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Xi's Visit Highlights China-U.S. Economic Ties
By limiting trade with China, simply drive up costs for U.S. consumers and therefore drive down U.S. living standards
By John Ross | NO. 40 OCTOBER 1, 2015

 
Chinese President Xi Jinping's state visit to the United States offers an opportunity to understand the potential for mutually beneficial economic relations between the two countries. This goes well beyond them being the world's two largest economies to revealing their respective fundamentally complementary economic characters.

Analyzing their most fundamental economic features illustrates this point and helps explain why China-U.S. economic relations can be stable and cooperative for decades to come. It also shows why the anti-China attitude of American neoconservatives damages not only China but also the United States.

In 2014, China-U.S. trade, standing at $650 billion, was the largest between any two countries in the world outside the North American Free Trade Area (Canada, Mexico and the United States). For the United States, it was second only to trade with Canada--the latter now being almost a domestic base for U.S. production.

In the period 2007-14, namely, since the beginning of the global financial crisis, U.S. trade with Canada increased by $121 billion, but that with China increased by $237 billion.

The driving force behind such rapid trade expansion goes beyond them being the world's two largest economies--to the point that China is by far the largest developing economy, while the United States is the world's most advanced economy. They complement each other rather than compete.

Measured at current exchange rates, preferred by Chinese scholars, China is the world's second largest economy. Measured in terms of Purchasing Power Parity (PPP), as many Western economists prefer, China is the world's largest economy. At any rate, the productivity gap between China and the United States remains huge.

At current exchange rates, China's per-capita GDP is 14 percent of the United States', while in terms of PPP, it is 24 percent. The fact that they are at very different productivity and wage levels means China provides a gigantic market for U.S. high value-added products, while China can supply mid-tech products at prices the United States cannot match due to its higher labor costs.

If the latest year's growth rate of per-capita GDP for the two countries was maintained, 6.8 percent for China and 1.6 percent for the United States, China would not be able to reach U.S. per-capita GDP until 2043.

The reason this gap cannot be closed rapidly is also clear. Contrary to neoliberal myths, the U.S. economy is powered by capital investment. Analyzed in fundamental terms, an economy's sources of output and growth can be divided into capital investment, labor input and Total Factor Productivity (TFP), the latter measuring the effects of economic policy, improvements in technology, etc.

Using the latest statistical methods of international economic agencies such as the Organization for Economic Cooperation and Development, capital investment accounted for 51 percent of U.S. economic growth in 1990-2014, while capital and labor inputs together accounted for 76 percent. Only when the country can match U.S. input levels, above all capital investment, can China achieve a U.S. level of development and productivity.

In 2013, China's annual fixed investment per person was $3,199 compared to the U.S. figure of $10,017. To take another example, in 2012, the most recent available data, there were 15 km of railway track per person in the United States compared to 1 km per person in China, a big factor in the productivity of the logistics system.

It is, therefore, impossible for China to close the gap in capital inputs to reach U.S. levels in the short to medium term. Even if China adopts brilliantly flawless policies, it will 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 reduce U.S. investment per person and wages to the Chinese level.

As China is by far the world's largest developing economy, the United States will also not find any alternative comparable source of supply to China for price-competitive mid-tech products.

It can, therefore, be predicted with certainty that, in 10 years' time, when the presidents of China and the United States meet, these fundamental parameters will be unchanged--U.S. productivity will still be higher than China's, and the two economies will still be fundamentally complementary. The stability of such fundamentals offers a firm foundation for relations based on benefit and equality.

China certainly loses by any restrictions on exports of U.S. high value products, but, equally, neoconservatives, by limiting trade with China, simply drive up costs for U.S. consumers--and therefore drive down U.S. living standards.

Restrictions of trade between the world's two largest economies also have negative economic consequences for other countries as they slow overall world growth and create a "lose-lose" scenario for everyone. The stable economic basis of China's concept of a "new model of major country relationship" is a win-win for the people of China, of the United States and of third countries that results from trade and investment between mutually complimentary economies.

The writer is a columnist with China.org.cn, and the article was first published on the website

Copyedited by Kylee McIntyre

Comments to yanwei@bjreview.com

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