Misjudging economic size and substance underestimates America’s arch-rival and misguides its policies
By: Ashkan Shekarchi (Ph.D.)
China’s rise to the position of the U.S.’s leading rival has been primarily driven by its meteoric economic rise. On its path to becoming the world’s foremost manufacturing, tech, and trade powerhouse, no indicator is better than its miraculous gross domestic production (GDP) trajectory. Decades ago, no one in Washington cared about China’s GDP, yet with China’s ascent as a rising superpower and a strategic competitor, this monetary measure is now frequently referred to for comparing the relative economic status of the U.S. and China. As the Asian dragon roars and narrows its economic rift with the Uncle Sam, promoting its GDP has increasingly become an integral part of America’s narrative war to hype its political system and economic model.
Months ago, the former Secretary of State Antony Blinken boasted that “The United States’ GDP is larger than that of the next three countries combined:” China, Germany, and Japan; and ex-national security advisor, Jake Sullivan, said in early 2024 that the moment of China’s outstripping the United States to become the world’s largest economy “may never come.” Such remarks and numerous similar statements by top U.S. statesmen and think-thankers during both Biden and Trump terms display Washington’s obsession with occupying top GDP status and its deep concern about if and when China’s GDP might eclipse America’s. This acute attention is partly supported by many studies conducted by credible institutions, offering various scenarios and forecasts on U.S. and Chinese economic outlook in near future.
After a century-long American reign as the world’s prime economy by a wide margin, ceding the top spot to a non-Western contending power has both symbolic and strategic significance. Historically, by around 1916, the emerging United States dethroned the British Empire to command the largest GDP worldwide, ushering an era where American economic heft far surpassed that of other great powers. Most notably, by the mid-twentieth century, U.S. share of world’s GDP peaked at 40% and 28% in nominal and PPP terms respectively; these astonishing figures were never achieved by any other great power and would remain unsurpassable for the foreseeable future. Ever since America reached the highest GDP, Washington has been concerned that an emerging economic behemoth could match or overtake its prime standing. In the 1960s, the Soviet Union was deemed to be on path to catch up with the U.S. economy even though its GDP never reached more than 60% of that of the U.S. Similarly, in the 1980s, similar forecasts focused on Japan, which never achieved more than 70% of U.S. GDP. In the decades that followed, Japan’s economic gap with Uncle Sam only widened. America’s GDP has since left both the Russian and Japanese economies in the dust.
At the turn of the century, similar worries were raised first about the European Union’s economy’s ability to eclipse America’s and later about the rising Asian giant, China. With its contrasting political system and the sheer size and vast unfulfilled potentials, China has been the only ascendant power displaying both the capacity and intent to overtake the U.S. economically, technologically, and militarily and to dismantle the already cracked American-led world order. Yet Washington’s overemphasis on GDP size reveals the prevalence of “only size matters” syndrome among politicians and many pundits alike. This, in turn, obscures the bigger picture of the substance of the U.S. economy and fails to capture the socio-economic landscape as well as the breadth of economic benefits and losses.
In contrast to their American counterparts, Chinese leadership have long avoided discussing the topic of outperforming the U.S. in economic size and strength. This reflects China’s cautious approach to framing its economic ascent, as it has opted for a narrative that emphasizes development and stability over competition and primacy. Such reluctance suggests a strategic choice to focus on pragmatic growth rather than engage in a rhetorical race for supremacy on the global stage. As China’s foreign ministry spokesperson Huachunying once put it, “the goal of China has never been to surpass the United States, but to constantly surpass itself and become a better version of itself.”
