Finally Official: China Passes Japan In GDP, Now The Hard Part

It is finally official. China passed Japan in GDP in the second quarter and is likely to lengthen its lead as Japan’s growth is stalled at under 1% and China’s GDP is expanding at approximately 10%.  It may be too early for China to gloat. Japan was viewed three decades ago as the largest threat to US global GDP primacy, but the Japanese economy fell apart.

Data released by the two countries show that in the second quarter, Japan’s GDP was $1.28 trillion compared to China’s $1.33 trillion. Many experts expect China to pass the US in GDP around 2030. Many economic experts see the news as a milestone. “This has enormous significance,” said Nicholas R. Lardy, an economist at the Peterson Institute for International Economics. “It reconfirms what’s been happening for the better part of a decade: China has been eclipsing Japan economically. For everyone in China’s region, they’re now the biggest trading partner rather than the U.S. or Japan,” according to The New York Times.

China’s growth could slow sharply for a number of reasons which will prevent it from catching the US, which has GDP growth of between 2% and 3% now. The first of these is that China faces the Japanese problem. The larger it becomes economically the harder it is to grow. China’s GDP, at nearly $5 trillion faces challenges that it did not face a decade ago when the number was closer to $2 trillion.

China’s largest problem is that its labor costs are rising rapidly. Once the clear low-cost provider of finished goods to the US and Europe, it will begin to lose that status as the nation’s work force agitates for higher pay. Foreign companies have already been hit by strikes as workers push for higher pay. There have also been labor strikes in the interior of China. The cost of labor could easily outstrip GDP increases which would undermine the value of China’s exports and raise their costs.

China also has to count on its emerging middle class to create a huge consumption engine, not unlike the one that began to emerge in the US in the 1950s. China’s workers have been savers so far which may make it difficult to get them to buy goods and services at the rate that the US consumer did in the last half of the 20th Century.

China’s growth could also be undermined by inflation which is currently nearly 5% and probably a good deal more for items like food. A large portion of the income of Chinese workers may go toward basics.

China will also continue to face an angry US and an unsettled Europe, both of which believe that the world’s most populous nation manipulates it currency to give it an advantage in global trading markets. Some members of the US Congress have already proposed passing legislation that would put tariffs on Chinese goods. There may be a trade war soon and China’s export growth rate would be hurt badly.

And there is the issue of energy costs. The US paid little for oil, much of it produced in America, in the 1950s, 196os, and part of the 1970s. This kept prices of gasoline and oil low for consumers and energy and petrochemical costs low for industry.

China also faces the challenge that the GDPs of its largest trading partners are slowing which means its industrial output will now have the rapidly growing markets it had for much of the 1990s and 2000s.

China’s hyper-growth may not last more than a few years, if it lasts that long at all.

Douglas A. McIntyre