Title Title
The past, present and future of Chinese and U.S. economies Investigating how much a trade war could impact Chinese and U.S. economies
Summary Summary
WikiTribune tests claims about Chinese economic performance by looking at the figures - and those of the U.S. WikiTribune tests claims about Chinese economic performance by looking at the figures - and those of the U.S.
Highlights Highlights
Content Content
<strong>The potentially "<a href="https://www.telegraph.co.uk/business/2018/06/05/threat-trade-war-already-hurting-growth-could-devastating-tariffs/">devastating</a>" trade war between the U.S. and China which President Trump started has dominated headlines. On July 9 Germany and China <a href="https://uk.reuters.com/article/us-germany-china/with-raft-of-deals-china-and-germany-swear-to-keep-trade-free-idUKKBN1JZ0VM">renewed</a> their commitment to free trade with $23.5 billion (€20bn) worth of commercial agreements. Beijing is also making friends through what is arguably history's <a href="https://www.ft.com/content/0714074a-0334-11e7-aa5b-6bb07f5c8e12">greatest</a> investment in foreign infrastructure. The <a href="https://en.wikipedia.org/wiki/Belt_and_Road_Initiative">Belt and Road Initiative</a> (BRI) will build $900 billion worth of highways, ports, rail networks and bridges in more than 70 countries.</strong> <strong>The potentially "<a href="https://www.telegraph.co.uk/business/2018/06/05/threat-trade-war-already-hurting-growth-could-devastating-tariffs/">devastating</a>" trade war between the U.S. and China which President Trump started has dominated headlines. On July 9 Germany and China <a href="https://uk.reuters.com/article/us-germany-china/with-raft-of-deals-china-and-germany-swear-to-keep-trade-free-idUKKBN1JZ0VM">renewed</a> their commitment to free trade with $23.5 billion (€20bn) worth of commercial agreements. Beijing is also making friends through what is arguably history's <a href="https://www.ft.com/content/0714074a-0334-11e7-aa5b-6bb07f5c8e12">greatest</a> investment in foreign infrastructure. The <a href="https://en.wikipedia.org/wiki/Belt_and_Road_Initiative">Belt and Road Initiative</a> (BRI) will build $900 billion worth of highways, ports, rail networks and bridges in more than 70 countries.</strong>
Trump claims he is determined to end what he perceives as China's unfair trade policies, such as<a href="https://www.wsj.com/articles/ending-chinas-currency-manipulation-1447115601"> currency manipulation</a> and export dumping. As early as 2015, 350 of the U.S.'s leading economists, including MIT's <a href="https://economics.mit.edu/faculty/acemoglu">Daren Acemoglu</a>, said Trump's views on trade ignore "<a href="https://www.wsj.com/public/resources/documents/EconomistLetter11012016.pdf">the reality of technological progress and the benefits of international trade</a>." Trump claims he is determined to end what he perceives as China's unfair trade policies, such as<a href="https://www.wsj.com/articles/ending-chinas-currency-manipulation-1447115601"> currency manipulation</a> and export dumping. As early as 2015, 350 of the U.S.'s leading economists, including MIT's <a href="https://economics.mit.edu/faculty/acemoglu">Daren Acemoglu</a>, said Trump's views on trade ignore "<a href="https://www.wsj.com/public/resources/documents/EconomistLetter11012016.pdf">the reality of technological progress and the benefits of international trade</a>."
It is fair to say that America's economic dominance has been challenged; declining growth is experienced as stagnant wages and dying industries. To what extent this is due to Chinese growth and trade is a different matter. If China is the world's factory, what can the trade war do to its economic well-being? Will the BRI successfully re-orient its exports? It is fair to say that America's economic dominance has been challenged; declining growth is experienced as stagnant wages and dying industries. To what extent this is due to Chinese growth and trade is a different matter. If China is the world's factory, what can the trade war do to its economic well-being? Will the BRI successfully re-orient its exports?
