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Opinion

US must realize size is not everything when it comes to GDP

China's economic growth benefits Americans too

If China becomes the largest economy in the world, especially with its consumers leading the way, this will boost the world economy.   © Reuters

At a recent event at international relations think tank Chatham House in London, I came to an important understanding.

The session was about the state of the world, both in terms of economics and security, and at the core of the discussion were the U.S. and China, with their respective economic models and their growing points of conflict.

Throughout the discussion, which involved a variety of experts, about the only thing broadly agreed was that there are unlikely to be any permanent, positive breakthroughs on major issues this side of the U.S. presidential elections.

What started as primarily President Donald Trump's grievance about China's rising trade surplus with the U.S. has morphed into much more. Experienced observers of U.S. paranoia, especially as it relates to Japan, might recognize aspects of what I took away from the event.

My key conclusion was that the U.S. needs to understand and then accept that another country becoming larger than it in U.S. dollar nominal terms is not only not a threat to Americans' wealth but will make it easier for them to become richer.

During the 1980s, it became fashionable to believe that Japan would become a larger economy than the U.S., and indeed some persisted in this view through the early 1990s, despite the Japanese real estate bubble having burst in the late 1980s.

Throughout the 1980s, the U.S. repeatedly tried to disrupt the Japanese economic model, especially by forcing a huge rise in the value of the yen and trying to prise open its financial markets. This was predicated on the view that Japan's trade surpluses were unjust and at the expense of the U.S.

Finance ministers from the five major Western industrial nations agreed in September 1985 at New York's Plaza Hotel to strengthen the Japanese yen against the dollar, whose strength has fueled record U.S. trade deficits according to then Treasury Secretary James Baker III.   © AP

Whether the structure of Japan's development genuinely allowed for it to become bigger than the U.S. is questionable in my view, but it became highly unlikely thanks to the interaction of U.S. initiatives and the Japanese response, especially regarding monetary policy, coinciding with the peak of Japan's potential growth.

Having lived through all of this in my professional career, I can combine these experiences with separate observations of the Chinese model.

Two things stick in my mind. First, I think that Chinese policymakers have studied the Japanese growth model from the 1960s to the 1990s, including how it responded to U.S. pressure, and have made decisions about how these observations might influence them.

In particular, Chinese officials will try hard to not let U.S. pressure take them too far from their own plan for growth, insofar as this is possible.

Secondly, Japanese individuals have become -- albeit slowly -- wealthier despite their own growth potential having dropped dramatically. Indeed, because of Japan's extremely poor demographics, Japanese GDP per capita has grown just as strongly as any other G-7 economy this decade.

However, because China has a population 10 times bigger than Japan, even with an aging workforce, it is a different challenge to U.S. self-confidence.

A country with a population of more than a billion will likely, at some point, become a larger economy than one with a population a third its size like the U.S. -- unless that country has persistently weak productivity, the second key driver of economic growth.

Similarly, at a much more distant point in the future, it is not unreasonable to expect India's economy to become larger than the U.S.'s, since it is the only other country with more than a billion people.

What I picked up from the Chatham House discussion is that U.S. intellectual and political leaders have to move beyond the ego trip of being the biggest economy. It does not have to mean anything.

The fear of not being the biggest can drive U.S. policymakers to do anything, including harming their own future, simply to stop another country becoming bigger. This, in my view, is the path the U.S. is on -- perhaps unknowingly.

Its aggression on trade issues and its pursuit of a tit-for-tat battle on tariffs are causing world trade, including exports, to slow. These actions, and the uncertainty that goes with them, have resulted in additional weakness in businesses' fixed investment. As a result, consumption is once again driving the U.S. economy, something that is unsustainable.

The alternative is to recognize that if China becomes the largest economy in the world, especially with its consumers leading the way, this will boost the world economy -- as it has done for the past 20 years. It would make it easier for the U.S. to export, for its businesses to invest and for its citizens to have wealthier lives.

International thinkers, including those of us at institutions like Chatham House, have a role in helping the U.S. to get to this better place.

Jim O'Neill is a former chairman of Goldman Sachs Asset Management and a former British government minister. His career at Goldman Sachs spanned 1995 to 2013, the bulk of it as chief economist. He is credited with coining the acronym "BRICs."

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