Comment 26: Gauging the evolution of China and the future of globalization(Dec. 3, 2005)

As China has emerged as an influential power in the global economic scene, there appear many analyses about China, some as admirers and some displaying strong phobia. However, most of them are treating China as an isolated entity and thus miss the real picture of the role of China within the globalization scheme. As we have pointed out in various articles and comments on this website, though China is emerging rapidly as a powerful economic power, it is a link in the globalization scheme. In principle we can start to analyze any important node in this tightly linked globalization scheme and it will naturally touched upon the evolution of all the other important nodes in the scheme, including China. In Article 1of December 1998, we have looked from the view point of Japan and the mutual interaction between Japan and The United States of America (abbreviated as US). Since August of 2003 we have looked mostly from the side of US; how its run away trade deficit is boosting Chinese economy but eventually everything will collapse due to the inability of the globalization scheme to correct the un-sustainable global trade imbalance. In this comment we will change the angle of viewing from US to China and to see how it may evolve and how its evolution will affect US, the current economic super power and the globalization scheme itself.

At the aftermath of Tienanmon Square incident in 1989, the supreme leader of China at that time, the late Deng XiaoPing, had pushed further the open market policy to transform China into a partial free-market economy, called Chinese style socialism. Deng claims that this Chinese style socialism will save the Chinese communist party from destruction, strengthen its control over the whole China, push up rapidly the economic and military powers of China, and eventually will boost China into the super power status that can rival or even surpass US. At that time western scholars, analysts and policy makers, as well as western big businesses with dollar sign hanging in front of their eyes, all rushed in to proclaim that the market-open move of China will quickly transform China into a democracy, just like Taiwan, and encouraged businesses big and small to plunge into China to grab as much fortune as possible to enrich themselves at the same time to eliminate one of the last bastions of communism from the surface of the earth. Thus businesses, spearheaded by "Taiwan merchants", started a gold rush China style. This policy is called "engagement of China". When the internet and the information age has dawned in late 1990's, the same group of western scholars, analysts and policy makers, this time joined by high tech experts, all proclaim further that the free flow of information through internet from the democratized west into China will dismantle the authoritarian Chinese communist government and mold China into a western style democracy even quicker. After 15 years of this "engagement policy", with China bathing in the aura of the age of information technology, Chinese economic and military powers are rising rapidly along side with the living standard of Chinese populace. However, the control of Chinese communist party is strengthening, not disintegrating as those western experts had wished, and the road for China to turn into a western style democracy seems to be very remote at best. With the help of advanced high tech schemes Chinese government has succeeded in blocking Chinese internet users to connect to western news websites that may pollute Chinese populace with the words and news about "democracy", "human rights", "religious freedoms", and so on. Western high tech experts have even pulled out a remarkable technological feast at the demand of Chinese government; when a Chinese computer user types in a word like "democracy", the operating system of the computer will flash a warning saying that the word is forbidden and will block the polluting word from entering the internet. Many readers have probably realized that the vision of Deng is gradually taking shape, whereas the western experts' scenario seems to be just a fantasy. It is instructive to analyze the past evolution and the future course of China anew based on actual empirical data and logic, not from political rhetoric or wishful thinking.

To understand the evolution of China, we must first study the economic development model of China. This model has proven to work like a miracle in Taiwan, so we call this model "Taiwan model". Taiwan model is based on 4 major ingredients:

(1) Very low labor costs.

(2) Loose environmental controls.

(3) A currency vastly under valued vs. US dollar.

(4) Hospitable living conditions for foreign managers of businesses and a welcoming attitude of the central and local governments to bend backward to accommodate foreign investments.

