Global economy: Is China overtaking the United States?

China's Vice-Premier Li Keqiang attends a session at the World Economic Forum in Davos on Thursday.
REUTERS/Christian Hartmann
China’s Vice-Premier Li Keqiang attends a session at the World Economic Forum in Davos on Thursday.

President Obama mentioned China only twice during his State of the Union address this week: First, he said, “There’s no reason Europe or China should have the fastest trains, or the new factories that manufacture clean energy products.” Later, he said, “China is not waiting to revamp its economy.”

But China looms as a great economic wall over almost everything Obama emphasized in his summation of America’s pressing challenges — especially in the emphasis on jobs and the nation’s ailing economy, retired U.S. diplomat Tom Hanson told a crowd in Minneapolis on the night before Obama’s address.

“We’ve had twin booms in the past 30 years: the Chinese export boom, and the United States consumer boom,” Hanson said in the Minnesota International Center’s annual foreign policy outlook lecture at the University of Minnesota’s Humphrey Institute.

China has facilitated both booms by keeping its currency artificially low and pegging it to the dollar. It has recycled profits back into the U.S. economy, effectively holding down interest rates and covering up the United States’ financial weaknesses. The upshot is that China and some other Asian countries hold vast global reserves while the United States lives increasingly on credit.

“It is more clear today than it was a year ago that this is really coming to an end,” Hanson said.

Losing the lead
Hanson is not alone in observing that the United States is in danger of losing — indeed, may already have lost — its position as economic leader of the world.

Source: Pew Research Center for People & the Press

In a poll reported in December, just 27 percent of Americans said the United States is the world’s top economic power. China now holds that position, said 44 percent of those polled by the Pew Research Center for the People & the Press.

That was a reversal from February, 2008, when 41 percent of those polled named the United States as the top economic power, and just 30 percent named China.

Further, 41 percent in the December poll said the United States plays a less important and powerful role as a world leader today than it did 10 years ago, the highest percentage ever in a Pew Research survey.

The poll reveals more than temporary economic angst. A fundamental shift in power and alliances is underway, Hanson said.

Deep back in history, Asia and Europe dominated the global economy. Goods, culture and even religion travelled back and forth along the Silk Road.

Keep in mind that picture of an economic world with Eurasia at its center while you recall what happened after World War II as the United States re-engaged with the rest of the world.

The picture changes: Now you see two oceans with the United States at the center, serving as the fulcrum for worldwide trade — interacting with Asia across the Pacific and Europe across the Atlantic.

Today, Eurasia is reclaiming its spot at the center, Hanson said, with China quietly rising in stature while the United States spends borrowed money and political capital on military conflicts around the world.

A new northern sea route is opening shorter waterways for shipping goods between Asia and Europe. At the same time, high-speed rail networks are connecting parts of both continents. You could think of these emerging transportation networks as a new Silk Road.

Meanwhile, the European Union and India are negotiating a free trade agreement. And China has forged a broad new trade agreement with other Asian nations.

The end of ascendancy
Hanson drew on views posed by historian Niall Ferguson of Harvard University.

“We are living through the end of 500 years of Western ascendancy,” Ferguson wrote in December in a widely circulated opinion column for the Financial Times.

Tom Hanson
Tom Hanson

Because the United States has to rely so heavily on east Asian capital to stabilize its accounts, “the decline and fall of America’s undeclared empire might therefore be due not to terrorists at the gates nor to the rogue regimes that sponsor them, but to a fiscal crisis at home,” Ferguson wrote.

The eureka moment of the past decade, he said, was the realization that U.S. deficits were increasingly being financed by Asian central banks with the Chinese in the lead. Ferguson called the mutual relationship Chimerica.

Like Hanson, Ferguson said the relationship is unsustainable.

I will quote Ferguson’s piece at length because it is central to Hanson’s argument and to Obama’s unspoken challenge:

“It would of course be ingenuous to assume that the next decade will not bring problems for China, too. Running a society of 1.3 billion people with the kind of authoritarian planned capitalism hitherto associated with the city-state Singapore (population 4.5m) is fraught with difficulties. But the fact remains that Asia’s latest and biggest industrial revolution scarcely paused to draw breath during the 2007-09 financial crisis.

“And what a revolution! . . . US GDP was more than eight times that of China’s at the beginning of this decade. Now it is barely four times larger — and if the projections from Jim O’Neill, Goldman Sachs’ chief economist, prove to be correct, China will overtake America as soon as 2027: in less than two decades.