<em>WikiTribune </em>collected the World Bank's <a href="https://data.worldbank.org/">economic indicators</a> for China and the U.S. from 1980 onwards. Gross Domestic Product (GDP) and its composition gives us an idea of how the two economies have developed over time. Combining the facts of the past with IMF predictions of growth, current account balance and government debt, we can place the BRI within the context of the evolution of the two economies. <em>WikiTribune </em>collected the World Bank's <a href="https://data.worldbank.org/">economic indicators</a> for China and the U.S. from 1980 onwards. Gross Domestic Product (GDP) and its composition gives us an idea of how the two economies have developed over time. Combining the facts of the past with IMF predictions of growth, current account balance and government debt, we can place the BRI within the context of the evolution of the two economies.
<h2>Gross Domestic Product (GDP)</h2> <h2>Gross Domestic Product (GDP)</h2>
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A country's economic size is primarily measured by <a href="https://en.wikipedia.org/wiki/Gross_domestic_product">GDP</a>. The U.S. remains ahead of China when measuring production in current U.S. dollars, but China has been catching up over the past 30 years. If the two measurements are taken at <a href="https://en.wikipedia.org/wiki/Purchasing_power_parity">Purchasing Power Parity</a>, which accounts for the fact that a dollar has different <a href="https://www.economist.com/news/2018/01/17/the-big-mac-index">buying power</a> across borders, the Chinese economy surpassed the U.S. in 2014. A country's economic size is primarily measured by <a href="https://en.wikipedia.org/wiki/Gross_domestic_product">GDP</a>. The U.S. remains ahead of China when measuring production in current U.S. dollars, but China has been catching up over the past 30 years. If the two measurements are taken at <a href="https://en.wikipedia.org/wiki/Purchasing_power_parity">Purchasing Power Parity</a>, which accounts for the fact that a dollar has different <a href="https://www.economist.com/news/2018/01/17/the-big-mac-index">buying power</a> across borders, the Chinese economy surpassed the U.S. in 2014.
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In the same year, China took the lion's share of the world's productivity. This is the result of a steady buildup, which the graph below depicts. In the same year, China took the lion's share of the world's productivity. This is the result of a steady buildup, which the graph below depicts.
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Since the 1980s, China has experienced consistently high levels of growth, almost double those achieved by the U.S. Both experienced a drop in output after the 2008 financial crisis. Even though both bounced back, it is expected that GDP growth will slow over the next five years. China's growth miracle has faded in recent years, but growth has remained positive. China is predicted to continue increasing its output, unlike the U.S. Since the 1980s, China has experienced consistently high levels of growth, almost double those achieved by the U.S. Both experienced a drop in output after the 2008 financial crisis. Even though both bounced back, it is expected that GDP growth will slow over the next five years. China's growth miracle has faded in recent years, but growth has remained positive. China is predicted to continue increasing its output, unlike the U.S.
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The expansion of GDP has yet to trickle down to the Chinese population, as output per capita shows. Even at purchasing power parity (PPP), the American worker produces 3.5 times what his Chinese counterpart does. High levels of GDP associated with low levels of GDP per capita can be interpreted as a red flag for <a href="https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-sweden-2017/gender-equality-is-associated-with-high-gdp-per-capita_eco_surveys-swe-2017-graph50-en">inequitable development</a>.  What is more, low household income precludes high levels of consumption, which can act as a driver of GDP growth. The expansion of GDP has yet to trickle down to the Chinese population, as output per capita shows. Even at purchasing power parity (PPP), the American worker produces 3.5 times what his Chinese counterpart does. High levels of GDP associated with low levels of GDP per capita can be interpreted as a red flag for <a href="https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-sweden-2017/gender-equality-is-associated-with-high-gdp-per-capita_eco_surveys-swe-2017-graph50-en">inequitable development</a>.  What is more, low household income precludes high levels of consumption, which can act as a driver of GDP growth.