When those 4 conditions are met, foreign capitals will pour in like a deluge to establish factories to manufacture goods to be exported to US, and the entity will enjoy an explosive and miraculous economic growth that will blind the eyes of awestricken experts. A simple logic tells us that such a model requires an authoritarian political system to sustain. Under a democracy, people have the freedom to speak their minds and workers have the freedom to organize. Thus public will immediately demand an environment that will not poison their families so condition (2) will be violated. Workers will organize to demand a better working environment and condition (1) will be substantially watered down. At that time those foreign manufacturers will escape like running from a plague and the economic development model will collapse. This logical conclusion can be tested easily by studying the experience of Taiwan from that this economic model gets its name. The "Taiwan model" was applied in Taiwan during 1970's and the most part of 1980's. That was during the last part of the regime of Chang Kai-shek and the whole era of the regime of Chang Chin-Kuo, the son of Chang Kai-shek. Throughout that period Taiwan was under a typical authoritarian political system. At the end of 1980's, under the rein of Lee Dung-hui, Taiwan has transformed to become a democracy. The first thing happened after the democratization has been the mass exodus of manufacturers, the products of which are earmarked to be exported to US, from Taiwan, migrating into China. At the end of 1980's, Taiwan's per capita nominal GDP had reached about 25 % of that of US. It is probably still hotly debated among political scientists whether the transformation of Taiwan into a democracy is due to its economic development or is due to the unique external and internal conditions of Taiwan. Let us be optimistic and assume that the transformation of Taiwan is indeed due to its economic development. This 25 % level of US nominal GDP per capita becomes a useful yardstick to gauge when the transformation to a democracy under the Taiwan model will take place. We will be using this 25 % yardstick to estimate the time required for China to evolve into a democracy and study how the economic scenery in US and China will be at that point in order to gauge that such a development is really feasible.

Before plunge into the quantitative data, we need to dig deeper to see how Taiwan model actually works in China. About 50 billion dollars of foreign capital flow into China per year to build factories to manufacture goods to be exported to US, to sell into Chinese consumer markets, or just to construct buildings. Those 50 billion dollars must be sold for Chinese yuans so the foreigners can undertake businesses in China since US dollar is not the legal tender in China. China is currently running 100 billion dollars a year trade surplus. These 100 billion dollars are handed over to Chinese exporters and they must convert the dollars into yuans so that they can sustain their operations in China. There is also about 50 billion dollars a year of so called hot money flowing into China in anticipation of the upward revaluation of yuan against dollar. The hot money also must be converted from dollars to yuans so they can take advantage of revalued yuan. Thus there are about 200 billion dollars a year to be sold for yuans, about 10 % of China's GDP. Chinese government must buy up the majority of 200 billion dollars to prevent the plunge of dollar against yuan, and to maintain yuan's undervalued status vs. US dollar. When Chinese government buys up near 200 billion dollars a year, it must sell equal amount of yuans into the domestic Chinese market. Due to the huge amount of yuan sell, Chinese government is not able to mop up all the excess yuans created by its massive dollar buying operation. The excess yuans eventually flow into the hands of government controlled Chinese banks. The local governments and related parties of China have top priorities to borrow those excess yuans from the local branches of Chinese banks, and they use the borrowed money to construct highways, bridges, power stations, steel mills, apartment buildings and even mammoth scale textile mills to make textiles for export. When banks lend money, the money will flow back into banks as new deposits so banks can lend out the new deposits again to local governments to undertake more and more constructions. By this repeated lending by banks and repeated borrowing by local governments and the related parties, new constructions in China amount to near 1 trillion dollars a year, almost 50 % of the total GDP of China. The stellar growth rate of Chinese GDP is mainly due to the run away constructions in the hands of local governments and the related parties, thanks to the gigantic dollar buying operation of Chinese central government. This government's dollar buying operation is in turn the result of expanding Chinese trade surplus and the influx of foreign capital that will translate into more Chinese exports down the road. In that sense we may say that China's economic expansion is rooted on its export business and the foreign capital inflow, the typical pattern of Taiwan model. By assuming that 100 billion dollar worth of yuans become excess yuans that Chinese government cannot mop up through its monetary operations, the total lending by the repeated lending of banks balloons to 10 times of the original seed money of 100 billion dollar equivalent yuans.

