Analysis

Why China's economic growth isn't nearly as scary as it sounds

Yes, China's economy is growing at a rapid pace. But there's no need for Americans to panic.

Around 2032, China will dethrone America as the world's biggest national economy. That's the news from the latest global economic report from London's Centre for Economics and Business Research.

As my colleagues joked, this is basically President Trump's worst nightmare. An ill-defined rivalry with the Asian behemoth dominates Trump's rhetoric. And given his adolescent obsession with schoolyard dominance narratives, the idea that China will be "bigger" than the U.S. in any manner is certain to freak out the president — along with any Americans who share his way of thinking.

But things are a bit more complicated than the headlines suggest.

National economies are measured in gross domestic product (GDP). Very crudely put, annual GDP is calculated by adding up all the incomes earned by everyone in a country's economy in a given year.

This isn't a straightforward matter. It's a huge accounting undertaking, complete with lots of bookkeeping decisions. Measuring GDP requires a number of judgment calls — for which there are no objectively right answers — about what should count as income and how to measure it. We tend to treat GDP as synonymous with "economic prowess," but you could debate all day whether the technical details of how GDP is measured actually justify that use.

Another complication: GDP is measured in currency, and most major countries have different currencies. To avoid an apples-to-oranges comparison, the Centre for Economics and Business Research used currency market prices to convert every country's GDP to U.S. dollars. But there are other ways. For example, a method called purchasing power parity (PPP) compares different national currencies by figuring out how much of each is needed to buy the same basket of goods. And using this conversion, China's economy is already bigger than America's.

But let's set those details aside, and dig into what everyone's really wondering: Does a bigger GDP, measured in either U.S. dollars or PPP terms, mean China is stronger or more powerful than America?

Not really.

The idea driving our collective obsession with GDP is that, the bigger it is, the more resources a country can wield to influence or bully its neighbors, shaping international relations, trade, and geopolitics. The most obvious way to do this is with a big and powerful military. But it could also be done with things like foreign aid or international investment.

But any resources a country pours into tanks and missiles, or infrastructure in foreign lands, are also resources it can't pour into raising living standards at home. So here's the real question: How much room does a country have to divert its resources like this before it harms its own citizens and invites a political backlash?

GDP alone can't actually tell you this. What you need to know is GDP per person.

For instance, America's GDP in 2015 was around $18.1 trillion. Spread that across almost 321 million men, women, and children in the country, and you get around $56,400 per person. Meanwhile, America's military spending in 2015 was just under $600 billion. That's about $1,870 per person, or 3.3 percent of each American's cut of the economic pie. Its foreign aid budget was a piddly $49 billion in 2015 — $153 per person, or 0.3 percent of each American's cut.

Now, this ignores the distorting effects of inequality, which are considerable. America's economy isn't actually divided up in anything close to these sorts of egalitarian terms. Nonetheless, our wealth-per-person ratio is enormous, and lets us really throw our weight around.

This isn't the case in China. Despite its overall size, its GDP is spread across a vastly larger population — roughly 1.38 billion. Its GDP per person, even measured in PPP terms, is still way lower than ours: $15,600 versus $57,600, respectively.

China also has really high levels of inequality. And it has a more authoritarian government. So maybe it can extract more wealth per person to use on nationalistic projects than America can. But a country can only push this dynamic so far: The basic bargain China has made with its citizens is that if they don't rock the boat too much or try to overthrow the powers that be, the government will make sure the country's rising economic fortunes lift standards of living for all Chinese citizens.

As a result, despite GDP that's close to America's, China's military is only one-third the size of our own.

China's growing GDP could matter in other ways: Other countries' economies will want access to its growing population of consumers. And that will give China more leverage in international trade negotiations. But it's not as if America will be relegated to the back bench here: Even after China claims the top spot, the U.S. will still be close behind, and the second biggest national economy by a considerable margin. Countries won't suddenly become nonchalant about alienating America. The fact that we'll still have some of the world's richest consumers on a per person basis will make us attractive in ways China won't be able to easily replicate.

If there's any way China's economy really is hurting America's economy, it's in the trade imbalance. But that's only peripherally related to size. The causes of the imbalance are wonky decisions about currency policy and other domestic economic issues made by elites in both countries. China's size may exacerbate the consequences of those choices, but that's it.

Nor does the trade imbalance hurt Americans as a whole while helping the Chinese as a whole. A far more accurate characterization is that the trade imbalance harms workers in both countries — albeit in different ways — while enriching wealthy elites and business owners.

No matter which way you slice the data, it's hard to come up with a story in which China having the world's biggest gross domestic product is anything for Americans to worry about.

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