2 of the World's Largest Economies, One is Surging and the Other is Stumbling!

Two of the World's Largest Economies

In this article, we will investigate the world's largest economies: the USA and China! Stay with us.

The world's largest economies, America and China, are separated by the Pacific Ocean, one shaped by freewheeling capitalism characterized by a market-driven economy and democratic governance, the other ruled by an authoritarian Communist Party which maintains tight control over the state's economic and political life, emphasizing collective goals and state-led development.

Both are the world's largest economies: one in current exchange rates and the other in purchasing power parity. But one is surging, while the other is stumbling.

This table demonstrates the world's largest economies based on their power:

China

Every so often, there has been no shortage of optimism about China.

Headlines like "The Inevitable Superpower," "The Chinese Century is Well Under Way," and "China Will Surpass the US" have appeared in leading magazines and articles.

It's been a common idea that China was on its way to becoming one of the world's largest economies, with other countries looking up to it, or that its economy would be even bigger than the U.S. in a decade. But now, that certainty doesn't seem so certain anymore. Things are starting to look a bit shaky and uncertain.

• Several structural weaknesses have been dragging down China’s prospects:
• China’s population growth has stagnated
• Chinese entrepreneurs are leaving the country
• And optimism is dimming among Chinese youth
• The Chinese stock market is tanking
• Foreign direct investment is in free-fall as global businesses seek alternatives to the 'world’s factory' without the same geopolitical risk and big State political meddling.

USA

Meanwhile, the U.S. is doing well, with the most dynamic economy and the fastest growth in the G7, a group of the seven world's largest economies.

Inflation is down while jobs, real wages, and productivity are going up. It's impressive how the U.S. has not only maintained but also extended its dominance over other developed countries.

In 1990, America made up 40% of the G7's nominal GDP. Today, it makes up 58%. Regarding purchasing power parity (PPP), the increase is smaller but still significant, going from 43% of the G7's GDP in 1990 to 51% now.

America’s out-performance has translated into wealth for its people.

In PPP terms:

Income per person in America was 24% higher than in Western Europe in 1990; today it is about 30% higher. It was 17% higher than in Japan in 1990; today it is 54% higher. Compared to China, it is 241% higher. Since the end of 2019—a period that includes the COVID-19 pandemic and its aftermath—America’s economy has grown by about 8% in real terms. During that same time, the euro area has expanded by only 3%, Japan by a piddling 1%, and Britain not at all.

America is the only large economy that is back to its pre-pandemic growth trend. Much of the improvement in the United States’ performance during the pandemic is the result of domestic renewal and successful coalition building. The U.S. economy is the only one among the world's largest economies that is predicted to be larger in 2030 than was forecast before the pandemic.

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Weakness of the China

The faster-than-expected U.S. economic recovery has coincided with growing headwinds in China.

China’s economic growth is slowing, from eight percent annually a decade ago to a 'new normal' of just over four percent annually predicted by the end of this decade.

These aren't the only red flags pointing to China’s economy slowing down, there are more.

• China is suffering a double whammy of weak demand at home and abroad.
• Both exports and imports have fallen sharply since 2021.
• Adding to the dismal economic mood, people have borrowed less money, marking the lowest reading since late 2009.

As people borrow and spend less, the consumer price index has moved into deflation territory for the second time. While the headline unemployment rate remained steady at 5.3%, the urban youth unemployment rate increased to 21.3%, but the highest ever recorded in the country.

China's workforce is projected to contract by almost 20 percent from current levels by mid-century, and there are few policy levers to reverse the decline in the working-age population.

Its big factories will miss hardworking laborers, and even immigration may not solve the problem as Chinese citizens might not warmly welcome immigrants. Productivity growth is slowing, and China’s investment-heavy approach to driving the economy will produce diminishing returns over time. China is starting to hit the limits of a state-directed economy and society, where political decisions override open-market economic interests.

