The Myth of China’s Economic Superpower: Why the US Still Holds the cards

the US-China geopolitical rivalry is a defining feature of the 21st century, a clash between the world’s largest economies and vastly diffrent political systems. While many believe China is on the verge of economic parity with the US, a closer look reveals a different reality: the US maintains a substantial and enduring economic advantage.

The prevailing narrative in Washington,fueled by statements like former President Joe Biden’s “If we don’t get moving,[the Chinese] are going too eat our lunch,” and Elbridge Colby’s warning that China’s economy is “almost as large [as] or perhaps larger than America’s already,” paints a picture of a near-peer competitor. This perception, though, is misleading.

while Chinese government statistics suggest near-parity, option assessments using metrics like nighttime satellite imagery paint a different picture. These studies consistently indicate that China’s GDP is overstated by approximately one-third, placing its actual size at roughly half that of the United States.This is considerably less than the Soviet Union’s peak of 57 percent of US GDP in 1975.

Beijing directly manipulates key economic metrics, including GDP.

This manipulation stems partly from China’s unique growth model, heavily reliant on massive investment—averaging over 40 percent of GDP for 30 years—much of wich lacks productive value. The result is a high housing vacancy rate (20 percent) and massive infrastructure projects like the 30,000-mile high-speed rail network, which, according to the Wall Street Journal, has generated over $1 trillion in debt and features many underutilized routes. These nonperforming investments artificially inflate China’s GDP.

Even with reliable GDP figures, china’s economic power is overstated. while its manufacturing output is remarkable, much of it is indeed low-complexity production or controlled by foreign firms. Global production chains are intricate and heavily influenced by multinational corporations,predominantly based in the US and its allies. This dominance is reflected in profit generation: US firms account for 38 percent of global profits, allied firms for 35 percent, and Chinese firms for a mere 16 percent.

This disparity is even more pronounced in high-tech sectors. US firms generate 55 percent of profits in aerospace and defense, drugs and biotechnology, and semiconductors, with allies contributing another 29 percent. Chinese high-tech firms lag significantly, generating only 6 percent—slightly more than South korea.

The production of the iPhone 14 serves as a prime example. While assembled in China, contributing billions to the US trade deficit, the majority of its value comes from US components (32 percent), followed by South Korea (25 percent), Japan (11 percent), and Taiwan (7 percent). China’s contribution is only 4 percent.

This dependence on foreign firms and technologies is crucial from a geopolitical outlook. Foreign companies are not obligated to operate in china if it becomes disadvantageous or if their governments incentivize or mandate their departure.

The Power of Decoupling

Modeling various decoupling scenarios reveals the significant asymmetry in potential economic damage.In all scenarios tested, China would suffer disproportionately, with short-term economic disruptions ranging from five to eleven times greater than those experienced by the US. In a baseline model involving a naval blockade of China’s maritime trade,39.9 percent of china’s GDP would be disrupted, compared to only 3.6 percent of US GDP.

China can be cut off only once.

Long-term modeling shows the US and its allies would recover to baseline growth levels, while China’s economic trajectory would permanently decline. This is because China’s economy is heavily reliant on foreign firms and their supply chains,while US and allied firms possess greater diversification capabilities.

While a targeted approach, like the Biden administration’s “small yard, high fence” strategy focusing on critical technologies, has merit, a complete decoupling, as advocated by some China hawks, carries significant strategic risks in peacetime.It would squander valuable leverage for deterring Chinese aggression and could inadvertently provoke conflict.

Decoupling preemptively could cause exactly the war policymakers want to avoid.

A peacetime decoupling would also likely fail due to the reluctance of US allies to participate, given the significant economic costs they would face.Therefore, a broad economic cutoff should only be considered as a response to severe Chinese aggression, such as an attack on Taiwan.

The Need for Economic alliance

To prepare for such a scenario, the US and its allies need a coordinated economic strategy. Creating a formal economic alliance, similar to NATO’s military cooperation, is crucial. This alliance would reduce uncertainty about joint action, plan for resource distribution among vulnerable members, and coordinate fiscal and monetary policies during a crisis.

This economic alliance should not come at the expense of existing security alliances, notably with Europe. The US needs Europe’s participation in any economic cutoff of China, given the continent’s significant economic influence. The triumphant restriction of semiconductor exports to China, requiring cooperation with ASML, highlights the importance of the transatlantic relationship.

The US also needs to address its own vulnerabilities. Stockpiling natural resources to Cold War levels, incentivizing the development of substitutes for Chinese-sourced materials, and strengthening domestic production are crucial steps. Creating new institutional structures within relevant government departments to focus on long-term economic security planning is also essential.

The US maintains a significant economic advantage over China. While a targeted approach to managing the economic relationship is prudent, a broad decoupling should be reserved for a moment of true crisis. Strategic planning and the creation of a robust economic alliance with key allies are vital to ensuring the long-term economic security of the United States and its partners.