World’s Two Largest Economies: One is Surging and the Other is Stumbling | China & US Economy | Econ

Summary

The video compares the economic trajectories of the U.S. and China. While China once seemed poised to overtake the U.S. as the world's leading economy, its growth has slowed due to structural issues such as stagnating population growth and declining investment. Meanwhile, the U.S. has seen strong economic performance, driven by domestic renewal and successful coalition building. The video highlights the geopolitical and economic challenges facing both nations, emphasizing the U.S.'s increasing dominance and China's struggles with state-directed economic policies and complex regional relationships.

Takeaways

• 🌍 America and China are separated by the Pacific Ocean, with America characterized by freewheeling capitalism and China ruled by an authoritarian Communist Party.
• 📉 China's economic growth is slowing, with issues like stagnating population growth, a declining stock market, and reduced foreign direct investment.
• 📈 The U.S. is experiencing strong economic performance, with dynamic growth, increased productivity, and a robust recovery from the pandemic.
• 📉 China's economy faces structural weaknesses, such as declining demand, a shrinking workforce, and slowing productivity growth.
• 📉 China's political decisions are increasingly overriding open-market economic interests, leading to limitations in economic growth.
• 📊 The U.S. has maintained and extended its economic dominance over other developed countries, with significant growth in GDP and productivity.
• 🌐 China has significant regional economic power in Asia, but faces geopolitical challenges and declining influence in diplomatic and cultural aspects.
• 📊 The U.S. economy benefits from a growing working-age population, high productivity, and significant investment in technology and efficiency.
• ⚖️ Despite economic success, the U.S. struggles with income inequality and a lower life expectancy compared to other developed countries.
• 🌍 The U.S. and its allies must provide China's neighbors with alternatives to reduce their reliance on China, while China must navigate its complex regional relationships.

Q & A

How are the economic models of the United States and China fundamentally different?

The United States is characterized by a market-driven economy and democratic governance, while China is ruled by an authoritarian Communist Party that maintains tight control over the state's economic and political life, emphasizing collective goals and state-led development.

What recent trends indicate a shift in China's economic prospects?

China's population growth has stagnated, Chinese entrepreneurs are leaving the country, and optimism among Chinese youth is dimming. Additionally, the Chinese stock market is declining, and foreign direct investment is decreasing as global businesses seek alternatives due to geopolitical risks and state political meddling.

What factors have contributed to the recent improvement in the United States' economic performance?

The improvement in the U.S. economy is attributed to domestic renewal, successful coalition building, and a faster-than-expected economic recovery during the pandemic. The U.S. economy is now predicted to be larger in 2030 than forecasted before the pandemic.

What challenges does China face in sustaining its economic growth?

China faces challenges such as weak domestic and international demand, a decreasing workforce, slowing productivity growth, and diminishing returns from its investment-heavy economic approach. The increasing political control over the economy also hampers its growth potential.

How does the current leadership in China differ from the approach of former leader Deng Xiaoping?

Deng Xiaoping moved China from a state-directed economy toward global capitalism, unleashing the talents of millions of entrepreneurial people. In contrast, current leader Xi Jinping focuses on concentrating his power, limiting economic dynamism by restricting freedoms necessary for innovation and growth.

What are the two main factors that matter to an economy in the long term?

The two main factors are the size of the workforce and productivity. A higher fertility rate and a more open immigration system have given the United States a demographic advantage over other wealthy countries.

How has the United States maintained its dominance in the Indo-Pacific region?

The U.S. has maintained dominance through its comprehensive power, including strong diplomatic and cultural influence, economic capability, and defense partnerships. Despite China's significant regional economic relationships, the U.S. has gained more comprehensive power in recent years.

What are the main groups of China's neighbors, and how do their relationships with China differ?

China's neighbors fall into three main groups: fragile or failing states (like Afghanistan and North Korea), frenemies (countries with close ties but also fear China's dominance, like Russia), and countries with defense ties to America (like India and Japan). Their relationships with China vary from dependency to cautious cooperation.

What are the greatest threats to sustaining the recent resurgence of the United States?

