Wilson Briefs l January 2015

China, No. 1?
Wake Up, America!
by Kent Hughes

China surpassed U.S. to become largest

world economyFox News, December 5, 2014
SUMMARY
According to the International Monetary Fund, early in December 2014
Chinas economy surpassed that of the United States, which had led the
world since the late nineteenth century. Meanwhile, the United States
experienced large trade deficits and an eroding industrial base. To respond,
the United States must promote fair international trade rules and embrace
domestic policies for public and private growth.

Few Americans greeted the above headline by happily chanting Were number 2! even while
economists and journalists quibbled over the meaning of the ranking, which had been announced by
the International Monetary Fund (IMF). The IMFs ranking is based on purchasing power paritywhat

the Chinese economy is worth in terms of purchases within Chinawithout accounting for
either the U.S. economys ongoing superiority in terms of value on the world market or the
generally higher U.S. standard of living.
No matter who is first, Chinas rise has been spectacular. For thirty

The United States has

gone from being the worlds
slipping in 2012 to below 8 percentwhich would be thrilling for leading creditor to its largest
any other country. Chinas export prowess has let it amass some
debtor.
years, Chinas economy grew at an average of 10 percent a year,

$4 trillion in hard currency reserves.

Meanwhile, Americans cannot ignore the glaring deficiencies of their own economy. The
United States has gone from being the worlds leading creditor to its largest debtor. A
decade ago, the United States led the world in the proportion of citizens with a four-year
degree; now, it is twelfth. On average, U.S. high school students lag badly in international
exams in math and science. In 2013, U.S. infrastructure received a D+ from the American
Society of Civil Engineers. The American commitment to spread democracy abroad is
hobbled by federal institutions that seem unable to develop a shared commitment to
investing in the future.

The rise of the rest

Underlying Chinas growth has been a national strategy focused on growth and innovation.
And China is not alone in building for the future by investing in innovation, education, and
infrastructure. India, Brazil, and Indonesia all have aimed their policies at growth. It is the
economic rise of the rest.
One of the first alarms about emerging competition came in 1979, when Ezra Vogel
published Japan as Number One: Lessons for America. Japans rise contradicted many of
Americans underlying economic assumptions, shocking U.S. economists and business
leaders. Japans government protected its domestic markets, subsidized its exports, kept
the value of the yen artificially low to sell more of its goods in world markets, tolerated the
borrowing of intellectual property, and worked closely with industry.
American companies responded in the 1980s by adopting and adapting Japanese
production techniques to match Japanese manufacturings price, quality, and speed to
market. And the United States passed laws supporting commercialization of inventions
developed in universities and national laboratories.

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Todays challenges
Japans strategy became known as the East Asian Miracle. Other Asian economies
followed. Chinas version adds a system of state capitalism and also aggressive pursuit
of foreign direct investment in a form that requires partnering companies from advanced
economies to share their technology.
In light of Chinas challenge, America must again rethink its approach to international
competition. The United States needs to promote effective rules by which different
economic systems can compete on a level playing field. For
undervalued currencies, the United States should press the
IMF to work with the World Trade Organization to let countries
and companies penalize offending countries. For state-owned
enterprises that have unfair advantages over private companies,
the United States should conclude negotiations for the Trans
Pacific Partnershipwhich does not include Chinaand try to
extend its rules to China. For those who violate trade rules, the

...the United States should

press the IMF to work with
the World Trade Organization
to let countries and
companies penalize offending
countries.

United States should turn to imposing fines, confiscating intellectual property, or restricting
certain financial transactions in place of the usual imposition of tariffs or withdrawal of tariff
concessions, which can hurt the punisher, too.
The United States needs to set a national goal of eliminating its trade deficit, which
has cost millions of manufacturing jobs and more than 60,000 factories. The federal
government should offer incentives for key high-tech industries to locate in the United
Statesstates often make such efforts, but their resources cannot compete with national
economies.
America should adopt strategies for growth, manufacturing, and innovation, the lack of
which sets America virtually alone among its major competitors. A revived manufacturing
base would foster the U.S. ability to translate inventions into growth-driving commercial
successes.
America also needs to retake the lead in supporting scientific and engineering research,
investing in infrastructure, and emphasizing education, resuming its tradition of making
these investments to spur long-term growth. These have included the land grant college

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system, created in the midst of the Civil War, and the interstate highway system and the
GI Bill, launched following World War II. Nationally supported science and engineering
research has sustained American leadership in health sciences, electronics, and advanced
materials since the end of World War II.
The United States should set national goals of eliminating its trade deficit, effectively
enforcing global trade rules, and responding to other practices that put America at
an economic disadvantage.
America needs to renew its commitment to investing in research and development,
infrastructure, and education, and promoting private sector investment and
entrepreneurship.
The United States must adopt an economic strategy that will drive the future:
scrutinizing its competitors strategies, engaging the full range of its institutions, and
maintaining flexibility in a rapidly changing global economy.

Kent H. Hughes
Public Policy Scholar
kent.hughes@wilsoncenter.org
Hughes is the author of Building the Next American Century: The Past and
Future of American Economic Competitiveness (Woodrow Wilson Center
Press 2005). He has served as associate deputy secretary of commerce,
and president of the Council on Competitiveness, and in a number of senior
positions with the U.S. Congress.

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