Tale of the colossus and the inexorable upstart

The world economy now has two powerful engines pulling it forward: China and the United States.

China is the unstoppable industrial upstart. America is the still-expanding financial colossus. Like rival siblings, they sometimes fight but are also inextricably linked. They can prosper together, experts say, and in the process the rest of the world can benefit mightily.

That economic reality was an important backdrop for this week's meeting between Chinese Prime Minister Wen Jiabao and President Bush at the White House. The top issues were the sensitive politics of Taiwan and concern over North Korea's nuclear program. US-China trade tensions were also discussed, thanks to a flood of cheap Chinese exports that is seen by many as a destroyer of American jobs.

Yet beyond those challenges, the two sides need each other economically, and the rest of the world needs both of them. The dynamism of these twin economic powers is stunning:

• America remains the world's giant - with an $11 trillion annual output versus the $4.4 trillion of second-place Japan.

• For most of the past decade, the US has been almost alone in stimulating output in other nations through its keen hunger for imports. Japan was in the doldrums. Continental Europe grew slowly.

• China is already the world's sixth-largest economy, and it is growing like the US did in the 19th century. It could be the world's largest within four decades.

• China must build the equivalent of a Philadelphia or Houston each month, due to migration from rural areas to cities. That's just one sign of rapidly rising demand that makes China hungry for imports from the rest of the world.

"China's a good source of demand," says Frank Vargo, a trade economist at the National Association of Manufacturers.

So is the US. Fast-growing imports by both nations are a vital upward drag on the rest of the world, which now appears to be in a full-fledged expansion following America's slowdown in 2001.

So far this year, the growth of imports into China is even greater than the increase in US imports. Up to September, Chinese imports, growing at a 40 percent annual rate, rose $86 billion to $299 billion from the same period a year ago. US imports rose $73 billion to $936 billion in the same time span. The US would like China's imports to continue expanding. Bush pressed China's leader to speed trade liberalization, as promised to the World Trade Organization.

China has been for years the fastest growing economy in the world. Its gross domestic product (GDP), its output of goods and services, has risen about 9 percent a year in real terms for two decades.

Since 1990, the Chinese economy has tripled in inflation-adjusted terms. In the same period, Japan's has increased only 15 percent, notes Stephen Roach, chief economist of Morgan Stanley, a Wall Street investment banking firm.

With its 1.3 billion people, China is the third-largest importer in the world behind the US and Germany. China's imports, economist say, have been key to the modest recovery this year in Japan and bolstered other economies in southeast Asia.

Chinese imports of iron and steel are up 68 percent this year, helping keep up the world price of these products. China has boosted its oil imports 56 percent to fuel the explosive growth of its industry and car market. Volkswagen sells more cars in China now than in Germany.

Worried about their competitiveness, American manufacturers have been pressing for a revaluation of China's currency, the renminbi, for more than a year. US Treasury Secretary John Snow took up the cause on a visit to China in September. Chinese officials said they would consider scrapping the decade-old peg to the US dollar in the future.

But the Bush administration has in degree stepped away from pushing for revaluation, says Adam Segal, a fellow at the Council on Foreign Relations in New York.

Donald Straszheim, an economic consultant in Santa Monica, Cal., holds that the US government has "its head in the sand" in dealing with the degree of job challenge that China represents.

For example, a Chinese university graduate in finance, near the top of his class, costs about $7,000 in total per year, versus $80,000 for an American counterpart.

China's economic importance in the world is forecast to continue to escalate. A study by Goldman Sachs projects that in US dollar terms, China's economy could overtake Germany in the next four years, Japan by 2015, and the US by 2039. India, meanwhile, could become No. 3, by growing at a 5 percent annual rate for the next 30 and 50 years.

For now, though, it's China that is luring foreign investment. "Everywhere you turn in China, there are Japanese factories," says Straszheim.

China is still a developing country, and experts say it needs major reforms in curbing corruption and raising living standards to keep its people content.

But overall, China's dynamic shift to a free enterprise economy means that "we are all better off," says Straszheim.