Warning: the Chinese economy may soon run out of steam

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Appeared in The Hill, December 5, 2018
Warning: the Chinese economy may soon run out of steam

At the recent G20 Summit in Buenos Aires, President Trump and Chinese leader Xi Jinping made minor progress in easing trade tensions between the two countries, including postponing a scheduled tariff hike on Chinese imports.

Nevertheless, China’s rise has been driven by a focused economic modernization program that made effective use of the post-war global liberal economic order. With access to international markets, knowledge and hard work, China has learned from foreign technology and now innovates on its own. However, in the eyes of other countries, the Chinese economy, which is not entirely market-driven, is also not as reciprocal on trade and market access.

China’s mercantilist trade policy grows its exports while limiting competition from imports. While it has private companies, its state-owned companies are prominent and make foreign investments, building an integrated supply and production chain. Such behaviour was accepted when China was a developing economy, given the belief that with growing incomes and development China would embrace democracy and become a full partner in the liberal economic world order.

Of course, the United States particularly has grown wary of China, not unlike late-19th and early-20th century Britain, which grew concerned with the growth of rivals including the U.S. and Germany. (Such concerns were not entirely misplaced given the history of the early-20th century.) Nevertheless, despite the seeming prowess of China and its rise, economic mass and success in trade and development, its position remains fragile. This may fuel a sense of insecurity, with implications for global stability.

Consider this. China’s GDP overstates its economic performance. First, total GDP is a measure of extensive growth—that is, the total size of the economy. While total GDP is important as a measure of economic and market size, per capita GDP—the output per person—is a better indicator of development. Since the start of modernization in the 1970s, China has seen both its total and per capita GDP grow. Based on the Maddison World GDP database, since 1970 China has seen its GDP (in 2011 U.S. dollars) grow from $0.912 trillion to $17.255 trillion, with 2016 marking the year it surpassed the U.S. GDP of $17.212 trillion.

This phenomenal growth was a nearly 20-fold economic expansion whie the U.S. economy expanded by about four times. However, while the total size of the Chinese economy is now larger than America’s, its output per person has far to go. In 1970, per capita Chinese real GDP (in 2011 dollars) was $1,115 compared to $23,958 for the U.S. In 2016, it had grown to $12,569 compared to $53,015 for the U.S. And per capita incomes in China (on average) remain only one-quarter of those in the U.S.

While China has several hundred million middle-class members with incomes and purchasing power comparable to the developed world, and has created many millionaires, it still features widespread poverty. Given the economic extremes generated by such rapid economic growth, any slowdown will create enormous domestic political and social tensions making foreign adventurism an attractive option for its authoritarian leadership.

While America and the developed world should ensure their interests are respected and the world economy plays by a common set of rules, it must keep China’s rise in perspective given past experiences. China has far to go when it comes to economic development despite its newfound international bravado.

By way of example, with post-Civil War industrialization, the U.S surpassed Britain’s total GDP in the late 1870s and its per capita GDP on the eve of the First World War. Yet in 1870, the total size of China’s economy was larger than the U.S. and U.K. economies—but its per capita GDP was 14 per cent that of the U.K. and 20 per cent that of the U.S. In terms of relative numbers, not much has changed.

China has a bigger GDP than the U.S., but it’s been there before. It’s made impressive strides but may soon run out of steam given its large population has slowed its per capita output growth. China has a rapidly aging population, which also limits its output growth. And it now faces pushback from other countries on trade and investment as it’s viewed as a non-reciprocal player in international trade.

Despite China’s recent success, we should remember the early successes of the Soviet economic approach, which ultimately turned out to be exaggerated. We know how that ended. China has grown because of its initial liberalization and despite government economic directives. In the long run, planned economies remain a poor substitute for market-driven ones. China will not be an exception.

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