China overtaking the US economically: What does it mean for Israel?

A question keeping economic pundits busy is whether the Chinese economy will overtake the US economy as the largest in the world.

The British Consultancy Centre for Economics and Business Research (CEBR) predicts that China, now the world’s second-largest economy, will surpass the US by 2030. On the other hand, the Japan Center for Economic Research (JCER) had predicted the revolution would come by 2029 but has recently “delayed” that projection to 2033.

At this point, China exceeding the US economically is not a matter of if, but when. Yet the real question is: Why does this even matter?

Simple statistics answer the first question. China’s 2021 Gross Domestic Product (the size of the economy in monetary terms) was $17.7 trillion. America’s 2021 GDP was $23 trillion. Additionally, some argue that China’s sheer size will lead to the country inevitably outgrowing the US economically and even forming its own economic bloc.

The truth is, though, China is barely larger than America. The US land mass is 9.1 million km2 (3.5 million square miles) while China’s is 9.3 million km2 (3.6 million square miles). This 2 percent advantage isn’t what is going to push China over the top.

The second statistic pundits tend to cite is the difference in population: 332.4 million for the US and 1.41 billion for China, 4.3 times the American total. But comparing the US economy with China’s misses a key point — the US is part of a larger economic bloc population-wise, including the Eurozone, European Free Trade Association (EFTA), Canada, and Australia. This Western bloc has a total GDP of $44.33 trillion — far larger than China alone — and a combined population of 851.57 million. While China will have some advantage in that its “economic bloc” is managed by a single authority and the Western bloc is managed by a committee, the Ukraine war has proven that the Western bloc is capable of effective cooperation.

China also has a low per-capita GDP. When assessing a country’s economic well being, the gross numbers don’t reveal much. For example, Israel’s 2021 GDP was about $415 billion, minuscule compared to China. However, the per-capita GDP of China in 2021 was $8,840, compared to Israel’s $43,700, or nearly five times that of China. America’s 2021 per-capita GDP was $69,231, or 7.8 times that of China. Per-capita GDP provides a stronger indication of how individuals in an economy are faring, and a better sense of how productive a country’s people and equipment are at any point in time. Clearly, US standards of living and labor productivity are much higher than those of China.

But if that is so, then why is China growing at a faster rate than the US? One reason is the math. Dividing a small number into a small number yields a large percentage; dividing a larger number into a larger number produces a smaller percentage. The dollar value of Chinese growth in 2019 versus 2018 was $390 billion or 5.9%, while the US dollar growth was $820 billion or 2.2%. America’s total growth was higher, but its growth rate was smaller. Developed economies also grow at a slower rate than developing economies because developed economies, by the nature of the term, have fully developed their economic resources while developing economies are still in the process of doing so.

Another emerging issue which most experts have not yet taken into account is that both the Chinese and Western bloc populations are about to drop significantly. Due to low fertility rates, the over-65 age bracket exceeds the 0-5 bracket. This trend occurred in China because government policy limited parents to one child. In the West, low fertility rates resulted from higher incomes, as fertility is inversely related to income.

Simultaneously, due to modern medicine, low birth rates coincide with high life expectancies in both blocs. In the US, according to Census Bureau figures in 2020, the 0-5 age bracket constitutes 5.8% of the population, while the over-65 age group is 16% of the population. As the over-65 age group passes away, it will be replaced by a smaller population. The US is expected to peak at 350 million people and then to drop to 320 million. China is expected to peak at 1.5 billion and then drop to 1.2 billion. China, though, will lose a larger portion of its population due to the more extreme reduction in its fertility rate for a longer period. The drop in US population will be matched by a European decline for the same reason — a drop in fertility due to rising incomes.

The consequences of this drop in population will be dramatic, but they won’t happen overnight. They’ll play out over a 20-year period. For the US, a drop of 20 million people will mean substantial vacancies in housing, causing a dramatic drop in housing prices. Similarly, certain consumer markets will take a hit, depending on who their buyers are. Unless governments pursue policies with this event in mind, unemployment in both blocs will likely grow and remain high for an extended period of time. The greater drop in China’s population, both in absolute numbers and in percentage of the population, will likely have a greater impact on China and its developing economy. Further, the drop in China’s population will likely begin sooner than the West’s, and Beijing will consequently experience a drop in its GDP and economic viability.

How does all this affect Israel?

In Israel, with a fertility rate of 3.1 children per woman, the population will continue to grow naturally (the replacement rate is 2.2 children per woman) and Aliyah (immigration) will add to the total growth rate. The Western bloc is Israel’s main buyer of goods and services, while China is a major source of low-cost products. Sales from the Western bloc will decline, relatively speaking, and prices of purchases from China will rise as Beijing’s labor force declines and labor costs rise. This squeeze will require Israel to reassess its trading partners.

History is replete with the rise and fall of civilizations, typically due to wars, famine, and birthrates. Instead of focusing on the China versus US debate, experts should take note that the world’s 21 most fertile countries are all in Africa.

In the meantime, I wouldn’t write off the Western bloc just yet.

About the Author
Michael Humphries teaches marketing and management at the Jerusalem College of Technology and is deputy chairman of the Business Administration Department at Touro College Israel, where he teaches finance.
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