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How does China’s future as an economic superpower affect U.S relations? COVID and a trade war have hammered both the U.S. and Chinese economies. Can China still overtake the United States? And how bad was America's China Shock, really? Two economists from the National University of Singapore weigh in.
by Valentina Graziosi, National Press Foundation
China may no longer be on track to overtake the U.S. in GDP. Chinese leader Xi Jinping has said it is possible for China to double its total economic size, or per capita income, by 2035. Although it has long been assumed that China would inevitably surpass the United States in GDP, its ability to do so depends on Beijing’s willingness to implement extensive reforms, said Bert Hofman, Director of the East Asian Institute at Singapore National University. Both the U.S. and Chinese economies have fared poorly in the pandemic. But China lags far behind in terms of productivity, with per-worker productivity at just one-quarter that of the U.S., Hofman said. Per capita income, at $12,000 per year, also lags.
China could boost worker productivity - if it wishes. Hofman outlined several reform measures that China could take to increase productivity and GDP growth. First, it would have to deal with steep demographic headwinds, including low fertility rates and an aging population resulting from its one-child policy. But “demography is not destiny,” Hofman said. China has begun to invest in boosters of human capital, such as education, although this is slow to bear fruit. Increased investment has allowed China to catch up rapidly, despite having a large rural population whose education remains quite poor. But even more capital will be needed, Hofman’s data show.
Continued R&D investment will also be required. To overtake the United States, China will need to continue its investment in research and development. China already spends about 2.5% of GDP on R&D, a higher percentage than Europe invests, Hofman said. “That is going very much in the right direction.” Hofman says that China can continue to produce growth from more investment in both education and technology, but there are limits to that strategy without structural (human) reforms.
More expansive reforms would be needed for China to surpass US GDP. China’s infrastructure investments alone are inadequate to generate sufficient growth to overtake the United States in GDP growth, Hofman’s data show. “China has been misallocating… quite a bit of its savings,” he said. Its glut of empty apartments is a drag on the economy. “If you don’t solve bottlenecks, if you have a lot of empty apartments, in the end, it doesn’t add to productivity, doesn’t add to GDP,” he said. Growth-enhancing reforms might include extending the retirement age for women to 65; abolishing the household registration system; increasing the efficiency of the bankruptcy system; and improving the rural land system and rural education, he said. China is likely to make these changes over time, but what is critical, Hofman said, is the speed of the reforms. “The differences are not that large, but under a low (reform) scenario… Xi Jinping’s target will not be met, I can tell you. Under a comprehensive reform scenario, it will be met,” he said.
The U.S.-China trade war was costly to both sides. Sanjana Goswami, assistant professor at the University of Singapore, noted that the China Shock - the massive increase in Chinese exporting starting in 2001 - has been followed by a measurable dent from the U.S.-China trade war. Before the trade war began, about 5% of Chinese products were subject to U.S. tariffs. Now, after a series of retaliatory measures by both sides, it’s 19%. About 58% of U.S. exports are now subject to Chinese tariffs, and about 66% of Chinese exports are subject to U.S. tariffs, she said. The price increases have been fully passed on to consumers, who have no recourse, she said. “There’s no forum for consumers to ban together and say, ‘Hey, we don’t want to pay higher prices on certain products,’” she said.
Speakers: Bert Hofman, Director, East Asian Institute; Professor in Practice, Lee Kuan Yew School of Public Policy, National University of Singapore
Sanjana Goswami
Assistant Professor, Lee Kuan Yew School of Public Policy, National University of Singapore
Takeaways, transcript and resources: nationalpress....
National Press Foundation’s International Trade Fellowship in Singapore is sponsored by the Hinrich Foundation. NPF is solely responsible for the content.