“What gave the west the edge over the east over the past 500 years? My answer is six ‘killer apps’: the capitalist enterprise, the scientific method, a legal and political system based on private property rights and individual freedom, traditional imperialism, the consumer society and . . . the ‘Protestant’ ethic of work and capital accumulation as ends in themselves.

“Some of those things (numbers one and two) China has clearly replicated. Others it may be in the process of adopting with some ‘Confucian’ modifications (imperialism, consumption and the work ethic). Only number three — the Western way of law and politics — shows little sign of emerging in the one-party state that is the People’s Republic.”

Not waiting
Obama spoke to the prospect of a United States slide from the top when he warned that Washington needs to break out of its blinding political gridlock and get something done.

“China is not waiting to revamp its economy,” Obama said. “Germany is not waiting. India is not waiting. These nations — they’re not standing still. These nations aren’t playing for second place. They’re putting more emphasis on math and science. They’re rebuilding their infrastructure. They’re making serious investments in clean energy because they want those jobs.”

China looms over the economic challenges President Obama emphasized in his State of the Union address Wednesday.
REUTERS/Molly Riley
China looms over the economic challenges President Obama emphasized in his State of the Union address Wednesday.

The applause came when he said, “Well, I do not accept second place for the United States of America. As hard as it may be, as uncomfortable and contentious as the debates may become, it’s time to get serious about fixing the problems that are hampering our growth.”

Lawrence Summers, director of the National Economic Council, has been more blunt about the unsustainability of Hanson’s twin booms (China exporting/America consuming). China can no longer behave like China because the United States intends to behave much more like China, Summers warned last year.

The question is: What nation will be the market for stepped up U.S. exports? What country will be as addicted to reckless consumption as the United States has been?

“I am beginning to conclude that the fundamental issue in the world economy– and perhaps soon for world political and foreign relations — is this: Who will replace the United States as the consumer of last resort?” Hanson said.

Without speaking to that major question, Obama said, “We need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America.”

To help meet the goal, Obama said he is launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.

He added: “We have to seek new markets aggressively, just as our competitors are. If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores.”

China has said it too wants to move away from the “Chimerican” model, and stimulate growth in its domestic markets. But China’s leaders also are “petrified at the notion of high unemployment,” Hanson said, knowing that jobless masses make for political instability.

“It’s going to be jobs, jobs, jobs on both sides of the China-American continuum going forward,” Hanson said.

Another political reality both nations face is that protectionism looms as an ever-larger force if Americans don’t go back to work soon.

“Ten percent unemployment in the United States and 10 percent growth in China is an unstable mix,” he said.

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

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Comments (11)

  1. Submitted by Adam Minter on 01/29/2010 - 10:00 am.

    For goodness sake.

    It’s remarkable to me how people who don’t spend any time in China – much less, live here – have developed an out-sized and exaggerated sense of this developing economy’s power and assets. To be sure, China has accumulated a vast reserve of US treasuries, but that accumulation was made on the basis of a flawed strategy to peg the nation’s currency to the dollar. In the US, it may look as if China is accumulating dollars due to its wealth; but in China, where the economy is still disproportionately dependent upon exports – and will continue to be so for at least another generation – the currency reserves are a sign of weakness. That is, the only way that China’s export sector can boom is if the government subsidizes it via a manipulated currency. In any case, while folks like Tom and Niall Fergusson cite China’s power via its currency reserves, China borrows vast sums to subsidize its massive fiscal stimulus precisely because it can’t spend the reserves lest it damage its export sector even more than its been damaged already by the decline in exports to the US.

    In any case, ask any Chinese businessman the key to the global economy’s recovery (I do it on a fairly regular basis), and they’ll all say the same thing: US consumers. Urbanization is proceeding quickly here, but the vast, vast majority of Chinese are barely above subsistence-level farmers. Meanwhile, outside of a few elite pockets, the education system is a rote shambles, something that would make the worst US districts feel embarrassed.

    No doubt, China is developing, but the impressive figures that are thrown around – many of them “cooked” numbers from self-interested CCP statisticians and economists – are far less impressive when spread out across a country that likely exceeds, in population, 1.5 billion people.

    The US should worry, but I’m sorry, this “end of the West’s dominance” talk is premature to the comic extreme.

