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Impact of China's Economic Growth on the United States


Is China's economic success a threat to the United States?


While some may be happy to see China prosper, the U.S. and Europe often wonder what negative consequences China’s development will have on them. This is perhaps an understandable fear given that China remains an authoritarian Communist state, and it is impossible to say that China’s economic rise won’t one day threaten the security of the United States.[1] Those who fear such an outcome see China’s economic rise as a strategic threat to the U.S.

On the other hand, those who tend to see economic and trade disputes between the two countries through a commercial and mercantile lens tend to be less worried about China as a long-term security threat. The belief here is that the deeper the economic ties between the two countries, the less the chance of political or security conflagrations down the road as the cost to both sides would be too high. The irony is of course that the deeper the economic ties, the more interdependent the economic relationship between the two countries, the greater the likelihood of trade tensions and other frictions. This is to be expected. On balance, more experts than not believe that China’s economic rise should be seen as more of an opportunity than a threat. C.Fred Bergsten of the Center for Strategic and International Studies (CSIS) has argued that the annual gains to the U.S. from increasing economic interaction with China could be substantial – around $70 billion.[2]


Why might the U.S. have a vested interest in China's continued economic growth?


For the last fifteen years, China’s cheap products have kept inflation down for Americans while its savings have financed American consumption. While most experts agree that this scenario cannot continue, (see “Foreign Currency Reserves”), it is still in the United States' interest to have an economically strong China.

Staunch World Recession: Between 2003 and 2005, China contributed 13.8% of the global GDP growth, second to America.[3] America actually needs China to be strong, as strong Chinese growth that is fueled more by domestic spending than exports can actually help prevent the world economy from sliding down too drastically should the U.S. fall into an economic recession. This, however, depends on China continuing to remain economically strong. If, however, China’s bad loans and debt come calling during the same time or an unforeseen disruption to the Chinese economy occurs, then it is possible that the two main growth engines of the last decade will both be stalled at the same time.

Prevent Inflation: Continued cheap exports from China can help prevent inflation in its trading partners. As it is, China is currently exporting inflation to the U.S. via higher export costs.

U.S. Companies Profit: American companies with a presence in China stand to profit from their foreign direct investment there (see "Trade").

Increase U.S. Exports: A strong China with increasing domestic consumption and growing middle class bodes well for U.S. exporters and the creation of more American jobs. American companies that meet the needs of a growing China are even better poised to help both themselves and the Chinese.


So why do many Americans still fear China’s economic success?


America’s own Economic Health: What is important to understand is that American attitudes towards China’s economic success and the evolution of the U.S.-China economic relationship depend as much on the United States' own economic performance and on broader U.S. confidence. To wit, the tensions in the U.S.-Japan economic relationship between 1970 and 1995 played out against a backdrop of poor U.S. economic performance when annual productivity growth averaged only 1% - 1 ½%.[4] Unfortunately, in recent years, the U.S. economy has not been fundamentally sound despite surface appearances to the contrary. The list[5] of potential negative drags on the U.S. economy in the future is alarmingly long:

  • Lowest domestic savings of any industrial country
  • Large budget deficits
  • Heavily dependent on capital inflows from the rest of the world including China
  • Rapidly aging population portending greater deficits to come
  • Health care dragging down the economy (with more than 40 million Americans having no health insurance)
  • Primary and secondary education, vital to maintaining skilled workers and to keeping the U.S. ahead of the high-tech curve, produces results that are among the worst in industrial nations
  • Greater income disparity: in the last 20 years, the rich got richer, the poor got poorer. The real hourly wages of American workers are lower today than in 1973
  • Bad debt from the housing market

Need for an External Foe?: In such disquieting times when Americans are feeling deeply anxious about their own economic future therefore, it is no surprise that China (as the proxy for globalization) with its astounding economic growth has borne the brunt of American dissatisfaction. In the face of voters’ ire, politicians too often find it easier to blame an external entity like China than to seriously address the underlying systemic causes of America’s own economic problems. On the other hand, if these challenging times inspire Americans to clean up their own economic house rather than just blame others, then it will ultimately be to the benefit of both the U.S. and China, for just as much as the U.S. needs an economically strong China for the reasons stated above, the reverse is equally true.

1 C. Fred Bergsten, Bates Gill, Nicholas R. Lardy, Derek Mitchell, “China in the World Economy: Opportunity or Threat?,” in China: The Balance Sheet: What the World Needs to Know Now About the Emerging Superpower, New York: PublicAffairs™, 2006, 116.

2 Bergsten, Gill, Lardy, Mitchel, “China in the World,” 116.

3 Jianxiong Zhang, “Acknowledging China,” The Globalist, February 28, 2008, http://www.theglobalist.com/storyid.aspx?StoryId=6657 (accessed 3/8/08).

4 Bergsten, Gill, Lardy, Mitchel, “China in the World,” 76.

5 Bergsten, Gill, Lardy, Mitchel, “China in the World,” 77.