As for the 200 billion dollars that Chinese government buys up in a year, Chinese government has no choice but to recycle them back into US financial market since US dollar is the legal tender only within US. Chinese government, using the 200 billion dollars at hand, buys US treasury instruments, mortgage backed securities and probably even commercial papers. Of course, the total US trade deficit is over 600 billion dollars a year, so the other 400 plus billion dollars are also recycled back into US financial market just like the 200 billion dollars from China; the other 400 plus billion dollars is coming from Japan, Taiwan, South Korea, Hong Kong, oil producing nations and so on that run hefty current account surpluses. The 600 plus billion dollars will eventually flow into the hands of lenders in US to be lent out repeatedly just as in the case of China. Assuming 10 fold increase of the total lending from the seed money of 600 plus billion dollars originated from US trade deficits, the total lending in US will balloon to 6 trillion dollars. In the case of US the lending goes into the hands of businesses and paid out as wages and salaries, and become consumer loans. This 6 trillion dollar lending forms the backbone of the US consumption boom. That is why we say that US economic prosperity is the result of its gigantic trade deficit, and China's exports to US is contributing substantially. If Chinese yuan is upwardly revaluated by a meaningful amount, say 20 to 30%, in a short time, the production cost in China will rise, Chinese exports to US will decline, the inflow of foreign capital will slow down, and Chinese government will buy far less dollar in a year. The reduced dollar buying operation will then reduce the liquidity in China, the reverse effect of the above-mentioned ballooning lending due to the gigantic dollar buying operation by Chinese government. Thus China's economic growth will slow down substantially. At the other side of the equation, if the reduced Chinese exports to US cannot be replaced by exports from other developing worlds, US trade deficit will shrink, causing the diminished consumer spending and an economic recession as discussed in Comment 22. This is why US government is paying lip service to urge China to revaluate yuan further but is not taking any real action to force China to do so. US government is satisfied with the token revaluation of yuan like less than 3 % since the end of July of 2005. A small revaluation of yuan like 2 to 3 % a year will not have any effect in slowing down the Chinese exports to US since such a small and gradual revaluation of yuan can be absorbed easily by the improvement of productivity on the side of China. Therefore, in short term we expect the explosive growth of US trade deficit with China to continue. To gauge the long-term trend, we need to plunge into the systematic analysis of the actual data to understand the history of the rise of China and the course of future development.

To study the long-term trend of an economic entity, the best data to use are GDP statistics. However, China's GDP data are notorious for their inaccuracy. In a planned economy like China, annual growth of GDP is planned beforehand, and each province is assigned a quota of GDP growth. Statisticians in the central government sum up the reports from provinces about their GDP growths and mold into the national GDP. In such a scheme each province has enormous incentive to inflate their GDP report to show the central government that they have fulfilled and even surpassed the given quotas. Central government statisticians must guess how to sort out the inflated numbers and get a number close to the reality. From time to time central government will also be tempted to inflate the reported GDP numbers to suite for its political purpose. In general older GDP numbers from China must be deemed to be highly unreliable and we will not use the official GDP numbers of China in this study of the long-term economic trend of China, though we will come back to discuss China's GDP later when it becomes necessary. From the previous discussions of the importance of exports for China's economy, we can use the total exports of China as a gauge of its economic performance. Among the global economic powers, Japan is running a large trade surplus, Europe as a whole is more or less break even on the trade front, and oil producing countries are, of course, running hefty trade surpluses. Only US is running a run away trade deficit. Thus China's near 200 billion dollar a year exports to US and near 170 billion dollars of trade surplus against US, compared to its total trade surplus of 100 billion dollars a year, are especially significant to Chinese economy. We will look at China's trade with US to discuss its economic evolution. In the graph at the right, various trade data between US and China are plotted. The trade data are quarterly sums and seasonally adjusted (from The Bureau of Economic Analysis data base). However, the seasonally adjusted quarterly numbers still display substantial seasonal variations, indicating the difficulty of accurately adjusting away the seasonal elements. We took four quarter moving sums of the trade data to further smooth out the curves. The black dots are US imports from China, the red dots are US exports to China, and the light blue dots are the US trade deficit against China. Those three types of data are plotted in logarithmic-10 scales whereas the data are expressed in billion dollars. Since the arguments of a logarithmic function must be positive, the data when US runs trade surplus with China cannot be plotted on the same scale; that is why the trade deficit data only starts from year 1986. In a logarithmic scale a straightly rising section of the data means that the data is growing with a constant rate, so in a linear scale the data is actually growing exponentially. The US trade deficit (trade surpluses as negative numbers) is then plotted in linear scale as dark blue dots to illustrate the dimension of the explosion of the deficit; from 1986 to 2005 the deficit has grown 100 folds. At the very bottom of the graph, quarterly averages of yuan exchange rate vs. US dollar are plotted as brown dots.

