China vs. the U.S.: The Case for Second Place

China will soon overtake the U.S. as the world's biggest economy. Should Americans be concerned?
October 13, 2011 |
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It is now a foregone conclusion that China’s economy will become the biggest in the world sometime very soon. According to the World Bank, the size of China’s economy is $10.1 trillion, compared with $14.6 trillion for the U.S., based on purchasing power parity (which adjusts exchange rates to account for the different prices people pay for goods and services across countries). But China is narrowing the gap in a hurry. Over the past 10 years, the annual real growth of China’s gross domestic product averaged 10.5 percent, compared with 1.7 percent in the U.S. The Chinese economy increased at an annual rate of 9.6 percent in the first half of 2011, vs. a rate of less than 1 percent in the U.S. America’s days as top dog of global output are numbered, at best.

Should we care? People from Thomas Friedman to Niall Ferguson cite the looming change at the top of the world economic rankings as a bellwether of broader American decline. “We are the United States of Deferred Maintenance. China is the People’s Republic of Deferred Gratification. They save, invest, and build. We spend, borrow, and patch,” complained Friedman in a recent New York Times column. And yet having the world’s largest economy isn’t all it’s cracked up to be—and you need look no further than the history of China and the U.S. to see that. The swelling size of China’s economy may be a source of pride to the Chinese people, but America is still by far the better place to live—and will remain so for a long time.

Although economists are skeptical about China’s ability to sustain its current levels of growth, most agree it is only a matter of a few years before the Middle Kingdom’s 1.3 billion or so people produce more than the 310 million living in the U.S. That means history is repeating itself. The U.S.’s reign as the largest world economic power began a little before 1890, when it supplanted the previous global giant: China. According to data from the late Angus Maddison, an economic historian at the University of Groningen in the Netherlands, China boasted the largest economy in the world all the way back to 1500. Prior to the 20th century, its run at No. 1 was interrupted only for a brief period around 1700, when India took a turn at the top.

And yet during those five centuries when its economy was the world’s biggest, China was never even close to being the world’s wealthiest country. Italy was almost twice as rich in 1500, the Netherlands almost three times as rich in 1700, and the U.K. six times as rich by 1870. Today, though the GDPs of the U.S. and China are roughly equal, the average person in China lives on an income that can buy only 16 percent of the goods and services of the average person in the U.S., and it will take decades for that gap to close. If you’re an American feeling down about losing top economy status, go take a holiday in Guizhou, a poor western Chinese province where incomes are about one-fortieth as high as the U.S. average. You’ll feel a lot better.

Nevertheless, pessimists warn that being knocked off the top spot could still have all sorts of ill effects for the U.S. Being the biggest economy, they argue, has been vital to American prosperity because, since the close of World War II, the dollar has been predominant in international financial reserve holdings, allowing the U.S. to borrow and trade in its own currency. Arvind Subramanian of the Peterson Institute for International Economics predicts that as China’s economy overtakes the U.S.’s, so too will the relative importance of the renminbi. He argues that within 10 years, the renminbi could replace the dollar as the world’s largest reserve currency.

But the impact of that change might be less than dramatic. It’s probably true that if the dollar loses its dominance, American companies will have to start hedging against exchange rate risk, and government borrowing might become a little more expensive. But foreign companies already have to hedge currency risk and yet still manage to compete, while less borrowing would surely be a good thing for the U.S. in the medium run. And a renminbi whose value rises—as it will have to if it is to become a reserve currency—should help even up the U.S.-China trade balance.

What China will soon discover is that being the world’s biggest economy and holding its favored reserve currency have little bearing on a country’s actual economic performance. For proof, just look at the U.S. Between 1890, when America became the world’s largest economy, and 2008, the U.S.’s annualized per capita income growth was about a quarter of a percentage point lower than China’s. America’s growth performance during those 118 years ranked just 15th out of 37 countries for which the University of Groningen’s Maddison has data—behind economies including Denmark, Canada, Sweden, and (wait for it) Greece. Even a number of really small countries have done better than America. Luxembourg has a GDP four-tenths of a percent the size of the U.S. economy, about the same output as the state of Delaware. And yet it is more than twice as rich per person as the U.S.

For a while in the 1940s, the U.S. showed that the combination of being the biggest and richest power can yield dividends—it was decisive in defeating two other world powers in war and making a global peace largely of America’s own design. And yet being the planet’s largest economy encouraged, or perhaps obliged, the U.S. to try to act as the world’s policeman, which even the most unrepentant neoliberal would acknowledge has been a burden as much as a blessing. Not least, it meant that more American soldiers died abroad last year than troops from any other nation, according to data from Sweden’s Uppsala University. Meanwhile, U.S. military spending now accounts for more than two-fifths of the world total, and it sucks up a larger percentage of GDP than any other member of the Organization for Economic Cooperation and Development.

If anything, supremacy confers even fewer benefits on the world’s dominant power than it did a century ago. Thanks in large part to the postwar international system the U.S. drove to create, any country’s ability to use size to strike unfair trading arrangements is considerably constrained by the requirements of the World Trade Organization. And China will likely be even more limited—because its economy is so reliant on exports, it needs the multilateral provisions of the WTO even more than does the U.S.

Of course, it must be nice for President Barack Obama to still be the guy at the Group of 20 afterparty who everyone wants to talk to. And it’s surely a boost to the ego for the U.S. ambassador to the United Nations to sit behind a country nameplate that is permanently screwed to the table in the Security Council. At the same time, being No. 1 makes you a target of abuse and criticism. Perhaps an America that is No. 2 would be more popular. Country polls conducted for the BBC suggest that America’s image abroad has improved markedly since 2007, when it came out only marginally ahead of North Korea and Iran, though it’s still way behind less powerful countries such as Canada and Germany. Meanwhile, China’s popularity ratings have been falling since 2005, perhaps in part a reflection of its growing economic muscle.

Ultimately, the best argument for Americans to let go of the idea of being No. 1 is that in the areas that really matter, we aren’t. When it comes to measures of the broader quality of life, the U.S. ranks in the bottom half of the OECD club of rich countries on such health indicators as life expectancy. It ranks around 15th worldwide in terms of the proportion of people who say they are happy, according to Jaime Díez Medrano, director of the World Values Survey archive. That puts the U.S. behind a bunch of small economies, including Norway, Ireland, Singapore, Switzerland, and (once again) Luxembourg.

On the bright side, the U.S. still outperforms China on almost every conceivable quality-of-life indicator, including happiness polls (where China is in 70th place). The average American lives five years longer than the average Chinese person, while under-five mortality rates are less than half the Chinese levels. And though you may take a dim view of the abilities of Congress and the President to manage the economy—or even manage their way out of a paper bag—they remain the voters’ to throw out. The same cannot yet be said of the leadership of the Communist Party of China. So rather than wring their hands over the decline of the U.S.’s relative economic weight, Americans should remember the wisdom of the Founding Fathers and focus on preserving the country’s advantages in life, liberty, and the pursuit of happiness instead.

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