Monday, June 22, 2015
Will the China Century End in 2019?
The United States has dominated the global economy for much of the Post-World War II Era. Its dominance has come from the sheer size of the U.S. economy. No other nation has yet been able to surpass the gross domestic product of the United States at any time during the period. To understand China’s rising status in the world, we must view gross domestic product in another way.
We can imagine annual gross domestic product as the economy standing still at the end of the year. The United States has always been the dominant economy and will continue to be dominant for the foreseeable future. However, if we measure economic dominance by the new amount of gross domestic product in dollar terms, we can see economic change in progress. We can safely assume that new gross domestic product has more impact on the world economy than recurring gross domestic product. This would explain China’s rapid rise in economic influence over the last few years, despite being significantly smaller than the United States.
According to the International Monetary Fund, between 1981 and 2001, the United States’ nominal gross domestic product increased by about $388 billion per year. By comparison, China’s nominal gross domestic product increased by about $51 billion per year. Not only was the United States economy much larger than China’s, it was adding much more new gross domestic product to the world economy. The United States was the unchallenged world economic superpower.
In 2007, even before the Global Financial Crisis, that changed. That year, China added $781 billion worth of new gross domestic product against the $622 billion created by the United States. As of the most recent numbers for 2014, this trend has continued.
Even more astonishing is China’s proportional contribution to world gross domestic product. In 2009, when the world lost $3.2 trillion in economic activity, China still added $470 billion worth of new gross domestic product. In 2012, the world added $1.2 trillion in new gross domestic product, and China’s contribution to that number was $900 billion. That means that in 2012, for every dollar the world made from new economic activity, China added about 75 cents. As China adds one impressive year of economic results to another, it is no wonder than many people expect the 21st century to be the China Century. It is surprising that China does not have an even greater say in world economic affairs already.
The challenge, though, is that as China’s growth slows, it will become increasingly difficult to continue this. Any economy that is twice the size of another only has to grow by slightly more than half of a competitor to overtake its new output. If China is expected to grow by 7.4% for the year, the United States really only has to grow by 4.0% or so to overtake China’s new contribution to gross domestic product.
Whether intentionally or not, the International Monetary Fund projects this scenario to play out in 2019. Their projections foresee China’s economy growing from $14.0 trillion in 2018 to $14.8 trillion in 2019, meaning $800 billion in new economic activity, whereas the U.S. is expected to grow from $21.1 trillion in 2018 to $22.0 trillion in 2019, meaning $900 billion in new economic activity. In that case, China will grow by 6.0% against 4.2% for the United States, but the United States will contribute $100 billion more new gross domestic product to the world economy.
Unfortunately for China’s long-term prospects, the only country that was able to outpace the United States for more than one year during the Post-World War II Era was Japan in the late 1980s and early 1990s. Between 1986 and 1988, Japan added $1.6 trillion in new gross domestic product, whereas the United States only added $900 billion. Alas, between 1989 and 2013, Japan added $1.9 trillion in new gross domestic product to the world economy compared to $11.5 trillion worth of new gross domestic product created by the United States during the same period.
Furthermore, the International Monetary Fund’s projections assume that China’s gross domestic product will continue to experience positive growth. During the Asian Financial Crisis, the combined economics of Korea, Thailand, Indonesia, and Malaysia, the nations hardest hit by that episode, declined 7.4% in 1997 and 35.8% in 1998. If from a starting point of $10.0 trillion at the end of 2014 China were to experience a similar event in 2015 and 2016, it would erase $748 billion one year and $3.3 trillion the next year. That is more economic pain than the entire world experienced during the Global Financial Crisis in 2009, but instead it would only affect one country. Even with the International Monetary Fund’s best-case scenario, the China Century will end in 2019.