No, the American policy should not to be keep China poor, any more than it was to keep Europe poor after 1945. Where the American policy does seem to have this implicit purpose -- as with Mexico or Africa -- it's ill-advised and contrary even to America's interest. But nor should it be the American policy to have Chinese firms take leadership in all, or most, high-value markets. That is, in effect, where America's current policy is veering, and it is ill-advised. In fact, the right balance is that America is better off if its firms, hiring American residents, win not all, but many, competitive battles in the global marketplace.

Does anyone really think the United States is better off because Toyota is headquartered over there, as opposed to having been created and centered in, say, Texas? Or that these cases are neutral as to American workers' income? Does anyone think that Americans are worse off, or even unaffected, because Microsoft is headquartered in Seattle rather than in Beijing? Sometimes common sense can be proved by academics, and that is true in these cases.

When the United States government argues for free trade, the bet is that absent protectionism on a global level American firms will do very well in marketplace competition. Some free traders are also laudably and rightly motivated by the prospect of the whole world growing richer, but American corporate leaders like free trade because they think under those conditions they can create value for their shareholders. Where those leaders also hire Americans and invest in America, their successes typically translate to rising national income (which can benefit all, or most citizens, subject to sound social policies, unlike those present in last five years). In other words, American firms need to compete globally and win in competition for their employees to enjoy rising income. Ultimately, the firm is the champion, the avatar, the organizational reality of any national economic or social policy. However, any nation is best off economically if its winning firms face constant entrepreneurial competition and usually it's better off when a new home-grown start-up defeats, or at least takes lots of share from, the reigning  home-grown champion in any market. That's what has happened in information technology since the early 90's - it is not so much the case in energy, health care, and other critical industries.

No, American workers need not always make 20% of the world's product in order to have a high and rising standard of living, but if that percentage goes down, then Americans on a relative basis will in the aggregate be poorer. That would produce a shift in the global balance of economic power, but not necessarily a declining standard of living for Americans.  Your example goes to this point.

However, if a nation's workforce is producing a declining share of the global production, then as that decline continues there will, of course, come a point when that nation's workforce is absolutely worse off in terms of national income (which means adjusting for currency changes). That was the case for the workforces in the countries of Latin America, Africa and much of the former Soviet Union, for example, in most of the 90's. 

To look at the concern from a different vantage point, from 1998 to 2003 the United States captured a vastly disproportional share of global economic growth. China grew too; most other regions by and large were flat or negative. Disproportional results are not unusual in global competition; they are the rule not the exception. The world is not flat.

The tremendous wealth of the United States and its century-long lead in global wealth creation makes it tempting to think that decline"can't happen here." As soon as that is thought, the path toward the denied outcome has been paved. Witness the United Kingdom in 1900: absolute and relative decline from the pinnacle of wealth was around the corner; some knew it and said it; most found that impossible to imagine. When people say the 21st century is the Chinese century, they might be getting ahead of history but then again they might be as right as if in the late 1800s one were to have said that the next 100 years belonged to Americans. 

If, say, the global economy went up by, say, 10% and American workers' share of that larger global pie fell to 18% or lower (that's about where the curves cross), then under that case Americans would in fact have made less of the world's product, not just a smaller percentage of that product. (To be clear, I'm referring to the value of product, not its amount; to a dollar's worth of microprocessors, not to the number of mpu's.) If you make less, you earn less, all other things being equal. This sort of negative outcome for American workers would occur if Chinese firms, among other foreign firms, defeated the preponderance of American firms in global competition, took global share from them, and chose not to hire many American residents to work in their new, winning firms. That, you might say, is a remote outcome. Would you say it is impossible in 20 years? How about 40? I say it's possible over one or two generations and that's why I wrote this book.

That negative outcome would mean, in the information sector, that Chinese firms became the world's leaders in information technology and Americans instead worked in non-tradeable low value-added jobs, such as real estate brokerage, gardening, and writing books for an American audience. Americans should want Chinese firms to win some of these battles in the marketplace, but not most of them; they should prefer Chinese workers to make much more of the world's products than they make today, but not necessarily much, much more of the world's high-value products. They should want Americans to obtain high-value jobs, which means working for winning firms in high-value markets, and eschew raising basil or writing books.

Big successful national economic stories depend on big successes (and not just many little successes, given the winner-take-most character of information markets) in creating new goods and services and winning in old and new markets. Successful national economic narratives are not composed of a sequence of honorable defeats by firms in global competition. Of course many factors contribute to national economic success, but having an entrepreneurial culture -- a system of beliefs and values that stimulates, tolerates, encourages, and rewards entrepreneurship - is the single sine qua non.

If you don't agree with my assertions, skim the works cited in the footnotes to see if they change your mind. Or at least take a look at my slides, and thanks for the attention! R.