It's hard to keep growing the economy with state-controlled enterprises and subsidized sectors like infrastructure, electric vehicles, and real estate, especially while increasing political control over the population and top entrepreneurs. The genius of China’s former leader Deng Xiaoping was to move the country, starting almost 50 years ago, from a state-directed economy toward global capitalism.

Strength of China

This economic opening allowed China to unleash the talents of hundreds of millions of entrepreneurial people. The results have been staggering: In just a handful of decades, China has transformed from a relatively poor, rural society to the home of the world’s largest middle class. Unfortunately, China’s current leader, Xi Jinping—heady with the geopolitical influence that economic strength brings—is too focused on concentrating his power.

Economic dynamism flourishes with freedom—the freedom to think, create, speak, travel, and do business with whomever you want—all bound by the rule of law that ensures a fair and open business playing field. It’s no accident that most major technological breakthroughs—from the silicon chip, computers, and smartphones to the internet and AI—come from the U.S. and its democratic allies. The more educated and freer society is to express itself, the more likely it is to be a source of technologies and ideas that transform economies and cultures.

Such a society is also more likely to keep attracting the best and brightest from around the world to join the innovation party.

Two things matter to an economy in the long term: the size of its workforce and its productivity.

A higher fertility rate and a more open immigration system have long given America a demographic advantage over most other wealthy countries, and that advantage continues. America’s working-age population—those between 25 and 64—rose from 127 million in 1990 to 175 million in 2022, an increase of 38%.

Comparison

If we compare the share of the working-age population in the total population of the U.S., China, and Europe, we see a sharp decline in China’s working-age population. Between 1990 and 2022, American labor productivity (what workers produce in an hour) increased by 67%, compared with 55% in Europe and 51% in Japan. Additionally, Americans work a lot.

An American worker puts in, on average, 1,800 hours per year (a 36-hour work week with four weeks of holiday), roughly 200 hours more than in Europe. Although Americans work 500 hours less than workers in China, they produce less in dollar terms while working more hours. Some of America’s productivity growth comes from increased investment.

However, total factor productivity (TFP), which strips out those effects to show increases in efficiency and the adoption of new technology, has also increased. These domestic investments must be combined with a robust ally-shoring regime that expands our economic integration and production with countries that share our values. This approach will strengthen our collective economic and political position in the global competition against authoritarianism.

That’s not to say the U.S. doesn’t have its challenges. Despite its incredible wealth, it struggles in other areas. After taxes and transfers, it has the most unequal income distribution in the G7. The earnings gap between the rich and poor, which grew in the 1990s and early 2000s, has been stabilized by a tight labor market over the past decade. Recent pay increases for low-wage workers have helped them start to catch up with the middle tier, but the gap between top- and middle-income workers remains.

Even more concerning is the harshness of life: Americans born today can expect to live to 77, about five years less than their peers in similarly developed countries. This gap is especially noticeable among the poor, who have less access to medical care and face more violence. This is a reality of capitalism. Another view is that the country has the wealth and knowledge to improve people’s lives but chooses not to, without facing much economic penalty. “Economics is not a morality play. It would be nice if we could design policies that solve inequality and promote growth at the same time, but regrettably, there are only a few policies that do both.

America’s economy has been overperforming for decades, so what might change this? One possibility is that other rich countries could catch up. Europe hasn’t produced giant tech firms like America, but its strong anti-monopoly rules have created a more competitive market for consumers, which could pay off. Japan has struggled with its slow economic model but isn’t giving up yet.

China aims to keep growing quickly despite clear structural challenges. Meanwhile, India’s rise will likely shift the world’s economy more toward the Pacific, and the U.S. is aware of this. However, the United States’ power has increased more significantly in the past year than that of any other Indo-Pacific country.

Since 2021, according to the Lowy Institute’s Asia Power Index, which ranks the relative power of states in the Indo-Pacific, Beijing has lost ground in half of the index’s measures of power, including diplomatic influence, cultural influence, economic capability, and future resources. In contrast, Washington has gained comprehensive power and is overall ranked as the number one influential power in the Indo-Pacific.

