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Saturday, December 6, 2014

As World's Largest Economy Does China Gain New Advantages? Should We be Worried?



For the first time in decades the U.S. is no longer the largest economy in the world. Despite industry experts throwing up red flags for years the inevitable happened. According to new data by the IMF the total output of goods and services by China is $17.6 trillion versus $17.4 trillion for the U.S. This leaves experts scratching their heads and wondering how this could happen and what it means for the future. Should we be worried?

Resource Advantages:

With China accounting for 16.5% of the world economy in terms of real Purchasing Power Parity (PPP) and the U.S. at 16.3% of PPP it means that China has a little more leverage in their treaties and purchasing behavior. They will be able to obtain and receive resources at a slightly lower rate than the U.S. giving them an economic advantage.

The advantage they have in obtaining cheaper resources for their manufacturing can be sufficient when systematically applied across multiple industries year-after-year. A few cents on every dollar means products can be produced a little cheaper and growth can be fueled at a slightly lower cost. Pennies can add up over millions of transactions.

Treaties:

When a country has more economic muscle they will also find that they can negotiate and enact more advantageous treaties than other nations. The power of the dollar,  or in this case the Chinese Yuan Renminbi, changes the fundamentals of the terms. Countries seeking growth will latch onto and make deals with powerful countries that they wouldn't have done otherwise. 

An Axis of Political Power:

China is not a stand alone nation that developed its power in isolation. It is intimately connected to other Asian countries and nations throughout the world. Country leaders look toward China for direction in fiscal, social, governmental, and military affairs. Being the biggest kid in the school yard offers a further reach for influence beyond willful intent. Nations looking for alternatives will find an ally in China. 

Should We be Worried?

America is making a reemergence unseen in the past few decades. As other economies are slowing the U.S. is improving. Exports are increasing and hiring is picking up. The U.S. has nearly reached cost parity in manufacturing with China. Mammoth budgeting problems in the country are starting to be looked at and analyzed for an effective solution. It is possible that a close race of leader and follower swapping positions in an all out sprint with China will emerge for some time. 

Where We Should Improve

To capitalize on the growth and improve on opportunities for the next generation it is important for the U.S. to fix problems and dysfunction where and when they occur. Improvements could be sought in educational reform; systematic law enforcement policies that foster people's capabilities; better management of budgets/debt to lower interest costs that could be better spent somewhere else; a rational economic policy that focuses on exports (i.e. hubs, innovation and jobs); responsive government that better serves the needs of the populace vs. special interests; higher technology/functionality of the military that lowers costs and enhances capabilities to combat amoebic groups; social justice and eradication of racism/religious bigotry to ensure full economic engagement and alignment to national interests; and better treaty making that strengthens U.S. manufacturing and knowledge development.

Should we be worried? That depends if you trust that people can put down their petty differences and move into collective action. The U.S. faces difficult challenges in today's world but these are surmountable challenges that require a little forethought and elbow grease. Political gridlock and dysfunction should give way to higher levels of enlightenment that creates environments where both business and people can accomplish their goals for the collective benefit of all. As a nation, we may have forgotten the spirit of what it means to be American and the core values we all believe in. It will be these values, if refreshed, that can lead the country to higher levels of performance.

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