Comparing Chinese And American Economies

Comparing Chinese And American Economies

Photo of Joseph S. Nye Jr.

Many analysts project China will have the world’s largest economy within a decade. Currently, the American economy is about twice the size of China’s at official exchange rates. Even if overall Chinese GDP (gross domestic product) surpasses that of the United States (by whatever measure), the two economies will be equivalent in size, but not equal in comparison and sophistication. Per capita income provides a better measure of the sophistication of an economy. China’s per capita income is only 20 percent of the American level and it will take decades to catch up (if ever).

Although China surpassed Germany in 2009 as the world’s largest trading nation in terms of volume, Chinese are concerned that their trade in services is lackluster, many exports have low added value, and China lacks top-notch brands compared with the United States and Germany. (Nineteen of the top 25 global brands are American.) In other words, Chinese trade is larger, but relatively less sophisticated than that of the United States or Germany.

Another illustration comes in the monetary area. China has studied the power (including financial sanctions) that the United States derives from the role of the dollar in the world. China has tried to increase its financial power by encouraging the use of the yuan for trade finance, and it now represents 9 percent of the global total. But the dollar still accounts for 81 percent. The role of the yuan will increase, but it is unlikely to displace the dollar until China lets international markets set exchange rates and develops deep and sophisticated domestic capital markets and an accompanying legal structure that engenders trust. As The Economist notes, “size and sophistication do not always go together. In the 2020s, China will probably be the world’s biggest economy, but not its most advanced. America’s sophistication is reflected in the depth of its financial markets.” China’s are only one-eighth as big and foreigners are permitted to own only a tiny fraction.

Technology is yet another example of differences in economic sophistication. China has important technological achievements, but it also has relied heavily on a strategy of copying foreign technologies more than domestic innovation. In the words of the Chinese journal South Reviews, “China boasts the title of the largest factory powerhouse in the world [and] China-based patents are growing fast and exceeding those of developed countries. But most patents obtained in China are less important in the entire industrial chain. In short, China remains weak in science and technological innovation.” Chinese often complain that they produce iPhone jobs, but not Steve Jobs. The trade volume shows up in Chinese statistics, but the value added shows up in the American national income figures. So, even when China becomes the world’s largest economy, it will not make China more powerful than the United States.

Joseph S. Nye Jr. is a professor at Harvard University and the author of “The Future of Power.”

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