Xi Jinping’s U.S. Visit Highlights China-U.S.Economic Ties

By JOHN ROSS

A KEY background factor to Xi Jinping’s state visit to the U.S. is that the potential for mutually beneficial economic relations between China and the U.S. is the greatest of any two countries. This goes well beyond their being the world’s two largest economies to their fundamentally complementary economic characters. Analyzing the most fundamental economic features of China and the U.S. demonstrates this clearly, and why China-U.S. economic relations can be stable and mutually beneficial over decades. It also shows why the U.S. neo-con proposals hindering such economic relations damage not only China but also the U.S.

In 2014 China-U.S. trade, at US $650 billion, was the largest between any two countries outside the North American Free Trade Area. For the U.S. it was second only to trade with Canada – the latter being almost a domestic base for U.S. production. China-U.S. trade was also growing more rapidly. In 2007-2014, that is since the beginning of the global financial crisis, U.S. trade with Canada increased by US $121 billion while U.S. trade with China increased by US $237 billion. 

The driving force of such rapid trade expansion is that not only are China and the U.S. the world’s two largest economies, but China is by far the largest developing economy while the U.S. is the world’s most advanced economy. The two economies are thus complementary rather than directly competing.

Measured at current exchange rates, as China prefers, China is the world’s second largest economy. Measured at Purchasing Powers Parities (PPPs), as many Western economists prefer, China is the world’s largest economy. But by either measure the productivity gap between China and the U.S. remains huge.

At current exchange rates China’s per capita GDP is 14 percent of the U.S., and in PPPs it is 24 percent. The fact China and the U.S. are simultaneously the world’s two largest economies, but with very different productivity and wage levels, means that China provides a gigantic market for U.S. high value-added products, while China can supply medium technology products at prices the U.S. cannot match due to its far higher labor costs. 

These relations are also stable as it is impossible to change the fundamental features of the two economies rapidly. If last year’s growth of per capita GDP for the two countries of 6.8 percent for China and 1.6 percent for the U.S. were maintained, China would not reach U.S. per capita GDP until 2043 – almost three decades.

The reason this gap cannot be closed rapidly is also clear. Contrary to neo-liberal myths, the U.S. economy is above all powered by its capital investment. Analyzed in fundamental terms an economy’s sources of output and growth can be divided into capital investment, labor inputs and Total Factor Productivity (TFP) – the latter measuring effects of economic policy, improvements in technology, etc. Measuring by the latest statistical methods of international economic agencies such as the OECD, Figure 1 shows that capital investment accounted for 51 percent of U.S. economic growth in 1990-2014, while capital and labour inputs together accounted for 76 percent of U.S. growth. Only if China can match U.S. levels of inputs, above all U.S. levels of capital investment, could China achieve a U.S. level of development and productivity.

However, comparison of the latest available internationally comparable data shows that in 2013 China’s annual fixed investment per person was still only US $3,199 compared to the U.S.’s US $10,017. Without tripling its annual investment per head China cannot reach U.S. levels and achieve U.S. productivity.

To take another example, in 2012, the latest available data, there were 15 km of railway track per person in the U.S. for every one km per person in China. The effect of raising the productivity of the U.S. logistics system with a railway density that in population terms is 15 times as high as China’s is obvious.

It is therefore impossible for China to close the gap in capital inputs to reach U.S. levels in anything other than the very long term. Even if China adopts brilliant flawless policies, it will still not reach U.S. levels of productivity for decades. Equally even a U.S. economic collapse on the scale of the Great Depression, which will not occur, would not lead to U.S. productivity and wages becoming comparable with China’s. As China is by a huge margin the world’s largest developing economy the U.S. will also not find any alternative source of supply comparable to China for price competitive medium technology products.

It can therefore be predicted with certainty that in 10 years’ time, when the presidents of China and the U.S. meet, these fundamental parameters will still not have changed – U.S. productivity will still be higher than China’s and the two economies will still be fundamentally complementary. The stability of such fundamentals gives a firm foundation to both recognize and negotiate mutually beneficial relations between China and the U.S.

China certainly loses from any restrictions on exports of U.S. high value products, but equally neo-cons, by limiting trade with China, simply drive up costs for U.S. consumers – and therefore drive down U.S. living standards. Trade restrictions between the world’s two largest economies also have negative economic consequences for other countries as they slow overall world growth.

The proposals of the U.S. neo-cons are therefore negative, a “lose-lose’ scenario for everyone – including ultimately the U.S. population. The stable economic basis of China’s concept of a “new model of major country relations” is the win-win resulting from trade and investment between mutually complementary economies.