Since the economic power of a country is best understood by both the size and quality of its domestic production, it is essential to further scrutinize and compare the magnitude and makeup of these two leading economies. To determine which country has the largest economy, economists come up with Gross Domestic Production in nominal and power purchase parity. Nominal GDP is based on the exchange rate measure and does not discount inflation to remove any distortions arising from surging prices. By nominal measures for 2024, the U.S. economy stood at $29.1 trillion, more than one-third ahead of China’s $18.9 trillion. This measure is widely touted by American-boosters to brag about sustaining U.S. economic dominance and its secured preeminence over its contender. This $10.2-trillion lead in 2024 has more than doubled from $4.3 trillion in 2021, even though China’s real growth has outpaced that of the U.S. in the past three years. Percentage-wise, Chinese-to-U.S. nominal GDP ratio has fallen from 76% in 2021 to 65% in 2024. The reason for this paradoxically widening rift is twofold: high inflation that has lifted U.S. GDP, and renminbi depreciation against the dollar. Between 2021-2024, the U.S. cumulative annualized inflation stood at 20.6%, 14 points above the 6.6% figure for China, jacking up U.S. nominal GDP considerably. Over a similar period, the U.S dollar-to-renminbi average exchange rate surged from 6.45 to 7.20, adding up another 11% to the U.S. nominal GDP edge.
In fact, with China’s potential future growth forecast well above that of the U.S., exchange and inflation rates will determine when these two will switch places at the economic table. Given the nominal GDP multi-factorial trajectory, major forecasts of China’s rising to the top of the podium have postponed this eventuality to 2030s—if ever. Still, there have been some studies ruling out China’s ever reaching top standing due to structural challenges its economy faces. Yet, most of these studies have underestimated the role of renminbi appreciation and Chinese inflationary path to balloon its GDP and precipitate China’s overtaking the U.S. as the world’s largest economy.
In the long-running debate over how to measure an economy’s size, many economists typically favor the purchasing power parity (PPP) measure. By this metric, China’s economy overtook that of America around 2015, currently valued at $37 trillion—nearly twice its nominal size. Thus, it is 27% larger than that of the U.S. while its GDP (PPP) is growing far more rapidly than America’s.
Expecting China’s ascent to the top is not surprising given its sheer population size. Indeed, its decline as an economic power can be viewed as a historical deviation from its long-held status as the world’s largest economy, caused by the rise of industrial and colonial Western powers. Historically, Imperial China’s share of global GDP by this measure peaked at about 33% in 1820, followed by a significant decline during the Century of Humiliation. Today, the thinking goes, China has simply reclaimed its age-old top status—with India anticipated to restore its status as the second largest.
China’s substantial lead in GDP (PPP) over the United States doesn’t translate into its economic primacy due to the extensive welfare and security obligations that strain its resources; thus, one should deduct, as Michael Beckley correctly argues in Unrivaled, “the costs countries pay to police, protect, and provide for their people” to reach a better grasp of their net economic resources. Additionally, America’s GDP (PPP) per capita, still nearly four times larger than China’s, should not be misconstrued. In light of the difference in two countries’ wealth and income distribution, infrastructure and public service levels, and housing, medical, and educational affordability, it is misleading to assume that Americans’ financial security and living standards are proportionally ahead of those of the Chinese people. Indeed, America’s advantage in these areas is smaller than often assumed. In the same vein, misjudging economies by ignoring PPP and focusing solely on nominal GDP can also result in flawed policies. A prime example is dismissing Russia’s economy as smaller than that of Texas or Italy, which overlooks its $7 trillion GDP (PPP)—the largest in Europe—and underestimates its industrial strength and resilience under sweeping sanctions and long attritional war. This notable misperception has informed misguided policies with limited effectiveness.
We often confuse a country’s commanding the world’s largest economy with being its leading economy, and emphasizing GDP size often causes us to neglect the importance of its substance, which reflects the structure, quality, and sustainability of its aggregate output. The American and Chinese economies, despite their comparable size, contrast vividly in many ways. In a broad-brush picture, China is a world-class manufacturing powerhouse possessing the most advanced supply chain and industrial ecosystem which dominates the world trade, whereas the United States boasts a service industry and virtual economy known for its innovation, dynamism, and resilience, along with the advantages of being a magnet for world talents and holding the world’s primary reserve and trade currency.
