escape the logic of demography and the phenomenon of ‘economic convergence’, the process by which poor countries catch up with the rich ones. Since China is four times as populous as the United States, it will be larger in overall economic size once its standard of living exceeds one quarter of that of the United States (which by author's estimate has already occurred). The United States, therefore, must reconcile itself to this inevitability. Nevertheless, a resurgent America can still materially alter this baseline scenario, says the author, but it would require Americans to get their act together, including addressing the country's structural problems arising from declining mobility and stagnating middle-class income.

As for the rest of the world, the author opines that China's future dominance ‘need not pose a threat to the current open and rule-based economic and trading system’, because China is so dependent on trade as an engine of growth that its continuing prosperity, which is key to the legitimacy of China's leadership, hinges on maintaining such an open system. That said, the author nonetheless warns:

Specifically, to prevent the future dominance of an unbenign China, the author calls for the launch of a ‘China Round’ of multilateral trade negotiations. According to the author, trade, not finance, will be the arena for future international cooperation, because the WTO has carried more legitimacy and proven more effective than the IMF as an institution for global economic governance. Presently, the WTO is mired in the failure of the Doha Round, and multilateralism is being seriously undermined by the proliferation of bilateral and regional free trade arrangements. But the WTO, through its effective dispute settlement mechanism, remains critical in safeguarding the open and rule-based trading system. To the author, the potential China threat provides ‘the new raison d’être for reviving multilateralism’. Given the power asymmetries in bilateral and regional relations, the author advises smaller countries to refrain from entering into any bilateral or regional agreement with China. Instead, they should engage themselves in a China Round, with the goal of making ‘multilateralism a habit for China’ so ‘there would be serious costs to China, reputationally and substantively, if it were to depart from it once its dominance becomes entrenched’ (p. 174).

Even assuming China's dominance is as imminent as he predicts, the author nonetheless does not present a clear case for China's potential threat to the current open economic system, and consequently the need for its preemption. In the passage quoted above, he mentions the uncertainty over China's political future and territorial ambitions, but these geopolitical concerns are outside the purview of global economic governance. Additionally, he identifies several forms in which a dominant China could ‘affect the fundamental character of the current economic system’: China could reverse some of its past liberalization (as the author believes it has done through its exchange rate policy); it could pursue industrial and quasi-protectionist policies at home; it could capture essential resources abroad and enter into bilateral and discriminatory arrangements with selected partners. Of these forms, the author deems China's own protectionism as the main concern, although he predicts China will soon exit from its current exchange rate policy via internationalization of the renminbi. In his analysis, if China is unwilling to open new sectors of its economy, the United States may lack the bargaining power to overcome this unwillingness, hence might be tempted to threaten to close its own market to China unless China further opens its own (pp. 170 − 173). Yet, in this scenario, it is the tension between two powers, and ultimately the US threat to close its market to China (in violation of the spirit, if not the letter, of the WTO) that would endanger the open economic system.

Indeed, the United States has in recent years led the way to create discriminatory bilateral and regional arrangements, the proliferation of which has already altered the fundamental character of the world trade system. And the US promotion of the Trans-Pacific Partnership (TPP), the latest of such efforts, is apparently aimed at containing China's growing influence in Asia.Footnote ³ Against this backdrop, it is difficult to see a chance of starting a China Round of multilateral negotiations. Above all, why would China be willing to participate in a project that is explicitly targeted at its ascendency? When China made extensive concessions in its WTO accession, it was motivated by the strong desire to take part in a major international organization, to secure a permanent MFN trading environment for its exports, and to use WTO membership as leverage to push domestic reforms. Nowadays, it is unclear what China wants from the multilateral system other than to maintain the status quo. The recent global financial crisis has forced China to reduce its dependence on trade, and prompted it to strengthen the State's role in the economy, contrary to the ideology of the WTO system. Unless and until China can identify its self-interest with a proposed China Round, it cannot be expected to support such an initiative.

In the final analysis, if China indeed becomes the world's dominant power in the near future as predicted by the author, then it will have done so by pursuing a successful blend of policies, both domestic and international, along the way. At a more fundamental level, a world economic order shaped by a nation comprising one-fifth of mankind can be deemed to have more legitimacy than those shaped by its far less populous counterparts earlier in history.

To conclude, this book makes an important contribution to the study of shifts in world power. It may well influence the thinking of policymakers in Washington. However, in Beijing it is likely to be dismissed largely as a misguided attempt to buttress policies aimed at containing China.