  2. Submitted by Richard Schulze on 01/29/2010 - 10:24 am.

    Power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP only at $5,800, compared to $48,000 in the US. We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars. China can’t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede. All of Asia’s progress to date has been built on selling to the US market. Take us out, and they’re nowhere.

    With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon. There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more because there is no social safety net. Ever heard of a Chinese unemployment office? Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries. The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia only has one world class school, the University of Tokyo. As much as we despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world. After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China and you feel this.

    For an iconoclastic, myth shattering, eye opening view of the true competitive threat posed by Asia, read the piece in Foreign Policy magazine by Minxin Pei, a scholar at the Carnegie Endowment for International Peace.

    Think Again: Asia’s Rise – By Minxin Pei | Foreign Policy

  3. Submitted by myles spicer on 01/29/2010 - 12:58 pm.

    I don’t see this as a “decline” in America, it is more that we will be seeing more parity in the world in future generations (I guess the world is flat). This is inevitable as economies in key nations continue to expand…education in certain nation’s continues to improve…and the natural resources in certain large and resource-rich coutnries are developed.

    Though it may bruise the egos of Americans who grew up believing (with a fair amount of justification that we were “the greatest country on earth), it need not signal the demise of our prominence or even a diminuation of our power. What it will likely bring is a more homogenous and more balanced globe which may dilute our power.

    Will this be bad? Maybe, but more importantly, it will probably be a fact of life we can and will have to adjust to.

  4. Submitted by Ginny Martin on 01/29/2010 - 03:16 pm.

    I agree with Myles Spicer. It seems to me that this is the wrong kind of battle to fight–to maintain supremacy, to be able to say “We’re No. 1.” The goal should be a more just global economy where no one has such dominance as the US has had. I think that’s a good thing. We have badly misused that dominance. A little humility and a world view that is less jingoistic is a good goal.

  5. Submitted by Bernice Vetsch on 01/29/2010 - 03:47 pm.

    It wouldn’t hurt, either, to give up the insane idea that only we can keep the world safe, and we do it by maintaining troops, weaponry and airplanes at about 750 military bases.

    I would guess most of them add to their local economies because our military and their families need to pay for food, clothing and housing, but I would like to know how dangerous life would become for those economies (especially those in wealthy countries like Germany and Japan) if we just brought all our soldiers home where they could add to OUR economy. And use the dollars saved to build homes for our homeless, give food to our hungry and develop the green economy (with its tens of thousands of new jobs) that we keep hearing about.

  6. Submitted by david granneman on 01/29/2010 - 05:39 pm.

    president obama’s energy plan will be a disaster for the united states – the cap and trade carbon tax – this is a tax that will be put on all the food you eat, the products you buy, gas for your car, and the energy to heat your home. worse yet industry and business is the greatest user of energy. this added cost will cause american businesses to be at a disadvantage to countries where energy is cheap and abundant. where do you think all the jobs will go.
    wasting money on renewable energy is pouring money down a rat hole. there is no viable energy source that has the remotest possibility of replacing coal and gas power plants in the near or even far future. wind and solar are very expensive and worst yet very unreliable.
    china is inversting heavily in developing their own natural resources. in addition they are working with cuba to develope oil fields in our own gulf of mexico. china is also working with argentina to develope their newly discoverd offshore oil fields. china is working to ensure they have a cheap and abundant supply of oil to allow them to grow and prosper.
    president obama is stopping the developemnet of our own natural resorces and wasting money on windmills and solar cells.

  7. Submitted by Richard Schulze on 01/29/2010 - 09:41 pm.

    hello david, Too much Faux news in your diet….

    The only way out of this is for the economy to return to a long term 3%-4% growth rate. That’s obviously what Obama is hoping for with his programs. He’s taking big risks, but he doesn’t have much choice. He really did inherit a bad hand. If he did nothing, we’d be in a depression by now, with 25% unemployment. He understands what he’s doing and understands the risks. He has great economic advisers.

    Obama couldn’t have allowed the banking system to collapse. We need banks as the economy’s lynchpin. A year ago we could have lost the entire financial system over a weekend. Ships were being turned around at sea and going back home because their letters of credit were failing. The freeze up in credit could have gone on for years.

    The stock market is up 50% since Obama took office, so it likes the uneasy stability that we have now. Credit markets have recovered tremendously, and IPOs are coming to the market again. Junk bond funds are up, confidence is returning. There’s greater willingness to lend, though only at high interest rates. But it’s a big improvement over last year.

