International investors so far have seemed to have taken the news in stride. Sometime during this year an event occurred that some Americans feared would eventually happen for the last decade or more. The Chinese economy became the largest in the world. For the first time since 1872, the United States no longer possesses the number one position in the global economy. It was in the 19th century that the United States passed the United Kingdom as the world’s largest economy. As growth rates in China have slowed in the past year to just 7%, many Americans seemed somewhat mollified that at long last, economic expansion there would have some limit. Unfortunately, the lackluster economic record in the United States since the 2008 financial meltdown, allowed China to move ahead of their closest competitor. China had previously expanded at a double digit rate of economic growth for 3 decades before 2008.
As the unbiased International Monetary Fund (IMF) tabulated the latest statistics on national economic output, it was discovered that China had sprinted ahead of the United States. If one measures the entire amount of goods and services produced in China the total comes to the equivalent of $17.632 trillion USD ( United States dollars). The United States came in second with $17.416 trillion USD.
China recently made the decision to adjust economic measures to that of international standards known as Purchasing Power Parity (PPP). Once that was done it was soon ascertained, that the economy of China had already surpassed the American one in Gross Domestic Product (GDP). As recently as the year 2000 the United States produced three times as much as the Chinese economy.
Globally the impact is moderate in real terms. As part of the global economy, China now controls 16.48% of all activity. The United States is responsible for 16.28%.
Americans can be conciliated by the fact that if you look at international exchange rates, the United States remains number one. In fact, by using this standard of measurement the United States is still $6.5 trillion USD ahead of China, coming in at $10.3 trillion USD. That makes the Chinese economy 70% smaller. However, this provides a false sense of security in that these measures are in constant flux and are not a true comparison. Money itself, is not a true measure of the size of an economy. It is the total of products and services generated that is the true determinant of economic activity. Moreover, some economists insist PPP is the only true way to measure economic size, because it takes into account the cost of living when making a comparative study.
There are a number of analysts that insist that the way China calculates its debt is actually inflating GDP numbers. If true this merely delays China from gaining the title of the world’s largest economy by less than a year. In addition until just recently, China curiously discouraged the IMF from giving them this new ranking. Could it be that China itself is not convinced of the importance of the achievement? Or possibly realize what a stir, the news will create in the United States.
It is also important to note that that the GDP per capita in China ($11,868 USD) is still less than 25% of that in the United States ($53,001 USD). China is no where near being the wealthiest nation in the world. At a population of 1.357 billion the total wealth of China distributed evenly, clearly leaves the country in the emerging nation status.
The United States is still ahead of China in the sphere of technological innovation. This can be measured by the amount of patent issued in both countries, but the gap is narrowing. In manufacturing China had already overtaken the United States several years ago. In terms of exports and household savings China has bested the United States for a much longer period. Savings and investment make up nearly 50% of GDP in China.
Still, the IMF estimates that the Chinese will have an economy that equals $26.98 trillion USD economy by 2019. In contrast to the United States which will come in at $22.3 trillion. By then it is deemed that China will have an economy that is 20% larger than the American one.
The psychological jolt that the latest news will have on the psyche on Americans and the world will be more important at the moment, than the change in the global position of the two largest economies. However, it is an ominous sign that the 21st century will be quite different than many Americans might have expected.
The United States has been the dominant military and economic power since 1945. As Europe and East Asia lay in ruins at the end of World War II, the American economy was now the global hegemonic power. The strength of the United States could also be measured by the importance of the American dollar to the global system during the postwar years as established at Bretton Woods in 1944. It was there that the resulting fixed monetary exchange rates, would assure the United States its premier role in international finance and banking.
Americans have become complacent with the end of the Cold War in 1989. The United States was no longer in the intense competition that pitted the American system, against that of the Soviet Union and China. Content in their supposed victory over communism, Americans assumed the new world order would codify the preeminent role of the United States indefinitely.
The United States still spends more on national defense than the next ten competitors combined. It needs to be pointed out that military spending is rising in Russia and substantially higher in China. One must also consider that much of the national income spent on defense is done through deficit spending on the part of the United States.
Although growth in China has now slowed to 7.4% this year and possibly 7.1% in 2015 this still compares favorably to growth forecasts in the United States at 2.2% and 3.1% respectively.
The return of China to distinction is a return to the status quo that had existed until the 18th century. Before then the country had the largest population and economy in the world and had maintained that rank for centuries.
There will not be an immediate change in international relations. Like Britain (UK) in the late 19th and early 20th centuries, the United States will temporarily remain at the helm of world politics and developments. It is only a symptom of things to come. The hegemony of Britain achieved at the end of the Napoleonic Wars in 1815 would only come to an end on the battlefields of World War I a century later. The British were locked in a war they could not win, without a huge cost.
Within a generation and another disastrous war, made worse by a preceding world wide depression, British imperial ambitions along with economic prowess came to an end. An empire the largest overseas one that had ever existed, at 25% of the land surface of the globe, rapidly eroded. The pound sterling the world reserve currency, would soon be replaced by the United States dollar.
Britain was able to maintain its position in Europe and temporarily on the global stage after the First World War, only because the United States was reluctant to assume that role for another generation. A similar situation now exists with China and the United States. Although China is clearly chafing at the projection of American power in East Asia, they are not in the position nor do they have the inclination to become the premier power of the world. However as Britain discovered in the 20th century, economic reality eventually must give way in the international order of things.
There are some economic historians that insist that if World War II had not arrived, Britain would have been able to maintain its position for a much longer period of time. That is unlikely and unimportant in the context of what is the present international situation. Economic weakness cannot indefinitely be ignored. The United States will face the same dilemma the British faced in the 1940’s and 1950 ’s. Will it be guns or butter. Americans will not be able to afford expensive social entitlements along with massive defense spending. Borrowing or creating money to finance both objectives is simply not sustainable. Foolish and short-sighted politicians in the United States that pretended it was possible, have only led the country to a financial and monetary cliff that is inescapable.
The two underlining questions for the United States are simple. The first one is to how to accommodate the rising power of China? Will it be done through accommodation and cooperation. Or will the two countries move toward hostility and confrontation. The second challenge for the United States is how to achieve policies that will eliminate the addiction to debt and allow the economy to grow faster again. A thriving and growing American economy, will solve a plethora of domestic and international problems.