What is the best global economic system

The EU, USA and China - three powerhouses of the world economy in comparison

Ursula Bauer-Hailer / Sebastian Debes

The balance of power in world politics and the world economy has shifted permanently since the beginning of the 21st century. China accounted for a good third of global economic growth in the 2010s. The "Middle Kingdom" as a new, aspiring great power has been measured in terms of economic output1 the United States and the EU-27 overtake, even if their per capita value is still well behind the EU-27 level at 44%. The global exchange of goods weakened noticeably in 2019 compared to previous years. A slowing global economy and protectionist measures are possible reasons for this. Higher tariffs resulted in trade diversion, which is already partly visible in the geographical distribution of exports. Driven by the skills and knowledge of its approximately 1.43 billion (billion) people, the rise of China currently seems unstoppable to many. With 1.5 million (million) patents, China accounted for almost half of all patent applications worldwide. China's research spending exceeds that of the EU's 27 member states and is almost on par with the US's investment in innovation.

With an area of ​​around 4.2 million square kilometers (km²), the 27 member states of the European Union (EU-27) are not even half the size of the USA or China, each with an area of ​​almost 10 million km². If you put the area in relation to the population, in 2019 in China with 149 inhabitants per km², around four times more people lived in one km² than in the USA (33 inhabitants per km²). On average in the EU-27, too, with 106 inhabitants per km², the population density was lower than »in the Middle Kingdom«. In Germany and Baden-Württemberg, on the other hand, with 232 and 311 inhabitants, respectively, there were significantly more people per km².

The world population grew from 3 billion to 7.7 billion people between 1960 and 2019. In the same period, the share of the 27 member states of the European Union fell from 12% to 6%, in the USA from 6% to 4% and China's share also fell from 22% to 19% today. But despite the declining proportions of the world population, the absolute population increased between 1960 and 2019 in the EU-27 by a good quarter to 447 million today and in the USA by a strong 76% to 329 million people. In the same period, China's population more than doubled to 1.43 billion people. Worldwide, one sixth of the absolute population growth between 1960 and 2019 was in the Middle Kingdom alone.2 According to population projections3 China's population will peak at 1.46 billion in 2030 and steadily decrease to 1.26 billion by 2070. The population of the EU-27 is also expected to grow to 449 million by 2040 and then decline to 427 million by 2070, while the number of inhabitants in the USA will rise continuously to 404 million by 2070 - also due to immigration becomes.

In the EU, as well as in the US and China, the under-15s make up an ever smaller proportion of the total population, while the proportion of those over 65 is increasing. The youngest population is in China. Here only around 12% of the people are older than 65 years, but 17.7% are under 15 years old. This means that there are around 1.5 boys for one elderly person. In contrast, the EU-27 is hit hard by the aging of society. Here, and this also applies in particular to Germany and Baden-Württemberg, the proportion of people over 65 is higher than that of those under 15. The birth rate4 is now at a relatively low level in all three regions. The United States has the highest fertility rate at 1.77 children per woman, but it also lacks the sustaining rate of over two children per woman (Table 1).

With the integration of the Asian emerging countries into the world economy, global growth gained momentum. World economic growth rose from an average of 3.1% in the 1980s and 1990s to 3.9% in the 2000s. In the following decade, growth remained high at 3.8% and, according to a forecast by the IMF (October 2019), should level off at an average of 3.5% by 2024. A look at the growth contributions of large regions makes the shift in power towards the Asian emerging markets clear. While the developed economies still accounted for 63% of global growth on average in the 1980s, this proportion fell to 23% in the past decade. The growth contribution of the emerging countries increased accordingly (Figure 1). China accounted for a good third of global growth in the 2010s. The other emerging countries based in Asia contributed almost 23%, the remaining emerging countries 20% of global economic growth. As a result, the emerging Asian economies, including China, have become global growth centers since the 1980s. More than half of the growth came from these states. According to the IMF forecast, growth in the years 2020 to 2024 is likely to be even more concentrated in these regions (see i-point »Global economic risk from COVID-19«).