    Stay away from natural gas. The volatility will kill you. If you are a masochist, then buy it only when it’s cheap, on big dips, in the $3/MBTU range.

    In the last three years, thanks to the new “fracting” technology used in oil shales, we have discovered a 100 year supply of natural gas sitting under the US, and the producers have not been able to cut back fast enough. So now we have a supply glut, and we are almost out of storage. This is what took us down from $13 to $2.40 in 18 months. Producers have been cutting back like crazy, trying to balance supply and demand, with a break-even point of $2. They need a cold winter to help bring things back into balance. If the industry gets organized, then gas can become the 20-year bridge we need, until energy alternatives kick in. That makes me a big supporter of the “Pickens Plan.”

    Oil is much more interesting. It overshot to downside in January 2009 to $32. Crude is now at $74 climbing out of the recession. Imagine how high it will get when all economies are functioning again.
    The financial crisis hurt the ability of big oil companies to get financing for large development projects in oil. These projects can take five to ten years to bring online. That means we will get higher oil prices sooner. We may get a pull back to the $50s, but the $30’s would be a stretch. The $32 low was an artificial one caused by a complete absence of liquidity in all markets. I don’t think we’ll see those lows again. I find it hilarious that when oil was @147/bbl everyone was a conservationist.

    I think that oil may dip into the 50s, then up, perhaps skyrocketing to $300 before dropping back down to $3 after alternatives take over and demand vanishes. But that’s at best 20 years out. If we can wean ourselves off oil in 20 years, it would be a huge accomplishment.

    Any further questions David?

  8. Submitted by Sharon Schmickle on 01/30/2010 - 10:28 am.

    One point I’d like to revive in this terrific discussion is Hanson’s concern about American consumption — in particular, consumption on credit whether the borrowing is done by Washington or by individuals.

    That is the core of the arguments here, not whether China is or is not rising to the status of a great world power — or, even, whether the United States is Number 1 on the planet. I’ve spent enough time in China to realize how far that nation has to go in so many respects. That’s one reason I included Ferguson’s to-be-sure graf in the article: “It would of course be ingenuous to assume that the next decade will not bring problems for China, too. Running a society of 1.3 billion people with the kind of authoritarian planned capitalism hitherto associated with the city-state Singapore (population 4.5m) is fraught with difficulties.”

    But of the two main players in his Chimeraca model, the one with the unsustainable role may be the one that borrows heavily on the future.

    What think?

  9. Submitted by Wanda Ballentine on 01/30/2010 - 08:06 pm.

    China is pulling ahead of the US on green technology – and will continue to do so. Manufacturing wind turbines, low-energy light bulbs and hybrid car batteries,as well as autos and other products, requires what are known as rare earth elements (REE).China has the biggest supply, while the rest of the world is running out.

    “Global supply of rare earth elements could be wiped out by 2012”

  10. Submitted by Richard Schulze on 01/30/2010 - 09:08 pm.

    Debt service is currently 11% of the budget. If interest rates rise sharply, that could double to 22%. Then you get a downward spiral like you saw in Latin America in the eighties, when higher debt service creates more borrowing, and more borrowing creates a higher debt service, until the whole thing blows up. At some point China, Japan, the Middle Eastern countries may stop buying our debt. There are only so many “greater fools” out there.

    Credit markets are now seeing a huge differentiation in terms. Lenders are much more discriminating about who they lend to. American consumers are very constrained, but foreign consumers are not as constrained. They are not returning to frugality as we are because they didn’t share our excesses in the first place. You don’t see many black Cadillac Escalades with chrome wheels in China.

  11. Submitted by david granneman on 02/01/2010 - 04:11 pm.

    hello wanda
    there are no “green jobs ” from any environmental technology in the near or far future. nobody is buying electric or hybred cars in any large numbers – the auto companys only build them to satisfy government as they are a losing investment. even t.boone pickins along with most of europe found that there is no future in wind energy. he is selling his vast windfarm in texas for a song. in europe they are seeing electric bills skyrocketing and at the enery shortages because of the millions of dollars they have invested for the past decade is not producing the power that was promised. you want to see proserity go to north dakota where recient oil discoveries is producing a boom for their state. they only two states in the country with budget surplus are energy producing states.
    if the “socall green jobs” where viable you would not need vast sums of taxpayer money to support them – WANDA YOU BETTER WAKE UP BEFORE YOUR LIGHTS GO OUT.

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