By going beyond GDP to compare the economic trajectories of China and the U.S., the IMF has sent a wake-up call to the world. Image: Flickr/ronancrowley CC-BY-SA

The International Monetary Fund has predicted that China’s economy will pass the U.S. as the world’s largest in 2016. Most financial analysts have predicted that China’s economy will not pass the U.S. for another couple of decades, based on comparisons of the two countries’ gross domestic products and current exchange rates. But because China deliberately undervalues its currency, the IMF used a different metric to draw its conclusion.

The true price of cheap Chinese products

The so-called “Age of America” will end in 2016, the year China’s economy grows larger than the U.S. economy, according to the IMF. Although the IMF posted the forecast on its website with no announcement, the ramifications sent shock waves throughout the world. The idea of the U.S. as second-best is unsettling to its allies. History has shown that a country that loses economic hegemony loses its status in all things. The U.S. passed Great Britain as the world’s leading economic power in the 1890s and has enjoyed that privileged status ever since. The Soviet Union at its peak could muster only a third of U.S. GDP. Japan managed to reach No. 2 with less than half of U.S. output. In 2001, the U.S. economy was three times larger than China’s. But in recent years, as American corporations have traded jobs overseas for profit, U.S. economic growth has slowed, and China’s has skyrocketed.

Seeing through China’s currency manipulation

Until the IMF forecast, the most pessimistic analysts figured that China’s economy would not pass the U.S. until the mid-2020s. But those forecasts were based on a comparison of GDPs using exchange rates that are rendered meaningless by Chinese currency manipulation. Instead the IMF used “purchasing power parities,” a comparison of what American and Chinese citizens earn and spend in context with their domestic economies. Using purchasing power parities, the IMF determined that China’s GDP will expand from $11.2 trillion in 2010 to $19 trillion in 2016. U.S. GDP would expand from $15.2 trillion to 18.8 trillion in the same period. China would reach 18 percent of world output. The U.S. would fall to 17.7 percent, the lowest American share in modern times.

Living under Chinese domination

U.S. consumers have been the cause of China’s success. Buying cheap Chinese products has strengthened China’s economy and undermined the system supporting that consumption. As an overextended U.S. struggles to maintain its place in the geopolitical sphere, Chinese interests are gaining control of strategic resources worldwide. Other countries, especially China’s neighbors, are worried about how China will behave with its new-found economic hegemony. The U.S. became the world’s leading economic power with a system of constitutional government that honors civil liberties and personal property rights. China has demonstrated no concern for either of those values.



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