Until the end of The Great Cultural Revolution, Chinese yuan was fixed at near 1 yuan for 1 US dollar from political considerations. Only after Deng XiaoPing became the de facto leader of China, yuan has been gradually devaluated and Chinese exports to US have risen rapidly. In the early era, only some venturesome Hong Kong businessmen dared to move their factories into China to manufacture goods to be exported to US. At that time Taiwan was still under the authoritarian rule of Chang Chin-Kuo, and Taiwan merchants that dared to invest in China would literally risking their lives. It is after the Tieanmon Square incident, and after yuan was devaluated sharply at the end of 1989 to above 5 yuan/dollar from 3.7314 yuan/dollar, Taiwan merchants became the major force in the industrialization of China by moving their factories in wholesale to China to produce goods to be exported to US. The migration of Taiwan merchants was encouraged by US government's so called "engagement of China" policy and the encouragement of then president of Taiwan, Lee Deng-Huei. However, Lee quickly realized his own foolishness to industrialize and militarize China so that China can easily take over Taiwan, and belatedly tried to stop the tide of Taiwan merchants' migration but to no avail. Thus within a short time US consumers have discovered that market-dominant "made-in-Taiwan" consumer goods had suddenly been replaced by "made-in-China" goods, without realizing that those goods are manufactured under same managements but at different locations. The devaluation of yuan at the end of 1993 from 5.8 yuan/dollar to over 8 yuan/dollar has further induced the migration of Taiwan merchants and has kept China's exports to US rising. As Japan has started the massive currency market manipulation to push up the value of dollar vs. yen in 1995, many Asian countries that had pegged their currencies to dollar suffered catastrophic collapses in the form of Asian economic crisis as discussed in Article 1. China escaped the Asian economic crisis with little scar and its exports to US had continued to rise, thanks to the massive two step devaluation of yuan from 3.7 yuan/dollar to 8.3 yuan/dollar that was more than enough to counter the relative rise of yuan against yen when dollar rose sharply against yen. As the global recession of 2000 to 2002 hit, induced by the collapse of dollar vs. yen at 1998 and 1999 (see Article 1 for the prediction and Article 2 for the analyses of that recession), Chinese exports to US also stagnated. If GDP report from China had been accurate, a substantial slow down of GDP growth in 2001 should have been noticeable. Since 2002 China's exports to US have entered its golden age and are growing exponentially as the linear scale of trade deficit, in the dark blue curve, manifests. It is this exponential growth of China's exports and the exponential growth of US trade deficit with China since 2002, along side with the strong GDP growth in China, that are generating the recent China phobia in US as discussed in Article 6.

The relations of China-US trade with yuan-dollar exchange rate, yen-dollar exchange rate, and US economic conditions are complex and change constantly with time. In very early stage of the migration of Hong Kong and Taiwan merchants into China, the migrators were very labor-intensive industries. They only need to gather local laborers and can quickly start up the factories to produce goods to be exported to US. Thus the China-US trade responds quickly to the change of exchange rates. The pick up of both US imports and exports with China from 1983 to 1985 was due to the expansion of Chinese economy, not the devaluation of yuan. The continuous devaluation of yuan from 1984 to 1986 and the sharp drop of dollar against yen in 1985 had a dramatic effect of dropping US exports to China in 1985 (show up in the drop of red curve in 1986 due to the delay in 4-quarter running sum), whereas keeping US imports from China growing steadily. The slowing down of the growth rates of both US imports and exports with China around 1990 was the result of US recession at that time. As mentioned before China weathered the Asian economic crisis well due to the substantial devaluation of yuan in 1994. China's exports to US were hit by the US recession of 2000 to 2002 due to the stagnation of the overall US trade deficit. More curious is the steady rise of China's exports to US in 2004. In 2002 US dollar plunged sharply against yen and euro. This drop of the value of dollar would have curtailed US trade deficit in 2004, but did not. As dollar falls against yen, so falls yuan, not only against yen but also against all other Asian currencies that are synchronized with yen. This effect has kept the growth of China's exports to US steady. Since China's trade with US has gained such a heavy weight in the scene of US trade with other countries, the strong showing of the imports from China is holding up the overall US imports of consumer goods. The second leg of drop of dollar against yen had occurred from 2003 to the spring of 2004, and will have the similar effect as the first leg of drop of dollar, that is, US trade deficit with China will continue to rise through most part of 2006. The token upward revaluation of yuan since the middle of 2005 is too small to have meaningful effect on China's exports to US in 2007. However, the steady rise of dollar against yen since early 2005 due to US Federal Reserve Board's interest rate rising activity (see Comment 23 and currency and gold update Nov. 12, 2005) has also raised the value of yuan against yen and other Asian currencies. This ill effect on China's exports to US is going to show up in 2007 and 2008.

