To counter the effects of external shocks – especially the pandemic – China’s government eased credit conditions, lowered interest rates, and loosened local governments’ control over fiscal expenditure. This suggests that China could reach 40% of US per capita GDP – high-income status – by 2033.īut whether China achieves this depends upon several factors, including its ability to continue upgrading its GVCs and manage mounting internal risks. In terms of per capita income level, China has been gaining on the US by about one percentage point per year, reaching 27.7% of the US level last year (Chart 2). At that rate, China will catch up with the US by 2035. Last year, China’s GDP was 73.4% of the US level, with the share having risen by two percentage points annually for the preceding five years (Chart 1). In any case, a partial decoupling from the US would not stop China’s rise.
Many sectors – including automobiles, batteries, wind turbines, drones, and cell phones – have embraced the “all made in China” ethos. The push for decoupling has also disrupted China’s Belt and Road Initiative, which was supposed to scale up GVCs, and driven China to attempt to source more intermediate goods locally. This prospect has sent China’s efforts to bolster its innovation capabilities into overdrive. While the US most likely cannot achieve comprehensive economic decoupling from China, it might be able to do so in high-tech sectors, including semiconductors, batteries, and artificial intelligence. The US does not want to rely on value chains led by its rising challenger, so it has imposed tariffs and restrictions on Chinese exports and banned many Chinese companies from accessing critical technologies, such as semiconductors. That said, China’s government recognizes the country’s inequality problem and has committed to addressing it through the so-called common prosperity campaign.Īs for the Thucydides Trap, although the US and China are not currently fighting a conventional war, they are locked in a tense competition, not least over GVCs. While these figures put China roughly on par with the United States, they do not bode well for avoiding the middle-income trap. The top 10% of Chinese own more than 40% of the country’s pre-tax national income. China’s Gini coefficient (a common measure of inequality, with zero representing absolute equality and one representing absolute inequality) stands at nearly 0.42, much higher than, say, South Korea (0.30). Inequality, however, remains a serious problem. The number of Chinese companies in the Fortune Global 500 soared from ten in 2000 to 135 in 2021, surpassing America’s 122.
On the former variable, China is also doing very well. And the government has made the continued development of China’s innovative capabilities a top priority.īeyond innovation, economic research has identified two other variables that determine whether a country can evade the middle-income trap: the presence of large world-class businesses and the absence of excessive inequality. As a result, China filed 28,680 US patents in 2021, ranked third after Japan (48,405), followed by South Korea (22,120) and Germany (15,334). Already, the country’s ratio of research-and-development spending to GDP is close to 2.5% – far above the average for upper-middle-income countries. It comes about partly because of the difficulty of building sufficient innovation capabilities to enable the economy to shift from low-wage activities to the production of higher value-added goods.īut China has positioned itself to avoid this pitfall. The middle-income trap is undoubtedly formidable, having ensnared Thailand, Turkey, and Brazil, to name a few examples. As I argue in my new book on China, global value chains (GVCs) are a key variable linking these two traps. The country risks being ensnared by two traps: the “middle-income trap” (the tendency of fast-growing developing economies to lose momentum once they reach middle-income status) and the Thucydides Trap (when tensions between an insecure incumbent hegemon and a rising power lead to conflict). Now that China is the world’s second-largest economy, it seems clear that our optimism was warranted.īut, as China’s economic slowdown suggests, the next phase of its development is rife with challenges. But many in the East – including Koreans like me, who witnessed the East Asian miracle while living under developmental dictatorship – were hopeful. In their view, a vibrant market economy was fundamentally incompatible with China’s authoritarian political system. When Deng Xiaoping launched China’s strategy of “reform and opening up” in 1978, economists in the West had their doubts.
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