by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Washington Post
April 29, 2011
© Washington Post
The world's two economic superpowers will meet soon for the third installment of their Strategic and Economic Dialogue. Beyond the specifics, the real issue for the United States and the world is China's looming economic dominance. President Obama's State of the Union address, after President Hu Jintao's visit in January, showed the level of anxiety that policymakers feel about China as a potential rival and perhaps a threat, with growing economic, military, and political power, including its bankrolling of American debt. But judging from the reaction to the president's speech, that threat is not viewed as imminent. The same was said, some pointed out, of the rise of Russia and Japan, 40 and 20 years ago, respectively, and those threats turned out to be false alarms.
But what if the threat is actually greater than policymakers suppose?
According to the International Monetary Fund, for example, total US gross domestic product in 2010 was $14.7 trillion, more than twice China's $5.8 trillion, making the average American about 11 times more affluent than the average Chinese. Goldman Sachs does not forecast the Chinese economy overtaking that of the United States until 2025 at the earliest. Americans also draw satisfaction from their unmatched strengths of an open society, an entrepreneurial culture, and world-class universities and research institutions.
But these beliefs may be overly sanguine. The underlying numbers that contribute to them are a little misleading because they are based on converting the value of goods and services around the world into dollars at market exchange rates.
It has long been recognized that using the market exchange rate to value goods and services is misleading about the real costs of living in different countries. Several goods and services that are not traded across borders (medical care, retail services, construction, etc.) are cheaper in poorer countries because labor is abundant. Using the market exchange rate to compare living standards across countries understates the benefits that citizens in poor countries enjoy from having access to these goods and services. Estimates of purchasing power parity take account of these differing costs and are an alternative, and for some purposes a better, way of computing and comparing standards of living and economic output across countries.
My calculations (explained in greater detail on the Peterson Institute website) show that the Chinese economy in 2010, adjusted for purchasing power, was worth about $14.8 trillion, surpassing that of the United States. And, on this basis, the average American is "only" four times as wealthy as the average Chinese, not 11 times as rich, as the conventional numbers suggest.
The different approaches to valuing economic output and resources are not just of theoretical interest. They have real-world significance, especially in the balance of power and economic dominance. The conventional numbers would suggest that the United States has three times the capability of China to mobilize real military resources in the event of a conflict. The numbers based on purchasing-power parity suggest that conventional estimates considerably exaggerate US capability. To the extent that the service of soldiers and other domestically produced goods and services constitute real military resources, the purchasing-power parity numbers must also be taken into account.
The economic advantage China is gaining will only widen in the future because China's gross domestic product growth rate will be substantially and consistently greater than that of the United States for the near future. By 2030, I expect the Chinese economy to be twice as large as that of the United States (in purchasing-power parity dollars).
Moreover, China's lead will not be confined to GDP. China is already the world's largest exporter of goods. By 2030, China's trade volume will be twice that of the United States. And, of course, China is also a net creditor to the United States.
The combination of economic size, trade, and creditor status will confer on China a kind of economic dominance that the United States enjoyed for about five to six decades after World War II and that Britain enjoyed at the peak of empire in the late 19th century.
This will matter in two important ways. America's ability to influence China will be seriously diminished, which is already evident in China's unwillingness to change its exchange rate policy despite US urging. And the open trading and financial system that the United States fashioned after World War II will be increasingly China's to sustain or undermine.
The new numbers, the underlying realities they represent, and the future they portend must serve as a wake-up call for America to get its fiscal house in order and quickly find new sources of economic dynamism if it is not to cede its preeminence to a rising, perhaps already risen, China.
Policy Brief 14-21: Is China's Property Market Heading toward Collapse? August 2014
Policy Brief 13-16: Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States June 2013
Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?
Revised August 2013
Policy Brief 12-7: Projecting China's Current Account Surplus April 2012
Book: Sustaining China's Economic Growth after the Global Financial Crisis January 2012
Book: Eclipse: Living in the Shadow of China's Economic Dominance September 2011
Op-ed: For a Serious Impact, Tax Chinese Assets in the United States October 13, 2011
Op-ed: Taxing China's Assets: How to Increase US Employment Without Launching a Trade War April 25, 2011
Op-ed: Why the World Needs Three Global Currencies February 15, 2011
Policy Brief 10-26: Currency Wars? November 2010
Testimony: Correcting the Chinese Exchange Rate September 15, 2010
Policy Brief 10-20: Renminbi Undervaluation, China’s Surplus, and the US Trade Deficit August 2010
Testimony: China's Exchange Rate Policy and Trade Imbalances April 22, 2010
Policy Brief 10-7: The Sustainability of China's Recovery from the Global Recession March 2010
Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010
Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010
Paper: China Energy: A Guide for the Perplexed May 2007
Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006
Working Paper 11-14: Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition September 2011
Testimony: A Muscular Multilateralism to Engage China on Trade September 21, 2011
Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011