<h2>GDP composition</h2> <h2>GDP composition</h2>
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<a href="https://en.wikipedia.org/wiki/Three-sector_theory">Economic theory</a> tells us that as countries' GDP per capita increases, employment moves from agriculture, through manufacturing and into services. The U.S. made this transition a while ago. As it got richer, financial and productive capital was accumulated, which boosted manufacturing, increasingly adding value to manufactured goods. Eventually, it withdrew from goods into services. These often face a more constant demand and less price volatility.  The model is not always accurate. In <a href="https://www.bloombergquint.com/global-economics/2018/07/04/india-services-activity-in-june-expands-at-fastest-pace-in-a-year">India</a>, services now make up 60 percent of employment, despite the fact that the industrial sector has remained <a href="https://upload.wikimedia.org/wikipedia/commons/2/2e/1951_to_2013_Trend_Chart_of_Sector_Share_of_Total_GDP_for_each_year%2C_India.png">constant</a>. <a href="https://en.wikipedia.org/wiki/Three-sector_theory">Economic theory</a> tells us that as countries' GDP per capita increases, employment moves from agriculture, through manufacturing and into services. The U.S. made this transition a while ago. As it got richer, financial and productive capital was accumulated, which boosted manufacturing, increasingly adding value to manufactured goods. Eventually, it withdrew from goods into services. These often face a more constant demand and less price volatility.  The model is not always accurate. In <a href="https://www.bloombergquint.com/global-economics/2018/07/04/india-services-activity-in-june-expands-at-fastest-pace-in-a-year">India</a>, services now make up 60 percent of employment, despite the fact that the industrial sector has remained <a href="https://upload.wikimedia.org/wikipedia/commons/2/2e/1951_to_2013_Trend_Chart_of_Sector_Share_of_Total_GDP_for_each_year%2C_India.png">constant</a>.
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As the graph above shows, China's employment follows the three-sector model to a large degree. Employment in agriculture has been steadily declining as a share of GDP, whilst the services sector is growing. The U.S. is increasingly a service-based economy, as has been it has been for several decades. If the three-sector model continues to apply in China, as the trend indicates, the distribution of employment will converge with the United States, towards a service-based economy. As the graph above shows, China's employment follows the three-sector model to a large degree. Employment in agriculture has been steadily declining as a share of GDP, whilst the services sector is growing. The U.S. is increasingly a service-based economy, as has been it has been for several decades. If the three-sector model continues to apply in China, as the trend indicates, the distribution of employment will converge with the United States, towards a service-based economy.
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But discrepancies appear when comparing the drivers of GDP. Household consumption, government spending, investment and net exports are the demands that finance production. Government spending has remained relatively constant at about 15 percent of GDP since 1980. Household consumption accounts for two-thirds of production in the American economy. Since the millennium, Chinese households have been reducing their spending. By 2016, they only accounted for a third of production. Investment, on the other hand, has seen a slow but steady increase, outpacing the U.S. by almost 40 percentage points. But discrepancies appear when comparing the drivers of GDP. Household consumption, government spending, investment and net exports are the demands that finance production. Government spending has remained relatively constant at about 15 percent of GDP since 1980. Household consumption accounts for two-thirds of production in the American economy. Since the millennium, Chinese households have been reducing their spending. By 2016, they only accounted for a third of production. Investment, on the other hand, has seen a slow but steady increase, outpacing the U.S. by almost 40 percentage points.
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Chinese consumers are saving more and more of their income, so they have less to spend on consumer goods. Overall, China's gross domestic savings is at least triple that of the U.S. Savings do not fuel production in the short-term, but can provide security in the future. Chinese consumers are saving more and more of their income, so they have less to spend on consumer goods. Overall, China's gross domestic savings is at least triple that of the U.S. Savings do not fuel production in the short-term, but can provide security in the future.
