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China No. 2, but U.S. can remain No. 1

Japan’s Ministry of Economy, Trade and Industry announced China had passed Japan in 2010 to become Asia’s biggest economy and the world’s second largest, only after the United States. With a Japanese economy that shrank at a 1.1 percent annual rate, while China’s gross domestic product surged 9.8 percent from a year earlier, Japan’s 2010 GDP was $5.47 trillion, or 7 percent smaller than China’s $5.88 trillion, according to Japanese government’s data.

While many economists still believe the Chinese economy remains considerably smaller than the U.S., others see China getting closer and closer to elbow the United States aside to become the world’s largest economy. In fact, one economist, Arvind Subramanian, senior fellow at the Center for Global Development in Washington and senior research professor at Johns Hopkins University, using the measure known as Purchasing Power Parity — GDP that takes into account the costs of living in each country, claims “the total Chinese GDP in 2010 was not only vastly higher than that in Japan, but was also slightly higher than that in the U.S.” In Subramanian’s estimate, China’s economy had grown to $1.48 trillion in 2010, compared with $1.46 trillion in the U.S.

Gavyn Davies, chairman of Fulcrum Asset Management and former head of the department of global economics at Goldman Sachs, agrees with Subramanian that China is bigger than one may think. “On the official figures,” says Davis, “China overtook Japan to become the second largest economy in 2010. But actually, this was very old news. Using purchasing power parity, China not only overtook Japan way back in 2001, but it is also quite close to overtaking the U.S. as the biggest economy in the world — if, indeed, it has not done so already.” Even by the conservative IMF estimate, China’s 2010 GDP was already $1.01 trillion in PPP terms.

The news marks the end of an era. “China’s ascendancy to No. 2 is very serious,” said Toyoo Gyohten, former Japanese vice-minister of finance for international affairs and the “senior dean” of Japan’s financial community, “this is clearly a very stark demonstration of a global power shift. The Chinese believe — rightly or wrongly — that they are qualified to become the top global leader like they used to be several hundred years ago. In that sense, this is less of a problem for Japan than it is a problem for the U.S. and the rest of the world.”

Indeed, for almost two generations, Japan had stood firmly as the world’s No. 2 economy since overtaking West Germany in 1967. As Chester Dawson and Jason Dean of Wall Street Journal report, “The new rankings symbolize China’s rise and Japan’s decline as global growth engines. For the U.S., while Japan was in some ways an economic rival, it also has been a geopolitical and military ally. China, however, is a potential challenger on all fronts. For Beijing, being No. 2 means, among other things, new clout.”

Facing China the Challenger with new economic clout, America will have to work hard to stay No. 1. It is a big job. But it is the one that has to be done, and America remains the only country in the world that can accomplish it.

Economically, even by a modest assumption of 3 percent growth a year for the next 20 years, the U.S. economy will be $30 trillion by 2030, therefore remains the strongest economy in the world.

Business wise, American corporations still create original consumer brands that are household names everywhere in the world, and nothing has diminished the world’s appetite for the brand names most frequently associated with the American companies. Europe and Japan have created a few brands in a few select industries, and China has none.

In science and technology, America still is the nation that produces the new inventions. This country still is the engine for almost all technological progress. The big and new technologies and influential applications continue to emerge from corporations headquartered in the U.S.

Most important, in terms of education, American universities and colleges still are the primary destination for the world’s top students and 17 of the world’s top 20 universities are in the U.S. And American higher education institutions still attract the best and brightest young people from all over the world, including hundreds of thousands of them from China.

In little more than a decade, China has surpassed Italy, France, Great Britain, Germany and finally, Japan, to become the No. 2 economy in the world. Now the only country standing between China and the No. 1 place is the United States. We better get to work or we will be trading the titles with China before long.


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