Will The U.S. Remain The World’s Largest Economy Against A Burgeoning China?

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The United States has been the world’s largest economy with commensurate business dominance since the late 1800s, and its foreign policy has been dictated by its position on that lofty perch.

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The Contenders That The World's Largest Economy Has Faced

During its almost 250 years of existence, the U.S. has contended with five main rivals in business. First, it fought for more than a century for manufacturing supremacy with Britain, waging wars and near-wars at fraught moments along the way. At the moment when the U.S. had become so large that its rivalry with Britain abated, it began a struggle with Germany for military and manufacturing supremacy that spanned two world wars. Next came its Cold War with the U.S.S.R., a contest between two vastly different political systems in which U.S. economists were briefly but wrongly convinced that the Soviet economy had surpassed that of the United States.

As the Soviet rivalry crumbled, Japan emerged to vie with the United States in manufacturing, especially in the all-important automobile sector. For another brief moment Americans feared that Japan’s economy would overtake its own.

China has now emerged as the latest rival and the only one yet with a population larger than the United States’, which means that for the first time, we rival a rival whose business scale will surpass our own.

The U.S. Dollar Might Be Replaced As The World’s Reserve Currency

Today, much talk revolves around our success or failure in trade policy, and of the threat that the U.S. dollar might be supplanted as the world’s reserve currency. But the much more fundamental issue is the underlying success of America’s businesses. If we make the world’s best products and provide the best services as we’ve largely done for 150 years, then continued success in trade policy and the maintenance of our reserve currency position will more readily follow. Without that, continued success will be almost impossible to sustain.

By the early 1900s, America’s business dominance was so complete that European fear of America began to surface in books such as The American Invaders, The Americanization of the World, and The American Commercial Invasion of Europe.

But our success in some of the most important areas of business is now threatened by China in critical emerging business areas such as genetic engineering, advanced telecommunications, supercomputing, electric vehicles, alternative energy and more — and for one simple reason. Our relative investment in government-sponsored research has been declining as a percent of GDP, while China’s has been rising, and with laser focus on these very areas.

Funding Of R&D

Since the 1960s, total U.S. federal funding of R&D has dropped by two-thirds relative to GDP. Meanwhile, during the past 10 years in China, central government funding in real renminbi (RMB) for science and technology has more than tripled.

One reason that our investment has fallen is the misguided belief that America’s business greatness has emerged from its laissez-faire policies, and that the government should not be engaged in “picking winners.” Nothing could be further from the truth. The U.S. government has been heavily involved in promoting key industries since the days it assisted manufacturing to support our Revolutionary War. It closely followed that support by promoting the key technologies of the Industrial Revolution, including helping to pilfer those technologies and that expertise from Britain. That was followed by a long panorama of government assistance for canals, railroads, the telegraph and much more — extending all the way to the invention of the internet itself.

Recently, in a welcome development, Congress has begun to take steps to remediate this investment shortfall. But this issue cannot be addressed in one step, and it will take a sustained effort in this regard to assure America’s continued preeminence.

About the Author

Richard Vague serves as Pennsylvania Banking and Securities Secretary. Prior to his 2020 appointment, he was managing partner of Gabriel Investments and chair of The Governor’s Woods Foundation, a nonprofit philanthropic organization. Previously, he was co-founder, chairman and CEO of Energy Plus, an electricity and natural gas company. Vague was also co-founder and CEO of two banks and founder of the economic data service Tychos. His new book is An Illustrated Business History of the United States (University of Pennsylvania Press, May 21, 2021). Learn more at richardvague.com.