Overview Of US- China Relations

The US alone doesn’t have the global influence they once had, and because of this, they cannot prevent China from becoming the world’s largest economy, which will happen a lot sooner than 50 years from now.

As the chart below indicates, the U.S. contributed 21.2% of total global economic output in 1970. This remained consistent until the year 2000. In every year since, with one exception, America’s percentage of the world’s economic output has declined. In 2015, the U.S. contributed 16.7% of the world’s economy.

By 2025, this is expected to fall to 14.9%. Equally noteworthy is the exceptional rise in China’s economy. In 1970, China was responsible for a mere 4.1% of the total. This rose to 15.6% in 2015.

In 2025, China’s contribution to the global economy is projected to be 17.2%. Since 1990, China’s percentage of total global output has risen every year with one exception (1998), when it fell by one percent.

The vertical black-dotted line on the chart denotes the year (2018) that China’s economic contribution is projected to surpass the U.S.

There are some other notable conclusions we can make from the chart. Europe’s economic contribution to global GDP is rapidly declining. India is gaining economic influence but still has a long way to go. In 2015, India’s contribution to global GDP was 6.7%. This is expected to rise to 8.7% by 2025. One of the most significant observations is that large developed economies are becoming less significant while smaller, emerging economies are gaining power. This is not a complete surprise as smaller economies are much more nimble than large ones.

China’s Rise

How has China become such a dominant economic power? Part of the reason is its booming auto industry. To illustrate, the total number of autos sold last year in China was 24.6 million. This dwarfs total auto sales in the U.S. last year, which hit a record 17.5 million cars and trucks. In addition, SUV sales in China increased a whopping 52% in 2015. China’s auto industry is thriving and should provide stiff competition for U.S. auto manufacturers in the years ahead. Unless the U.S. government levies high tariffs on imports to equalize prices between Chinese autos and those made in America. It is important to remember that the cost of production (labor included) is much lower in China.

The world’s economy is changing and globalization is alive and well. There will likely be a large number of new trade agreements in the months ahead as well as an increase in U.S. based companies deriving revenue overseas. Gone are the days when it was sufficient for investment analysts to analyze trends in the U.S., to the exclusion of foreign markets. In the current “global” climate, we must recognize how foreign companies will compete with U.S. corporations. Rising globalization should result in greater competition.

If the federal government does not levy new and increased tariffs on imported goods, the added competition will result in lower prices for the consumer.

However, I wouldn’t get too optimistic about a lack of tariffs. The federal government will likely view this as a source of revenue and a way to help its constituents rather than allow cheap imports to flood the U.S. Perhaps Americans will be buying more goods online, directly from foreign companies. Does UPS or FedExFDX -1.37% deliver cars? It could happen.

China’s Investment Opportunities

First, the total accumulated public debt of the central and local governments in China is less than 60 percent of GDP. In most other developing and developed countries, their government debts have exceeded 100 percent of their GDPs.

China has ample fiscal space to support desirable infrastructure investment. The only constraint is that local governments borrowed short-term debts from banks or shadow banks to finance long-term infrastructure investment in the past, causing a term mismatch issue. China’s Ministry of Finance recently addressed the issue by allowing local governments to issue long-term infrastructure bonds to replace their debts. When necessary, Chinese governments can adopt another round of expansionary fiscal policy to support infrastructure investments.

Second, China’s household savings is nearly 50 percent of GDP, one of the highest in the world. The government can use active fiscal policy to leverage private investments, including using private-public partnership to build infrastructure.

Third, investment requires foreign exchange to import technology, equipment and raw materials from abroad. China has $3.3 trillion of foreign exchange reserves, the largest in the world.

China Will Continue To Grow

The above conditions explain why China differs from other developing countries. Other developing countries also have many good investment opportunities, but their investments are often constrained by the government’s poor fiscal strength, low private savings rate or inadequate foreign exchange reserves when they encounter external shocks and downward growth pressure. China has no such constraints.

Will the US be able to stop China from becoming the world's largest economy?

Moreover, the interest rates and reserve ratio in China’s banks are rather high. Because the U.S., the euro zone and Japan have near zero or less than zero interest rates, they encounter a liquidity trap. The Chinese government can lower interest rates and the required reserve ratio to increase credits to support investments.

With the above favourable conditions, China will be able to maintain a reasonably high investment growth rate, which will create jobs, increase household income and maintain consumption growth at a reasonably high rate. Such favourable conditions will not change in the 13th Five-Year Plan period.

Even if external conditions do not improve and export growth is relatively weak, China still has the ability to achieve the growth target of 6.5 percent and above by relying on domestic investment and consumption growth.

Because it is able to reach its target growth rate, China will continue to be the main growth engine in the world, contributing around 30 percent of global growth annually.

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