The Asian emerging countries, and especially China, are making a significant contribution to global growth. If you adjust their economic output in purchasing power units by the number of inhabitants, there is a clear gap to the already developed economies. Since the price- and purchasing-power-adjusted GDP per inhabitant has increased in most years since 1980, this figure in Figure 2 becomes relative5 for the EU-27. China has seen remarkable economic growth since the 1980s, which is also evident in GDP per capita. Nevertheless, GDP per capita adjusted for purchasing power was only 44% of the EU-27 level in 2019. Based on China's catching-up process over the past 20 years, it would take another 34 years for China to catch up with the EU-27. By contrast, Germany was 21% above the EU-27 value in 2019, and the southwest was even 38% above. With an increase of 47%, the USA occupied the top position of the countries shown in Figure 2.

The economic output per inhabitant of the developed economies shown in Figure 2 has moved in a relatively narrow corridor over time. From 1980 to 2019, German GDP per capita was between 18% and 31% above the EU-27 average. The range was somewhat higher for the United States. In the period used, GDP per capita fluctuated between 35% and 53% above the EU average. This also puts into perspective the higher GDP growth that the US economy showed compared to the EU. In the »land of unlimited possibilities«, this is distributed over a significantly higher population growth than in the EU. Nonetheless, the US economy has consistently achieved a significantly higher level of economic power than the EU-27 and Germany. Baden-Württemberg also misses the US size by 6.6%.

The real growth rates in global trade decreased significantly in 2019. The export volume even fell in the year as a whole (- 0.4% compared to the previous year)6. Here, short-term trends, such as weaker investment demand due to the global economic slowdown as early as 2019, and developments that have been observed for years, overlap. These include a slower globalization (»slowbalization«)7 and also protectionist tendencies. Both factors together resulted in weaker export dynamics at the current edge. In 2018, world trade expanded at a rate of 3.1%, and in 2017 even at 4.4%. This shows how strong the decline was within a year. There are definitely differences between the largest economic blocs. The decline in export dynamics in the developed economies was less severe (2018: 2.6%; 2019: 0.0%) than in the emerging countries (2018: 3.7%; 2019: - 1.0%). Among the developed economies, US exports fell by 0.4% in 2019, following growth of 4.2% in 2018. There the dynamism slowed much more than in the euro zone, for example, where export growth fell from just under 2% to - 0.2%. This means that the protectionist measures taken by the US government do not appear to have had a positive effect on their export development in the short term.

But China, as the main addressee of US customs policy, also suffered from the trade dispute. Although the "Middle Kingdom" still recorded a real increase in exports of 0.5%, the momentum was significantly lower than in the previous year (5%).

However, the World Trade Monitor referred to in the last section does not allow any statement to be made as to which regions the export goods were delivered to. The Direction of Trade Statistics of the IMF provides more detailed data on trade links. The total exports of the EU-27 are adjusted for the EU intra-exports. This enables a more realistic comparison to the other major trading blocs, the USA and China.8 Since trade between the EU-27 countries accounted for almost 59% of their total exports in 2019, the shares of the other trading partners increase accordingly by deducting intra-EU trade. The exports of the USA, China and the EU-27 by target region are shown in Figure 3. The EU-27 delivered just under 42.5% of its exports to emerging countries and 55.3% to industrialized countries. Compared to the 2017 shares, there was a shift towards developed economies. The United States in particular gained in importance (+ 1.8 percentage points). 9.3% of all exports went to China, 0.3 percentage points more than in 2017. The share of emerging countries outside of Asia declined (- 1.4 percentage points).

Chinese exports increasingly went to the (Asian) emerging markets. These gained 1.9 percentage points compared to 2017 and rose to a share of 16.4%. Outside Asia, the increase was half a percentage point and reached a value of 19.2% in 2019. In return, the US export share fell by 2.1 percentage points and, at 16.9%, almost reached the share of the Asian emerging markets. China was the only group of countries within the industrialized countries to deliver an increasing share to the EU-27 (14.6%, + 0.6 percentage points compared to 2017). The most important region for export business are the remaining developed economies. China delivers almost a third of its exports there. This is 0.8 percentage points less than in 2017.

