The Sino-American Decade

Of course, there is also a healthy element of competition. The sharp differences in comparative advantage that were apparent two decades ago are diminishing as the gap in income, capital depth (including human capital), and capabilities narrows. Chinese multinationals with recognized brands will begin to appear, just as they did in Japan and Korea. They will compete with multinationals from a wide range of countries, and will become architects of global supply chains. Fair, rules-based competition in a rapidly expanding global economy is far from a zero-sum game.

The outlines of the structural changes needed to move toward a healthier, more sustainable growth pattern in the coming decade are relatively clear in China. The remaining questions concern policy implementation and institutional development – issues that will be clarified in the course of 2013, as China’s new leaders formalize and communicate their reform priorities.

The US economy, meanwhile, retains many elements of dynamism and flexibility. But, while GDP growth seems to be returning slowly to potential, the slow pace of recovery in employment and the residual secular shifts in income distribution remain causes of concern. In particular, the shift of income from those who save less to those who save more implies uncertainty about the restoration of aggregate demand.

Political polarization has become another source of uncertainty. Many centrists agree that an optimal fiscal policy would feature short-term stimulus, a multi-year medium-term deficit reduction plan, and measures to reduce long-term liabilities, especially if retrenchment protected growth-oriented public-sector investments. But that is difficult to achieve in a context of deleveraging and fixation on debt.

If current trends continue, with the US economy recovering slowly but steadily, the pattern of convergence with China will continue. East Asia as a whole will surpass the US in terms of aggregate GDP by 2015, with China contributing the highest proportion of the total. China’s GDP is projected to catch up to that of the US and Europe in 10-15 years, at which point (if not sooner) both Chinese and US real GDP will exceed $25 trillion (in 2012 prices), more than three times China’s current GDP. Each will account for approximately 15% of global output.

And yet this shift will be accompanied by very substantial global economic challenges and uncertainties, underscoring the importance of Sino-US cooperation. A constructive, cooperative relationship can make a significant contribution to both countries’ efforts to adapt their policies and institutions to achieve sustainable, inclusive growth patterns.

Beyond the bilateral benefits, the rest of the global economy is dependent on Chinese and US leadership – both in terms of growth and in matters concerning global economic governance and coordination. Trade and economic openness, financial stability and regulation, energy security, climate change, and many other issues confront the world collectively. It is very difficult to imagine successful global rebalancing and progress without China and the US taking a leading role in the process.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution.

Copyright: Project Syndicate, 2013.

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