When could China surpass the US economy?

Q: When could China surpass the US economy?

A:

It depends on how to measure the economy. Before the open-and-reform in the 1980s, China followed the USSR’s method of measuring the economy which is measuring the quantity of goods produced. It was based on classical economics that economy is about how wealth is created and distributed. By that measure, China already surpassed the US because China is the largest manufacturing country.

Now the mainstream method of measuring the economy is using GDP. It calculates economic transactions: buy and sell. This is an easier method because the measure is in terms of money, such as how many trillion dollars, unlike the USSR’s method you have to report how much corp is produced and how much steel is produced, etc. Goods have a variety of kinds. You can only select a portfolio of goods to do the statistics.

But GDP may mislead in many ways. One is the environmental damage is not calculated. Suppose a mill produces paper but also pollutes the river. If the mill ignores the pollution, the value added to GDP will be higher. But if the mill treats the water to avoid pollution, the cost will be increased and the value added to GDP will be lower. Yet, if the government spends money to clean the river, that government expense is also calculated as GDP. So the mill ignores the pollution to get a higher GDP, and the government cleans the river to add another GDP, even though the quality of paper produced is the same, the GDP calculation may vary a lot.

If a product or service is not a market transaction, then it cannot be counted as GDP. If I cook my meal at home for myself, it is not GDP. If I cook meals and sell them to my neighbor for $100, and my neighbor cools meals and sells them to me for $00, then we can produce $200 GDP. The same labor of cooking, and the same quantity of consumption, can or cannot be counted as GDP depending on if there is a market behavior involved.

Economics has a law of price neutrality. If the price of all transactions doubled, the economy would run just the same. It is like my salary is doubled, and all the goods and services I consume also have their price doubled, the end result is nothing changed. So the US may have a GDP higher than China because Americans get higher income and the price of goods and services in the US are also higher, the real size of the economy may not really be higher than China. To overcome this fallacy, economists use PPP (Purchase Power Parity) to measure the size of an economy. By this measure, China has surpassed the US in 2014.

However, if we consider the living standard or GDP per capita, China is far behind the US, regardless it is nominal GDP or PPP GDP. We have to remember that GDP is measured by money. It is one method to calculate the size of an economy. But the economy is not about money, it is about the utility, of how an economy benefits people. How do we measure utility or benefit? One way to measure it is by life expectancy. The reason is simple, if the utility or benefits are higher, life is happier; if life is happier, the life expectancy is longer.

In 2020, the life expectancy in China surpassed the US.

Going back to the USSR’s method of measuring the economy, where we calculate the size of an economy by measuring the capability to create wealth. It is the manufacturing that really counts.

Notice the blue line? the OECD. Members of the OECD include the US, UK, Japan, and other developed countries. The services of the OECD are about 70% of GDP. China is about 50%. Like the previous example of selling and buying meals with neighbors, service GDP does not create wealth. You can have a dish of spaghetti at a gas station store for $7 or the same dish of spaghetti in a fancy restaurant for $70 with more services, like fancy utility, table cloth, waiter standing by, and luxury furnished environment. Sometimes you just can't escape the services. You can buy a prescripted medicine and have to pay for the services of the pharmacy on top of the price of the drug.

Trump waged a trade war with China. Trade war is a lose-lose game. Trump calculates that the US has a larger economy than China, by a lose-lose game, China will be exhausted first and the US can laugh at the end. Trump is replaying the same play script of the Cold War, with Space competition exhausting the economy of the USSR. Yet Trump forgets that during the Cold War, the US had a larger manufacturing than the USSR. In the New Cold War, China has a larger manufacturing than the US. The positions are reversed. The US increased tariffs on Made-in-China wantonly, while China can only retaliate by raising tariffs on a few US products. It looks like the US is winning. Yet after 6 years of the trade war, China is better off than the US, though both sides are difficult.

Biden thinks that, OK, China has a bigger manufacturer, but it is not bigger than all the allies combined. But Biden is also wrong. Look at the graph above, the graph is measured by US dollar. If we measure the manufacture by PPP, the US together with its allies cannot win the trade war and the new cold war.

After 6 years of trade war and the new cold war, the debt of the US and its allies skyrocketed, while China is leading in EV, Solar panels, EV batteries, and green energy. The US and its allies wasted all their resources containing China while China just focused on economic development. Why? Why China is so confident? Of course, China has no choice. It is not China wants the trade war, not China igniting the trade war. But China is confident because the size of its economy is large enough to survive the Trad War, specifically, its size of manufacturing is larger than the US and its allies combined.

In international trade, the economy is measured by nominal GDP. China has not surpassed the US yet. In geopolitics, the size of an economy is measured by manufacturing, and China overwhelmingly dominates the world. The trade war harms the US and its allies more than China.