Currently, the share of industry and services in Chinese GDP hovers around at 38% and 55% respectively, while these shares are 18% and 77% in the U.S. economy. China’s manufacturing output exceeds that of the next nine countries put together, accounting for over 35% of the global total, while the U.S. share stands at just 12%, barely one-third of that. By 2030, China’s share of industrial production is projected to soar to 45% while the U.S. stagnates at 11%, or one-fourth of the Red Dragon’s. In numerous sectors, East Asia’s giant outpaces Uncle Sam and often by a substantial lead, from vehicles, clean energy, shipbuilding, and legacy chips to steel, apparel and housewares, communication, and robotics. This enormous advantage is manifested in China’s widening annual trade surplus of $992 billion in 2024, in stark contrast to America’s $918 billion trade deficit, revealing China’s above $1.9 trillion lead in its recent annual trade performance.
This expanding lead is even more pronounced in manufacturing, favoring China. Still, the value and sophistication of Chinese manufacturing exports continue to excel, becoming more tech-intensive and high-end, with higher added value and reduced sensitivity to exchange rate fluctuations. With a global research lead in 57 of 64 critical technologies and the potential to establish monopolies in many of them, as detailed by the Australian Strategic Policy Institute’s Critical Technology Tracker, China’s economy is well-positioned to lead in many high-tech industries.
In comparison, the share of services in U.S. GDP is 22% higher than that of China, partly due to the inflated sectors such as sports, media, and entertainment; exorbitant costs of healthcare and education; as well as the ever-larger volume and value of financial activities in the American economy. Indeed, the shift toward financialization has made the U.S. economy even heavier on services and lighter on manufacturing, rendering its financialized service-based economy both vulnerable and less competitive to the Chinese industrial economy with its dominance of rare-earth materials and critical components along with its massive skilled labor force and impressive innovation in sophisticated technologies. As China’s urbanization rate climbs from the current 65% to around 80% in the future and its economy matures, the share of its service sector will only rise accordingly because of increasing domestic and foreign demand, positioning China as a service powerhouse comparable to the U.S., while it capitalizes on its far larger and leading manufacturing base to champion the Fourth Industrial Revolution.
Bad comparison distorts reality, which in turn fosters bad strategy. While simplistic current-price GDP comparison and bragging about a U.S. supremacy over China may capture public and political attention and somewhat impact the narrative surrounding the U.S.-China all-out rivalry, it fails to encapsulate the complex realities of economic might and makeup. The recent widening of the U.S.’s GDP advantage over China’s is driven by its inflationary status and appreciated currency. These facts can foster a skewed understanding of the qualitative and quantitative aspect of American overall economic output compared with China’s. Although occupying top nominal GDP status and promoting its dollar-denominated economic size may sound impressive, doing so reveals little about American economy’s prowess, power, and performance. It is neither synonymous to high-quality development, nor is it indicative of the average person’s economic fortune and financial security, nor does it indicate the further decline of the U.S. manufacturing share in respect to its Asian peer rival dead set to win the race for techno-economic primacy.
By extension, focusing on economic size ranking should not distract U.S. politicians from putting the soaring debt and budget deficit on a sustainable path. As national debt reaches $36 trillion and budget deficit crosses $1.8 trillion, 122% and 6% of GDP respectively, the debt interest expense has totaled a record-high of $1.16 trillion, or 4% of GDP for 2024, expected to mount to 4.6% for this year. This uptrend of debt, deficits, and debt servicing costs creates a precarious economic environment which limits U.S. fiscal flexibility and lowers resources available for key areas of strategic competition with China such as technological innovation, defense spending, or diplomatic initiatives.
In a world shaped by competing grand narratives, disparaging the economy of a rising peer power while extolling one’s own has become common practice. Promoting the higher U.S. nominal output value over China’s as a calculated strategy may cast doubt on Beijing’s economic model and outlook, it risks obscuring the realities of China’s economic size, substance, and strength. Hyping GDP as the primary metric of economic power or national progress does a disservice to the broader discussion about U.S. techno-economic capabilities, social well-being, and long-term competitiveness, while also misleading those advocating for tech and trade standoff or a new Cold War trajectory.