In the discussion of future course of US-China trade relation, we are ignoring non-economic events like the feared bird flue pandemic that has the potential to scuttle the whole globalization scheme and induce a worldwide recession. Baring such unforeseen events like bird flue pandemic, the next landmark events in the US-China relation, ironically, will occur outside of China. The events are Taiwan's presidential election in the early part of 2008 and its election of legislators at the later part of 2008. As discussed before Taiwan merchants migrated into China en mass after Lee Den-Huei, the president of Taiwan opened the floodgate after Tieanmon Square incident. Lee quickly recognized that he had been duped by businesses of Taiwan in opening the floodgate and by doing so had helped China to industrialize and militarize so that it could retake Taiwan later on. Lee tried to close the floodgate in vain. Lee had drifted more and more toward the independence movement of Taiwan. In the election to choose the successor to Lee, Lee supported the candidate from The Progressive Democratic Party, the undisputed champion of Taiwan independence movement, Chen Shui-Bian. Chen has won two successive presidential elections since and is the current president of Taiwan. By late 1990's Taiwan's export oriented low to middle tech industries have more or less migrated into China. Taiwan is only saved from a total destruction caused by this spontaneous industrial hollowing-up movement by the return of high-tech brains from US that have started Taiwan's semiconductor and then LCD and plasma screen industries (see Comment 19 for that account). However, those new industries are also heavily export oriented and have quickly recognized that they too can migrate into China to take advantage of low labor costs and loose environmental controls. The wholesale migration of Taiwan's high tech industry and the remaining heavy industries like the petrochemical industry is prevented only from the policy of Chen Shui-Bian's administration and US policy to forbid the transfer of sensitive high tech information to China. The opposition party, The Nationalist party and its sympathizers still control Taiwan's legislative chamber. The Nationalist party is the party of Chan Kai-shek and Chan Chin-kuo, and is closely allied with Taiwan's businesses. The Nationalist party and Taiwan's businesses are in constant crash with Taiwan's administration for the freedom of Taiwan's remaining industries to migrate into China in wholesale. Though Chen Shui-Bian has won the 2004 presidential election, his party and its allies have failed to secure a majority in the legislative chamber in the election near the end of 2004. The popularity of Chen Shui-Bian's administration is nose-diving rapidly as Taiwan's consumer sentiment sours in spite of its exploding exports from its high tech industries, a typical Japan syndrome as discussed in Article 1. If that trend continues, The Nationalist party may very well win both the 2008 presidential election and the election of the legislative chamber. Then the floodgate will open for Taiwan's high tech and petrochemical industries to migrate rapidly into China. If that happens, China's industrial base will receive a strong boost, and Chinese products will not only dominate the consumer goods market of US as it is today, but will invade substantially into the capital goods market too. As for Taiwan, with all of it industries moving to China, it will gradually become a semi-tropical resort area for the newly riches of China. It is then natural to expect that Taiwan will be reabsorbed as a province into China by 2020. At best Taiwan will become the second Hong Kong with the head of The Nationalist Party serving as the first governor of Taiwan, appointed by Chinese Communist Party. If events develop along this line, US-Japan alliance will receive a heavy blow. Though the liberal media of the west, many of which are still playing the role of apologists for Chairman Mao and his Great Cultural Revolution, may hail such a trend, the question is what will be the reaction of US populace. In the worst case scenario, a strong backlash against the policy of engagement of China and the whole globalization scheme will ensure, free trade will be abolished and consumer goods and capital goods industries will be revitalized in US even at the price of a severe economic recession. In that event China will suddenly discover that it is holding a vast industrial structure but there is no outlet for their products since Europe and Japan will never allow themselves to become the dumping ground of Chinese made consumer and capital goods as the current US is. Then China will fall into a deep recession and chaos, and the current communist regime will be forced to change. Whether it will change back to the strict communism as under Chairman Mao, turn into a military dictatorship, or become a democracy is anyone's guess.

Suppose the worst-case scenario as outlined in the previous paragraph does not happen, and China continues to develop along the Taiwan model with US continuously absorbing the ever-increasing amount of Chinese made goods, from consumer goods to capital goods. We want to estimate when the per capita nominal GDP of China will reach the 25 % of that of US, the yardstick where the Taiwan model must be discarded and the communist regime of China must change. Since the population of China is 4 times that of US, the nominal GDP of China will equal that of US when the yardstick is reached. We assume that the nominal GDP of US will grow 6 % a year. Currently per capita nominal GDP of China is about 4 % of that of US. For China's future growth of nominal GDP, we make two different estimates:

Method 1: Use the average growth of past 20 years, from 1986 to 2005 as the guide.