<h2>Trade</h2> <h2>Trade</h2>
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The final component of GDP is trade. If a country imports more than it exports, it is using up its own currency. At the same time, it is funding the development of overseas industries. The final component of GDP is trade. If a country imports more than it exports, it is using up its own currency. At the same time, it is funding the development of overseas industries.
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The U.S. has been running a current account deficit since the 1970s. Its trade is withdrawing from rather than adding money to its domestic market. The last time China spent more money on other nation's production than its own was in the 1990s. Its biggest trade partner is the U.S., which means that, globally, Americans consume the highest amount of Chinese goods and services. The U.S. has been running a current account deficit since the 1970s. Its trade is withdrawing from rather than adding money to its domestic market. The last time China spent more money on other nation's production than its own was in the 1990s. Its biggest trade partner is the U.S., which means that, globally, Americans consume the highest amount of Chinese goods and services.
<h2>How does the Belt and Road Initiative fit in?</h2> <h2>How does the Belt and Road Initiative fit in?</h2>
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The current account includes exchanges of capital, such as interest payments and overseas investment. Since <a href="http://ticdata.treasury.gov/Publish/mfh.txt">2014</a>, China is the U.S.'s biggest creditor. Borrowing is an important step towards growth, but not one that should be taken lightly. For example, the BRI project operates through debt. The infrastructure that China is building is not free. They are loaning the necessary capital to the respective governments, hoping that it will be paid back, with interest. The current account includes exchanges of capital, such as interest payments and overseas investment. Since <a href="http://ticdata.treasury.gov/Publish/mfh.txt">2014</a>, China is the U.S.'s biggest creditor. Borrowing is an important step towards growth, but not one that should be taken lightly. For example, the BRI project operates through debt. The infrastructure that China is building is not free. They are loaning the necessary capital to the respective governments, hoping that it will be paid back, with interest.
BRI will provide China with paths to markets all around the world, but its impact on the world is yet to be determined. Many developing nations are being given an opportunity to increase their trade and customs revenue and participate more actively in the global value chain. At the same time, however, they are making a financial commitment to one of the world's toughest creditors. Whether they will meet their debt obligations remains to be seen. BRI will provide China with paths to markets all around the world, but its impact on the world is yet to be determined. Many developing nations are being given an opportunity to increase their trade and customs revenue and participate more actively in the global value chain. At the same time, however, they are making a financial commitment to one of the world's toughest creditors. Whether they will meet their debt obligations remains to be seen.
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The IMF predicts that public debt in BRI countries will decrease in the next seven years, while American and Chinese debts will see a rise. The BRI is a risk to China as well, since it is itself borrowing money at an increasing rate to fund this massive project. Its growth is expected to remain high until 2023, albeit slower than in previous years. The BRI countries are projected to grow as well, generating income to pay back their loans to China. Finally, while the U.S. is set to continue importing more than it exports, China's current account is expected to remain positive, as will the BRI countries until 2022. The IMF predicts that public debt in BRI countries will decrease in the next seven years, while American and Chinese debts will see a rise. The BRI is a risk to China as well, since it is itself borrowing money at an increasing rate to fund this massive project. Its growth is expected to remain high until 2023, albeit slower than in previous years. The BRI countries are projected to grow as well, generating income to pay back their loans to China. Finally, while the U.S. is set to continue importing more than it exports, China's current account is expected to remain positive, as will the BRI countries until 2022.
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Asia, Business, China, Current Affairs, Diplomacy, Economics, Finance, Markets, North America, United States Asia, Business, China, Current Affairs, Diplomacy, Economics, Finance, Markets, North America, United States
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China, consumption, Data, debt, Development, Economics, GDP, Investment, One Road One Belt, Trump, U.S., World Trade, Xi Jinping  Belt and Road Initiative, China, consumption, Data, debt, Development, Economics, GDP, Investment, Trump, U.S., World Trade, Xi Jinping
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