The Beneficent Dragon

Many pundits characterize the Chinese economy, now the world’s fourth largest, as a juggernaut that threatens America’s economic leadership. After all, China’s GDP growth in recent years has been three to four times our own, and its share of global exports has skyrocketed. At the same time, America’s bilateral trade deficit averaged a staggering $18.9 billion per month in the first quarter of 2007. Sectors including textiles, footwear and computers have seen significant job losses to competitors based in China. What’s more, the formerly cash-poor Chinese economy has now accumulated the largest foreign exchange reserves in the world, approximately $1,202 billion, over half of which is in U.S. Treasury bills. These figures are certainly striking, but a closer examination suggests that China’s ascendancy need not lead ineluctably to America’s decline.

China’s emergence on the world economic scene reflects the law of large numbers. When China abandoned its autarkic, centrally planned economic model, it unleashed what economists call a “positive supply-side shock.” Simply stated, a huge number of people and a huge pool of resources entered the world economy. China’s work force of 798 million people became part of the global trading system essentially overnight. Major changes to trade balances were inevitable but not unprecedented. China’s growth rate, while impressive, is almost identical to that achieved by Japan in the 1950s and 1960s when that country effectively reentered the world economy after the devastation of World War II.

Nor is the absolute size of China’s economy extraordinary. In 2006, China’s GDP reached $2.6 trillion — an impressive number until compared to the United States’ $13.2 trillion. The average American generates nearly $44,000 toward the GDP annually, while an average Chinese generates less than $2,000. Even under the most optimistic assumptions, there will still be a gap in GDP of three to four times in 2050. Moreover, China’s export performance looks less intimidating when one remembers that between 40% and 60% of its exports are manufactured by foreign companies located in China.

There are other numbers to keep in mind as well. Only 12% of the Chinese population has the equivalent of a high school degree, compared to 80% in America. Half of all China’s industry remains under the control of 140,000 notoriously inefficient state-owned enterprises, and its banking sector remains awash in nonperforming loans. China will undoubtedly continue to mature as an economy, but confident predictions of Chinese economic supremacy are no more reliable than the prognostications in the 1970s that Japan, Germany and even the Soviet Union would soon eclipse the United States.

Actually, far from harming our economy, China’s economic development has contributed much to our prosperity. It has become our third largest export market, growing at five times the rate of any other country since 2001. More significantly, low-cost imports from China have contributed materially to America’s own growth. The China Business Forum estimates that real income in the United States has been boosted by .5% as a result of trade with China, increasing the average household’s purchasing power by $500 annually. Tangible manifestations of that can be seen in many markets. For example, the nominal price of clothing and shoes has declined by 10% over the last 10 years, 35% in inflation-adjusted terms. And that benefit will continue to grow, reaching an estimated $1,000 per household by 2010.

The United States, in point of fact, has registered significantly higher economic growth than other developed economies in recent years, thanks in no small part to our burgeoning trade with China. Rather than fear Chinese economic development, we should welcome it.