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Is China a Threat to the U.S. Economy?

Updated January 23, 2007

Craig K. Elwell and Marc Labonte Specialists in Macroeconomics Government and Finance Division Wayne M. Morrison Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division

Is China a Threat to the U.S. Economy?
Summary
The rise of China from a poor, stagnant country to a major economic power within a time span of only 28 years is often described by analysts as one of the greatest economic success stories in modern times. From 1979 (when economic reforms were first introduced) to 2006, China’s real gross domestic product (GDP) grew at an average annual rate of 9.7%, the size of its economy increased over 11fold, its real per capita GDP grew over 8-fold, and its world ranking for total trade rose from 27th to 3rd. By some measurements, China has become the world’s secondlargest economy, and it could be the largest within a decade. China’s economic rise has led to a substantial growth in U.S.-China economic relations. Total trade between the two countries has surged from $4.9 billion in 1980 to an estimated $343 billion in 2006. For the United States, China is now its second largest trading partner, its fourth-largest export market, and its second-largest source of imports. Inexpensive Chinese imports have increased the purchasing power of U.S. consumers. Many U.S. companies have extensive manufacturing operations in China in order to sell their products in the booming Chinese market and to take advantage of low-cost labor for exported goods. China’s purchases of U.S. Treasury securities have funded federal deficits and helped keep U.S. interest rates relatively low. Despite the perceived threat from China, the U.S. economy has recently maintained full employment and robust economic growth. To date, the growth in Chinese exports appears to have come partly at the expense of Asian competitors. However, the emergence of China as a major...