The greatest threats include domestic political polarization and the stability of democratic institutions. A renewed commitment to economic engagement in the Indo-Pacific region is also crucial for maintaining the U.S. position.

What is the existential question facing China regarding its relationships with its neighbors?

The existential question for China is whether it can accept relations with its neighbors where it is not the dominant force. This is a challenge given China's ambition to maintain regional hegemony.

Outlines

00:00

🌏 Contrasting Economies: America vs. China

America and China, separated by the Pacific Ocean, represent two vastly different economic and political systems. The U.S., driven by free-market capitalism and democratic governance, contrasts sharply with China's authoritarian Communist Party-led state. Despite China once being seen as an inevitable superpower, its economic growth now faces significant challenges such as stagnant population growth, an exodus of entrepreneurs, a struggling stock market, and dwindling foreign investment. Meanwhile, the U.S. continues to outperform with robust economic growth, low inflation, and increasing productivity and real wages, maintaining a dominant position among developed economies.

05:00

📉 China's Decline vs. America's Resilience

China's economic momentum is slowing due to internal and external factors. Domestically, weak demand, falling exports and imports, decreased borrowing, deflation, and rising youth unemployment are significant concerns. The working-age population is projected to shrink, reducing labor force productivity. Conversely, the U.S. has experienced a strong economic recovery post-pandemic, attributed to domestic renewal and successful coalition building. America's economy is the only major one predicted to exceed pre-pandemic growth forecasts by 2030. The U.S. continues to lead in productivity and innovation, benefiting from a growing and productive workforce.

10:05

🇨🇳 China's Regional Influence and Challenges

Despite its significant regional economic power, China faces numerous geopolitical challenges. Its extensive land and maritime borders include complex relationships with neighbors, from fragile states to economic competitors. China's diplomacy struggles are compounded by issues with neighboring countries like North Korea, Myanmar, and India. China's significant regional trade and investment influence is juxtaposed with diplomatic tensions and territorial disputes. The U.S. has gained comprehensive power in the Indo-Pacific, reflecting increased influence across various domains, even as China maintains a lead in regional economic relationships.

15:07

🔗 U.S. Strategies in the Indo-Pacific

The U.S. must provide viable alternatives for China's neighbors to mitigate regional risks. America's resurgence in the Indo-Pacific underscores the importance of sustained economic engagement and political stability. However, the polarization of U.S. domestic politics threatens the stability of its democratic institutions and its reliability as an ally. For China, the existential question is whether it can navigate relationships with its neighbors without being the dominant force.

Keywords

💡Capitalism

Capitalism is an economic system characterized by private ownership of the means of production and operation for profit. In the video, America is described as being shaped by 'freewheeling capitalism,' emphasizing a market-driven economy. This system contrasts sharply with China's state-controlled economic approach, highlighting the fundamental economic differences between the two countries.

💡Authoritarianism

Authoritarianism refers to a political system in which a single entity or a small group of individuals possess significant control over the state, often without much input from the populace. In the video, China is depicted as being ruled by an authoritarian Communist Party, which maintains tight control over the state's economic and political life. This is contrasted with the democratic governance seen in the United States.

💡Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is an economic theory used to compare the relative value of currencies based on the cost of goods and services. The video mentions that China and the U.S. are the world's largest economies, one in current exchange rates and the other in PPP. This concept is used to highlight the different metrics by which economic size and power can be measured.

💡Geopolitical Risk

Geopolitical risk refers to the potential for political, economic, and social events in one country to affect the stability and operations of businesses and economies in other countries. The video points out that foreign direct investment in China is in freefall as global businesses seek alternatives due to geopolitical risks and state political meddling.

💡Economic Growth

Economic growth refers to the increase in the production of goods and services in an economy over a period of time. The video contrasts the surging U.S. economy with the stumbling Chinese economy. It discusses factors contributing to the U.S.'s robust growth and China's slowing economic growth, which is predicted to stabilize at around four percent annually by the end of the decade.

💡Domestic Renewal

Domestic renewal refers to the process of revitalizing a country's economy through internal reforms and investments. The video credits the U.S.'s economic resilience and faster-than-expected recovery during the pandemic to domestic renewal and successful coalition building, which have strengthened the country's economic foundations.

