China, The US, And The IMF

June 8, 2011 11:15 pm 0 comments

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David Smith

Before its former managing director, Dominique Strauss-Kahn, put the International Monetary Fund in the headlines with his alleged criminal behavior, the IMF was making the headlines with economic news with projections that China’s surging economy would surpass the United States as number 1 in the world sometime around 2016 if currently-predicted growth rates continue.

The response to this forecast was dramatic:  Marketwatch proclaimed that the “Age of America nears end”; Fox News warned that “America’s economic dominance on the world stage could end”.  Erstwhile Republican presidential contender Donald Trump has been a frequent critic of China, blaming outsourcing of American manufacturing for the current US economic slump, claiming that “we don’t make things anymore” and that “China is just ripping this country like nobody has ever ripped us before”, even criticizing the official state dinner President Obama held for Chinese President Hu Jintao earlier this year.

So does the rise of China’s economy really signal the decay of the American age?  The numbers bear closer investigation.

First of all, despite the claims of Trump, labor union bosses, and other politicians, American manufacturing has been on the rise over the past 30 years.  As shown by University of Michigan economics professor Mark Perry, American manufacturing output has increased by nearly 250% since 1970.  While we require fewer workers thanks to technological innovations like computers, robotics, and other high-tech advances that have resulted in an explosion in the productivity of American factories, we produce more “stuff” than anyone in the world.  While there are plenty of anecdotes about factories closing up shop in the US and moving to Mexico or China, Americans are still producing high-value products like airplanes, medical equipment, chemicals, and pharmaceuticals.

While much is made of the US “trade deficit” with China, over the past decade American exports to China have increased by over 400%.  While the demand for Chinese-made products continues to increase, imports from China are largely lower-value products like shoes, apparel, and video games.  But even that doesn’t tell the whole story, as even many higher-value items are only assembled in China, with the real value coming from components made elsewhere.  One such example is the iPod:  while “made in China”, the majority of the value of the iPod is attributable to American workers and companies.  Yet every dollar spent on an iPod adds to the “trade deficit” with China and to the calculated size of the Chinese economy.

In spite of its tremendous economic growth, China remains a country of extreme poverty.  According to private intelligence firm Stratfor, “[m]ore than 1 billion Chinese live in households whose income is below $2,000 a year (with 600 million below $1,000 a year)”.  While the industrial areas of China are indeed booming, the interior of the country is still extremely poor and undeveloped, and the Chinese government heavily restricts travel to those areas where the jobs are located.  In addition, the Chinese government’s “one child” policy has made shortages of cheap laborers inevitable over the coming years, and Europe’s looming population decline will mean fewer consumers to purchase those Chinese goods.

Finally, it is important to remember that even if, as the IMF predicts, China’s economy does grow larger than the US’s on an absolute scale, it will still lag on a per capita basis.  China currently has a population of approximately one billion more people than does the United States.  Even at the same overall economic output, the US would still be five times more productive than the Chinese.  That’s a significant advantage.

Will the Chinese “Asian tiger” overtake the American economy over the next 5-10 years?  Perhaps.  If so, it will still not signify the end of the American economic empire that rose out of the ashes of World War II and the fight against Communism.

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