Don’t Learn Chinese Just Yet

You’ve heard the headlines. China will become the world’s biggest economy any minute. America will slowly slip away. We don’t manufacture anything. We’ve become second rate. Put a chopstick in us, we’re done. But is this true? No, it’s not. . .

Not a week goes by without some hand-wringing journalist telling us that any minute the Chinese economy will surpass the American economy. Last month, we learned that China’s auto market will be larger than the American market this year. This month, Fortune magazine released its annual list of the world’s top 500 global companies, and, surprise, “the number of US companies . . . fell to its lowest level ever.” Even the top slot went to a non-American company for the first time in over a decade. At the same time, “more Chinese firms appeared [on the list] than ever before”!!

That sounds bad, right? It’s misleading.

China’s economy is big, sure. But ours is bigger. . . much bigger. The World Bank estimates China’s GDP at $7.8 trillion (2008). By comparison, the United States economy is $14.3 trillion dollars. Thus, China’s economy is only half the size of the American economy. (The European Union, if you want to count them, had a combined GDP of $16.5 trillion).

Alarmists originally estimated that China would overtake the United States in 2011. But now they’ve moved their estimate back to 2035. But of course, that assumes that China will continue to experience its current astronomical growth rate, which didn’t happen with any of the other countries that were going to unseat America. And there are reasons why strong growth can’t go on forever. China’s growth, like Japan’s and Korea’s before it, has been fueled by cheap labor (based on the bringing of peasants from the countryside into the manufacturing sector). But as economies grow, their labor gets more expensive and the economy becomes less competitive. Korea ended Japan’s run because it was cheaper. China ended Korea’s run. India is knocking on China’s door. Others wait as well.

So what about the Chinese market topping ours in car sales? Is this true? Sort of, but it’s not that clear. So far in 2009, Chinese consumers are buying cars at an annualized rate of around 10 million units. By comparison, Americans are buying only 9 million. But prior to the current recession, Americans bought around 16 million per year. If the American market returns to that level, the Chinese market will be only 60% of the size of the American market.

What about that Fortune list? Well, for starters, it wasn’t a Chinese company at the top -- it was Royal Dutch Shell. The Chinese only had one company in the top 10 (the state owned China Petroleum & Chemical Corp, which supplies 80% of China’s fuel) and only managed to get 37 companies on the list in total. That puts China below Japan (68), France (40) and Germany (39). The United States had 140.

And what about that claim that the United States doesn’t manufacture anything anymore? About 13% of the American economy, or around $1.8 trillion dollars, is directly related to manufacturing -- that’s about the size of Britain’s economy or France’s. Moreover, this number increases to 19% (or $2.7 trillion) when you consider indirectly related effort. That’s about the size of Germany’s economy, and would make our manufacturing sector alone the 6th largest economy in the world.

Further, we are the third largest exporter in the world, behind only Germany and China (in that order). That’s right, Germany exports more than China.

So what does this mean? It means that reports of our demise as the world’s premier economic power are greatly exaggerated. So don’t bother learning Chinese just yet.