:max_bytes(150000):strip_icc()/china-affects-us-economy_393165_final_-4d389d6666bb4301ac234004664bddc0.png "The Surprising Ways China Affects the U.S. Economy (1)")
China's economyproduced $22.5trillion in 2019, according to the World Bank. That's based onpurchasing power parity which takes into account the effect of exchange rates, making it the best method for comparing gross domestic product (GDP) by country.
Note
China is theworld's largest economy.
The United States is second, producing $20.5 trillion. TheEuropean Unionis third, at $19.9trillion.
China has almost 1.4billion people, more than any other country in the world. China remains a relatively poor country in terms of itsstandard of living. Its economy produces only $16,784 per person. In comparison, the U.S.GDP per capitais $65,118.
China's low standard of living allows companies there to pay theirworkers less than what American workers earn. That makes products cheaper, which lures overseas manufacturers tooutsource jobsto China.They then ship the finished goods to the United States, China’s largest trading partner.
Components of China's Economy
China built its economic growth on low-cost exports of machinery and equipment. Massive government spending went into state-owned companies to fuel those exports. These state-owned companies are lessprofitable thanprivate firms and return only 4.9% on assets compared to 13.2% for private companies.
These companies dominate their industries andinclude the big three energy companies: PetroChina, Sinopec, andChina National Offshore Oil Corporation (CNOOC). China developed cities around these factories to attract workers. The government also funded the construction of railways and other infrastructure to support growth and imported massive amounts of commodities, like aluminum and copper.
By 2013, the nearly 10%annual growth threatened to become a bubble.That's when China looked towardeconomic reform.
China spends9% of GDP on infrastructure. In 2013, it launched itsBelt and RoadInitiative, one of thelargest global infrastructure projectsin history.China will spend $150 billion a year to link 68 countries along the old Silk Roadwith Europe. It will build ports, railways, and pipelines.
Note
China's plan isto make a China-dominated Eurasiaan economic rival to the American-dominated transatlantic trading area.
China's president, Xi Jinping, hopes the project will accomplish four objectives:
- Provide investments for China's foreign exchange reserves. Most of them are tied up in low-returnU.S. Treasurys.
- Provide new markets for China's high-speed rail firms, and for cement, steel, and metal exports
- Stabilize countries on China's western border
- Increase China's claims in the South China Sea
China's Exports
In 2018, China exported$2.5trillion or 16.2% of the world's total exports. The EU is second, at $2.3 trillion, while the United States is third, exporting $1.7 trillion.
Note
China isthe world's largestexporter.
In 2019, China shipped $451.7 billionworth of goods to the United States. Since the U.S. exports to China were only $106.5 billion, there's a$345 billion U.S. trade deficit with China.
In 2018, China shipped $302.9 billion to Hong Kong and $147.2 billion to Japan.
China's Imports
China is the world's third-largest importer. In 2018, it imported $2.1trillion.
Note
The United States is the world's largest importer, at $2.6 trillion, followed by the EU, at $2.3 trillion.
Chinaimports rawcommoditiesfromLatin Americaand Africa. These include oil and other fuels, metal ores, plastics, and organic chemicals.
China also is one of the world's largest consumers of commodities:
China's Share of World Commodity Consumption
| Commodity | Share of World Consumption |
|---|---|
| Nickel | 56% |
| Copper | 50% |
| Steel | 50% |
| Aluminum | 47% |
| Cotton | 33% |
| Rice | 31% |
| Gold | 27% |
| Corn | 23% |
| Wheat | 17% |
| Oil | 14% |
How China Affects the U.S. Economy
China is the second-largestforeign holderofU.S. Treasurys. As of August 2020, it owned $1.07 trillion in Treasurys, around 15% of thepublic debtheld by foreign countries. TheU.S. debt to Chinais lower than the record high of $1.7 trillion held in 2011.
China buys U.S. debt to support thevalue of the dollar. This is because China pegs its currency, theyuan, to theU.S. dollar. It devalues the currency when needed to keep its export prices competitive.
Note
China's role as America's largest banker gives itleverage. For example, China threatens to sell part of its holdings whenever the United Statespressures it to raise the yuan's value.
Phase One Trade Agreement
As two of the world's largest economies, the U.S. and China have been involved in many trade disputes. In January 2020, the two powers agreed to the Phase One Trade Agreement after several years of an escalating trade war.
In the deal, China agreed to increase imports of U.S. goods by $200 billion annually. The U.S. agreed to cut tariffs on some goods by half. The two parties still were negotiating Phase Two of the trade agreement.
Economic Growth Slowing for China
In 2019,China'seconomic growthrate slowedto 6.1%. It's been declining since it hit 10.6% in 2010.
Part of the decline was part of a deliberate strategy to head off an economic bubble before it burst. China's economy had been growing at a rate its institutions could not sustain, necessitating a revamped strategy. The government mandated that its banks providelow interest ratesin return for protection of the strategic industry. It created business investments in capital goods. It also led toinflation, a real estateasset bubble, growth inpublic debt, and severe pollution.
Shanghai Cooperation Organization
The Shanghai Cooperation Organizationis a central Asian military alliance that combatsterrorism and drug trafficking while supportingfree trade agreements.Its members share intelligence and combine military operations to counter both terrorism and cyber-terrorism. It is China's version of theNorth Atlantic Treaty Organization.
Its members areChina,Russia, and the countries along their borders, including Kazakhstan, Kyrgyzstan, Tajikistan, Pakistan, India, and Uzbekistan. The group represents almost half of the world's population. Four of its members have nuclear weapons: Russia, China, India, and Pakistan.
Many nations in the SCO possess large reserves of oil and natural gas, giving the organization potential to be a major economic influence in the world. Some analysts see friction among the member states as an obstacle to reaching full potential.
Frequently Asked Questions (FAQs)
When will China's economy surpass the U.S. economy?
China's economy is not guaranteed to surpass the U.S. economy at any time, but the question itself requires a definition of "surpass." In terms of GDP per capita, China lags far behind the U.S. In terms of nominal GDP, China comes closer to surpassing the U.S. than any other country. China has also seen more rapid GDP growth in recent years, although its rate of growth has slowed since 2010.
How much of China's economy depends on the U.S.?
The Chinese and U.S. economies are connected in a lot of ways, but the tie isn't so direct that you can allocate a certain percentage of the economy to U.S. activity. The Chinese economy benefits from Treasury security payments, for example. China has also stepped up trading activity in the U.S. energy markets to offset shortfalls elsewhere in the economy.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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