China’s economic growth over the past three decades has been spectacular, even miraculous. Yet the veneer of double-digit growth rates has masked gaping liabilities that limit China’s ability to close the wealth gap with the United States. China has achieved
high growth at high costs, and now the costs are rising while growth is slowing. As I explain in a recent book, data that accounts for these costs reveal that the United States is several times wealthier than China, and the gap appears to be growing by trillions of dollars every year.1 This conclusion may surprise many people, given that China has a bigger GDP, a higher investment rate, larger trade flows, and a higher economic growth rate than the United States. How can China outproduce, outinvest, and outtrade the United States—and own nearly $1.2 trillion in U.S. debt—yet still have substantially less wealth?
The reason is that China’s economy is big but inefficient. It produces vast output but at enormous expense. Chinese businesses suffer from chronically high production costs, and China’s 1.4 billion people impose substantial welfare and security burdens. The United States, by contrast, is big and efficient. American businesses are among the most productive in the world; and with four times fewer people than China, the United States has much lower welfare and security costs.
GDP and other standard measures of economic heft ignore these costs and create the false impression that China is overtaking the United States economically. In reality, China’s economy is barely keeping pace as the burden of propping up loss-making companies and feeding, policing, protecting, and cleaning up after one-fifth of humanity erodes China’s stocks of wealth.
The persistent U.S.-China wealth gap means that the two countries are not destined for hegemonic rivalry, as many scholars argue. China will not be able to afford a full-scale challenge to American primacy, so the greatest risk of a U.S.- China war stems from the reckless escalation of a local crisis in East Asia, not a global power transition. Instead of gearing up for a new Cold War, the United States should take more pragmatic steps to bolster the East Asian balance of power and reinvigorate the U.S. economy.
The persistent U.S.-China wealth gap also undercuts the Trump administration’s argument that the United States has been losing economically to China and therefore needs to bypass the WTO, slap tariffs on Chinese goods, and decouple the U.S. and Chinese economies. Yes, China cheats on some of its trade commitments and engages in rampant espionage and intellectual property theft, and the WTO is ill-equipped to punish these actions consistently. But the biggest challenge to American workers and the companies that employ them may well be coming from the U.S. government’s failure to make large enough investments in job training (including hiring and wage subsidies), infrastructure, research and development, and support for working families. Boosting investment in these areas would allow the United States to protect American workers and preserve U.S. economic dominance without resorting to ruinous protectionism.