We assume that China's real GDP in yuan term has grown in average 10 % a year, and inflation rate 7% a year. This means that China's nominal GDP in yuan term has grown 17 % a year in average. This can be an over estimate of the growth rate of nominal GDP, but in this calculation lower growth rate in GDP will lead to more disastrous consequences so we deliberately made a slight over estimate to show a less bizarre result. In 20 years, from 1986 to 2005, such an average growth rate will boost China's nominal GDP by 23.1 times. At 1986, the exchange rate of yuan to dollar was about 3.5 yuan/dollar, whereas the exchange rate has become about 8.2 yuan/dollar in 2005. Thus in dollar terms, China's nominal GDP has grown by 9.86 times from 1986 to 2005. Converted into annual growth rate, China's nominal GDP has grown like 12 % a year in average in dollar terms. With this rate of growth, it takes about 33 years for China's nominal GDP to catch up with that of US. By that time nominal GDP of both countries will reach about 84 trillion dollars a year. During the past 20 years, the growth rate of China's imports from US (equivalent to US exports to China) has averaged to 11.8 % a year, whereas China's exports to US (US imports from China) have grown 21.9 % a year in average. Thus in 33 years China's imports from US will be 1.5 trillion dollars a year, and China's exports to US will reach 153 trillion dollars a year. This means that US trade deficit with China will be 151.5 trillion dollars a year, or 180 % of US nominal GDP in the year of 2038.

Method 2: Use the average growth of past 3 years, from the second quarter of 2002 to the second quarter of 2005 as the guide.

China's nominal GDP has grown about 15 % a year in the past 3 years (an optimistic estimate). With this growth rate it takes 22 years for China's nominal GDP to grow to 43 trillion dollars that equals the nominal GDP of US at that time. The average growth rate of China's imports from US in the past 3 years is 19.8 % a year, whereas China's exports to US has grown 26.2 % a year in average. With those rates, China's imports from US will grow to 1.9 trillion dollars a year after 22 years, and China's exports to US will grow to 37.2 trillion dollars a year. This means that US trade deficit with China will be 35.3 trillion dollars a year, about 80 % of US nominal GDP at the year of 2027.

No matter which estimate we use, the resulting ratio of US trade deficit with China to US nominal GDP is astounding when the yardstick is reached, and no right-minded economist will deem such an extremely high ratio feasible. Since US is certain to run trade deficit with other countries, excluding China, as a whole, the ratio of US total trade deficit to GDP will be somewhat larger than the values presented here in each estimate respectively. Some may argue that the rate of growth of US trade deficit with China will slow down in future, so the result from the estimates does not hold. However, in Taiwan model the rate of growth of trade surplus and the rate of growth of GDP are correlated, so if China's trade surplus with US slows down, so will China's growth rate of GDP. It will take China longer to reach the yardstick, leaving the astounding ratio not much changed. The coefficient of correlation between the growth rate of trade surplus and the growth rate of GDP reflects the unique character of the society to that Taiwan model is applied; it measures the efficiency of capital formation of the society. In the case of China, this efficiency is far from ideal. The reason of this deficiency is already discussed in the paragraph how Taiwan model works in China in detail; it is the hijacking of available liquidity by government related entities that distorts the free market function of allocating liquidity to the most efficient businesses. However, to reform such a system in China is tantamount to change its political system.

It is certainly extremely interesting to speculate what will short cut the development of China along Taiwan model if such a very high ratio of US trade deficit to GDP as estimated above is not feasible. One possibility is a bird flue pandemic, another is the fiasco related to Taiwan, or ironically the transition of China into a democracy from some reason not related to economic development. The transition to democracy will destroy the Taiwan model itself. However, the most likely scenario is none of the above. As the ratio of US trade deficit to GDP tops 10 % (currently is like 6.5 %) and starts to run toward 20 %, by definition US sinks deeper and deeper into debt status. This means that more and more middle class and lower income families will become the slaves of debt, by opening two new credit lines to pay off one old credit line and then sustain their living standard from the leftover credits, just like the case depicted in Article 7. At certain point a backlash will occur in the form of political land shift, globalization enthusiasts will be swept aside, the policy of engagement of China will be abandoned, and brutal measures will be imposed to force Chinese yuan to rise to whatever level necessary to curtail US trade deficit with China. This will be a warning shot to all other governments that are manipulating their currencies to keep their exports to US humming. Thus US dollar will finally collapse, after 2 to 3 years of the collapse US trade deficit will indeed shrink, and US industries will be revitalized but at a price of a severe recession as the US consumption boom based on debt and trade deficit is curtailed. Other countries, including China, that rely on exports to US will find suddenly that their products have no outlet, and a worldwide severe recession ensures. The current globalization scheme that is no more than a pyramid built on sands of free-for-all currency manipulations of central governments will then come to an end.