💡Workforce Productivity

Workforce productivity measures the amount of goods and services produced per hour of labor. The video highlights that America's productivity growth has been significant, contributing to its economic dominance. It compares productivity growth rates between the U.S., Europe, and Japan, illustrating how increased efficiency and technological adoption have played a role in the U.S.'s economic performance.

💡State-Controlled Enterprises

State-controlled enterprises are businesses owned and operated by the government. The video discusses the limitations of China's state-directed economy, where political decisions often override open-market economic interests. It argues that reliance on state-controlled enterprises and subsidized sectors like infrastructure and real estate may hinder long-term economic growth.

💡Total Factor Productivity (TFP)

Total Factor Productivity (TFP) measures the efficiency of all inputs to a production process, stripping out the effects of increased investment to show gains in efficiency and technological adoption. The video notes that the U.S. has seen increases in TFP, which have contributed to its robust economic performance. This highlights the importance of innovation and efficiency in driving economic growth.

💡Indo-Pacific

The Indo-Pacific is a geopolitical region encompassing countries in the Indian Ocean and Pacific Ocean. The video discusses the strategic importance of this region, noting that while China maintains significant economic influence, the U.S. has gained comprehensive power and is ranked as the number one influential power in the Indo-Pacific. This regional focus underscores the shifting dynamics of global power and influence.

Highlights

America and China are separated by the Pacific Ocean, with distinct political and economic systems.

China is ruled by an authoritarian Communist Party, while the U.S. operates under democratic governance.

China's economic growth is slowing, with predictions of just over four percent annually by the end of this decade.

The U.S. has the most dynamic economy in the G7, with low inflation and rising jobs, real wages, and productivity.

America's share of the G7's nominal GDP increased from 40% in 1990 to 58% today.

China's structural weaknesses include stagnating population growth and increasing youth unemployment.

China's stock market and foreign direct investment are both in decline.

The U.S. economy has grown by about 8% in real terms since the end of 2019.

China's economic power in the Indo-Pacific region is significant, particularly in regional economic relationships.

America's economy is predicted to be larger in 2030 than forecasted prior to the pandemic.

China's domestic economic challenges include weak demand, falling exports and imports, and deflation.

China's urban youth unemployment rate has increased to 21.3%, the highest ever recorded.

China's working-age population is projected to contract by almost 20% by mid-century.

America's total factor productivity (TFP) has increased, contributing to economic growth.

China's investment-heavy approach to driving the economy is producing diminishing returns.

America's working-age population rose from 127 million in 1990 to 175 million in 2022, an increase of 38%.

China's neighbors include powerful countries like India and Russia, each with their own regional ambitions.

The U.S. is gaining comprehensive power in the Indo-Pacific, ranked as the number one influential power in the region.

China's regional economic relationships are built on significant trade flows and investment.

The U.S. has a demographic advantage with a higher fertility rate and a more open immigration system.

America's economy is back to its pre-pandemic growth trend, unlike other large economies.

China's economic opening under Deng Xiaoping allowed it to transform into the world's largest middle class.

America's productivity growth has been driven by increased investment and efficiency.

China faces significant challenges with a state-directed economy where political decisions override open-market interests.

America's economic performance has translated into wealth for its people, with significant advantages over Western Europe and Japan.

Transcripts

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.

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 kind of a common idea that China was on  

its way to becoming the biggest player in the  world, 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.

A number of 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,  

and foreign direct investment is  in freefall as global businesses  

seek alternatives to the 'world’s factory' that  

don’t come with the same geopolitical  risk and big State political meddling.

Meanwhile, the U.S. is doing really well, with the  most dynamic economy and the fastest growth in the  

G7, a group of the seven biggest advanced  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%. In terms of 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 outperformance 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 major  

global economy now predicted to be larger in  2030 than was forecast prior to the pandemic.  

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. 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 free a 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.

There are two things that 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%. 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. 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  own prosperity and security by dominating their  

region in economic, military, political and  cultural terms. 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 on 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 own 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. 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?