The sources of anxiety about AI are many: the safety of increasingly powerful systems and the ability to control them; the fear of job displacement; surveillance and the loss of privacy; a rising tide of misinformation and deep fakes; the enormous amounts of electricity and water that the data centers consume; and the concentration of wealth and power in a handful of companies that own the frontier AI models.
Until now, anxiety about the role of AI in geopolitical competition has largely been confined to policy circles. But the possibility that Jensen Huang, who resigned as chief executive of Nvidia on Thursday, may have been compromised in a potential espionage scandal has brought that anxiety into the broader public sphere, fueling a frenzy over AI and the competition between the United States and China.
There is another dimension to this competition: the economic effects of China’s trade dominance and the rising role of AI in the economy could reinforce each other and produce greater impact than either would have alone. China’s trade dominance is well-known. Two decades earlier, the economists David H. Autor, David Dorn, and Gordon H. Hanson gave that anxiety a name when they coined the term “China Shock” to describe the impact of the massive increase in Chinese exports to the U.S. in the early 2000s. The surge contributed to a sharp decline in American manufacturing and the loss of more than two million jobs in certain regions of the United States. Over the past two decades, the so-called China Shock has gone global, as Chinese exports have surged around the world without a comparable rise in China’s imports.
On top of the China Shock, the AI Productivity Shock could further widen the gap between global supply and demand, and create new economic imbalances and strains on a scale the world has not witnessed.
But the iron law of economics still holds: supply requires demand, and an economy can absorb a large increase in output only if enough people have the income to buy what it produces. Economists have long described it as a problem of effective demand: the recognition that supply does not automatically create its own demand. For that to happen, greater production and supply have to translate into more jobs and higher incomes.
China is now regarded as one of the world’s leading technological powers. In some industries, China’s factories are producing more than the global demand put together. China makes more than 80% of the world’s solar panels, and its factories can turn out roughly twice as many modules in a year as the entire planet installs. In batteries, China’s manufacturing capacity is already more than double the current global demand. One projection suggests that, by 2030, China alone could produce more batteries than the whole world will use.
Economic progress is defined by progress in both production and consumption. These two areas of human activity move in tandem with each other and are mutually reinforcing. Faster productivity leads to rising output, which raises incomes and allows households to buy more of what is being produced. Historically, before the age of AI, this has been the case. The China Shock and the AI Productivity Shock may break that connection. What made, and continues to make, the China Shock so disruptive is the immense disparity between the scale of China’s exports and its purchases from the rest of the world. China’s imports consist largely of agricultural products, minerals, and energy products that it cannot produce in sufficient quantities on its soil.
Low domestic consumption forces Chinese businesses to sell more abroad, often at cutthroat prices. Cheaper imports benefit consumers abroad, but when local companies close or cut jobs, workers lose income and can no longer afford to buy as much, including goods from China. In the long run, the China Shock poses a risk to China itself. The more efficacious China is at expanding production under these conditions, the more it risks undermining demand for its products in the future. There is very little benefit to the Chinese economy if businesses fail and unemployment rises in the rest of the world.
The costs of overproduction
China need not have grown its economy this way. Its rapid GDP growth, its impressive technological prowess, and its vast population could have made it a much larger market for goods made at home and abroad. Beijing could have strengthened the social safety net for its citizens, and eased the burden on households of paying for healthcare and saving for retirement. Instead, it has focused singularly on expanding production by offering lavish subsidies to businesses and favoring capital over labor in many of its programs.
The cumulative result of these policy choices has made Chinese citizens more important to the economy as workers than as consumers, as they produce more than they consume. The signs of this imbalance are staggering. As I have written elsewhere, the share of labor compensation relative to total economic inputs in agriculture, industry, and utilities dropped from 21% in 1987 to 15% in 2023.
The relative slide in income growth amid rapid GDP growth is rooted in the Chinese economic system. So far, the full effects of AI and robotic technology on employment and incomes of Chinese citizens have yet to be fully registered. Given how fast these technologies are progressing, their combined effect could compound existing imbalances within years rather than decades.
For China, the wise course of action is to focus on the income side of its economy, beginning with reducing the inequities between rural and urban citizens and spending more on people rather than on buildings and machinery. For the West, it is prudent to rethink how to share the gains from AI in economies where most people depend on a watertight relationship between work and compensation.
China’s factories and AI technology can generate abundance. Whether that abundance translates into greater common welfare and sustains long-term growth is the big question. Policymakers in China and the West need to act now and work together to turn greater productive capacity into shared prosperity
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