China Won’t Overtake The US As The Largest Economy Any Time Soon?
Globalization has peaked and de-globalization is increasingly likely to occur, according to economists at Capital Economists. China, they argue, will not be able to overtake the US as the largest economy. Dr Zheng Wang, Associate Professor of Economics at De Montfort University, England, however, questions some of these findings.:
“Before we evaluate the effect of ‘de-globalization’, we first need to be cautious about this term which is mostly used by the media. Is de-globalization really happening? Just because of trade tensions between US and some other countries, plus Brexit, it doesn’t necessarily mean the whole world’s clock is being turned back. At least, according to the WTO, the world’s trade growth is again faster than GDP growth since 2017.”
Debating Peak Globalization
Economists have debated globalization’s peak fervently since the start of this century and before. Emerging nationalistic sentiments of world economies have, however, not halted the trend towards globalized economic integration.
Today, it is claimed that globalization’s drawbacks—such as the exportation of jobs to foreign countries—are forcing nations to reject the concept. Its advantages, however, cannot be ignored. At the 2020 UK-Africa Investment Summit, British Prime Minister and avid pro-Brexit supporter, Boris Johnson, promised to raise visa quotas for Africa to boost trade ties between Africa and Britain, for example.
The US-China Trade War
The China-US trade war has been brewing since China joined the WTO in 2001. The inauguration of US president, Donald Trump escalated this war, beginning in 2018, as the world’s two largest economies battle for global financial dominance.
“The United States imposes sanctions on Chinese companies for transporting Iranian oil,” a press statement from the US Department of State read in September 2019. In retaliation, China asked the World Trade Organisation for $2.4 billion sanctions against the US a month later.
The nationalistic sentiments of President Trump and China’s Xi Jinping have further fuelled this trade war, prompting what economists call, global economic “slowdowns”. While the US is the largest global economy by nominal GDP, China is the largest economy by GDP measured in terms of purchasing power parity (PPP), according to the IMF.
‘Rapid Development Of New Digital Technologies’
In China, there has been a “rapid development of new digital technologies” in the past few decades. Despite these new emerging technologies, productivity growth has remained “unusually weak” according to Neil Shearing, Group Chief Economist at Capital Economists.
“There are plenty of reasons for this,” he wrote, “but one that provides some cause for optimism is that it simply takes time for infrastructure and processes to adapt to new technologies in order to harness the benefits to productivity growth,” he continued.
“In particular, while most developed markets should start to see an improvement in productivity growth by the end of this decade, productivity growth in most emerging markets will continue to be held back by a variety of structural problems.
“These structural problems are most obvious in China but are also evident in other large emerging economies including Brazil, Russia and Mexico.”
For Dr Wang, the situation is much more complicated than that.
“In nominal terms, China’s GDP in 2018 is about two-thirds that of the US, and the gap is closing year by year due to higher growth rate in China than in the US. However, the total GDP figures mask the fact that China has a population four times that of the US. In terms of GDP per capita instead, the US is still much richer, six times that of China in nominal terms and 3.5 times in PPP.
‘China Is Not Even Close To The US’
“It looks it will probably take at least many more decades—if not centuries—for China to be as rich as the US in terms of wealth per person, and this is based on the assumption that China’s relatively high growth rate can be sustained which itself is highly debatable as in terms of the primary driver of long-term growth —original innovation and creativity in new technology—China is not even close to the US.”
Predicting the future of the global economic market, Shearing argues that a rollback of globalization would severely decrease technology-driven productivity growth in the next decade, hurting the economy of emerging economies.
“The process of reform and market liberalization has stalled in many large emerging markets, and some of the previous gains from opening up to international trade could be lost, as the current wave of globalization ends,” he commented.
Dr. Wang asserted that falling trade growth rate cannot be attributed to de-globalization, but rather a lot of structural factors.
“Although we do see signs of trade growth slowing down in China, it is not a new thing—trade growth rate has fallen behind GDP growth rate since 2005, he said. “The falling trade-GDP ratio in this period is, however, driven by a myriad of structural factors other than ‘de-globalization’ – the standstill of OECD countries’ demand compounded by the global recession, the rapidly rising labor cost in China, the shifting of its economic structure towards domestic market etc.
“If the stagnant import demand of western countries means de-globalization, China is now working hard to “re-globalize” with other partners – it is wooing the vast regions of less rich countries through its ambitious Belt and Road Initiative that pretty much includes every level of international cooperation—political, economic, cultural, military etc. It has been the consensus of the political leaders in China that the sustainability of the country’s growth in the next decades relies on the strength of its domestic economy and the market potentials in developing countries.”
A Power Struggle For Global Hegemony
The trade war between both countries is indicative of a power struggle for global hegemony. The political is economical, as the US wields its political power to cripple China’s economic threat. Recent sanctions on China by the US government have been a deliberate attempt to stifle China’s economic growth.
“It is not just tariff threats, but also all sorts of activities aiming to curb the rising influence of China—from blacklisting Huawei’s 5G technology and DJI drones to tightening visa rules for Chinese academics in many scientific fields. But is it the economic growth that worries Washington DC?” Wang asks.
“For the previous US governments, it is the non-democratic political power that came with China’s economic growth that worried them most. For the Trump administration, however, it is both—after all it vowed to Put America First, both economically and politically.”