However, China maintains a significant lead over the U.S. in regional economic relationships. China's economic power in the region is built on a narrow but deep foundation. While China is virtually on par with the United States in terms of overall economic capacity, it significantly surpasses the U.S. in terms of regional economic relationships. China’s ability to connect with and influence the choices of other countries in Asia through economic interdependencies underlies this power, similar to how U.S. defense partnerships are the cornerstone of U.S. military power.

Trade flows between China and the rest of Asia are now three times the size of those between the United States and the region.

Additionally, China has become the primary foreign investor in as many countries in the Indo-Pacific as the United States and Japan, the next-largest investor, combined. However, China’s flawed diplomacy is making things even more challenging. China has more neighbors than any other country, with 14 land borders. And its neighborhood is not just crowded, but also tumultuous.

Other Countries

There are more countries to talk about considering the world's largest economies.

There's a rogue state, North Korea; war-torn countries like Myanmar; countries with ongoing territorial disputes, like India; others with overlapping maritime claims, like Japan; and then there's Taiwan, which China keeps threatening to invade. Powerful countries often try to enhance their prosperity and security by dominating their region economically, militarily, politically, and culturally. In the modern era France, Germany, Japan, and Russia have all sought local hegemony by force, with devastating consequences.

The European Union has expanded peacefully but remains a marginal power in defense and security. Only America has managed to dominate its region for a long time. Part of America's ability to maintain dominance is thanks to its geography, which has helped keep other major powers at a distance. But it has also forged strong ties with its neighbors through mutually beneficial agreements, like a free-trade deal with Mexico and Canada, close defense relations (especially with Canada), and relatively open borders.

American soft power plays a role too. On the other hand, China's neighborhood is much more complicated. With 22,800km of land borders, the most of any country, and all eight of its maritime borders in dispute, China faces significant challenges. Its neighbors include powerful countries like India and Russia, each with their regional ambitions. China's neighbors can be categorized into three main groups.

First, there are fragile or failing states like Afghanistan, Laos, Myanmar, Nepal, North Korea, and Pakistan. Then, there are frenemies—countries with close ties to China but also fear its dominance—such as Mongolia, Russia, and the Central Asian states. Lastly, there are countries with defense treaties with America or military ties to it, like India, Japan, the Philippines, South Korea, Taiwan, and Vietnam.

The economic situation is a bit more complicated. China is a crucial partner for all its neighbors, even those with territorial disputes. Bilateral trade in goods with its 20 land and sea neighbors reached over $2 trillion in 2022, a 74% increase over the past decade. This surpasses the combined trade of America and the EU with the same countries. China is also a significant source of investment in poorer countries.

The Regional Comprehensive Economic Partnership, a trade deal involving China and eight of its neighbors that came into effect in 2022, will further enhance cross-border commerce. The limits on U.S. economic leadership in the Indo-Pacific highlight a deeper issue: just as the United States’ recent resurgence is rooted in domestic events, so too are the greatest threats to sustaining this revival.

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Without a renewed commitment to economic engagement in the region, the U.S. position will be at risk, which in turn relies on domestic factors in America. Another major concern for the United States is the polarization of its domestic politics and the threat it poses to the stability of its democratic institutions—and ultimately, its trustworthiness as an ally and partner. The challenge for America and its allies is to provide China's neighbors with more options to hedge against risks.

For Mr. Xi, the question is more existential: can China accept relations with its neighbors where it is not the dominant force?

Ranking of the world's largest economies

Based on statistics, the ranking of the world's largest economies has been provided here:

• The USA is the first on the world's largest economies.
• China is the second on the list of the world's largest economies.
• Japan is the 3th on the world's largest economies.
• Germany is the 4th on the world's largest economies.

This article was about the world's largest economies including the USA and China. If you have any other opposing or supporting opinions about the world's largest economies, tell us in the comments.