In the United States, export activity shifted towards the industrialized countries, especially the EU-27. Compared to 2017, the share increased by 1.4 percentage points to 16.2%. The export share of the other industrialized countries was more than twice as large (39.9%). The export to China decreased by almost 2 percentage points to 6.5%. Almost a third of total exports went to the other emerging countries outside of Asia.9

The shift in shares can be explained in part by trade diversions. The USA and China have imposed additional tariffs on their exports in recent years. The bilateral trade share, which has fallen since 2017, could be a visible result of this policy. At the same time, some Asian emerging countries such as Vietnam have more favorable tariff conditions with the USA compared to China, which makes exporting to the USA from these regions more attractive. Furthermore, China is economically strongly integrated into the Southeast Asian region, so that it can be considered as a supplier for preliminary products. An indication of this is the now higher share of Chinese exports to the Asian developing countries. So far, the EU-27 appears to be benefiting from trade diversion, as the increased weight of exports to the US shows. How long this development will last remains to be seen, as the US administration has also raised tariffs on EU products and announced further increases.

Research and development (R&D) spending in China is increasing rapidly. Between 2009 and 2018, the “Middle Kingdom” tripled its research spending, to 554 billion US dollars after adjusting for purchasing power.10 This means that China's research and development spending exceeds the EU-27's innovation budget of 411 billion US dollars after adjusting for purchasing power, and almost reaches the level of the United States, which invested 582 billion US dollars after adjusting for purchasing power in 2018. The shares of the world's largest research nation USA and that of the 27 member states of the EU in global R&D expenditure fell between 2009 and 2018 from 33% to 28% and from 21% to almost 20%, respectively, while China increased its contribution of 15% within this decade. almost doubled to 26% (Figure 4).

Long-term economic success needs qualified employees and here, too, the "Middle Kingdom" has made huge strides. In 2016, according to calculations by the World Economic Forum, 37% of all 12.5 million university graduates worldwide took STEM subjects11 (Science, Technology, Engineering, Mathematics) from China, 21% from India, 8% from the EU and only 5% from the "land of unlimited possibilities". Another Chinese record was set by the 1.5 million patents that researchers in China applied for in 2018. The US (597 141), Japan (313 567), South Korea (209 992) and the European Patent Office (174 397) followed the patent office of China at a considerable distance. These five patent offices together accounted for 85% of the 3.3 million patent applications worldwide in 2018, almost half (46%) in China alone. However, with regard to the applications filed abroad - which can be interpreted, among other things, as an effort to expand into new markets - the applicants based in the USA were in the lead with 230 085 patent applications filed. The USA followed Japan (206,739), ahead of Germany (106,753), South Korea (69,459) and China (66,429).12

The 2,500 companies that invested the most in research and development in the world in 2018 saw their spending increase by 9% to US $ 947 billion compared to 2017. In an increasingly fierce global technology race, US and Chinese companies in particular increased their innovation budget and left their European competitors behind. This emerges from the current EU Industrial R&D Investment Scoreboard of the European Commission. Every year, the scoreboard provides a detailed analysis of the latest investment trends from the world's 2,500 leading industrial companies. In 2018, these companies represented around 90% of global business investment in research and development.

Of the 2,500 leading industrial companies, 424 were based in one of the 27 EU Member States. Their R&D expenditures developed rather below average in a global comparison with an increase of almost 5% compared to the previous year. In an international comparison, the 130 German companies included in the ranking were also able to grow only comparatively weakly with an increase of less than 4%. In contrast, the 769 companies with a registered office in the United States increased their innovation budget by a good 10%. However, the 507 Chinese companies developed most dynamically. Their R&D spending increased by over a quarter compared to 2017 (Figure 5).

However, when looking at the absolute level of R&D spending, companies based in the United States invested by far the most ($ 359 billion), more than companies in the EU-27 and China combined ($ 317 billion). U.S. dollar). Of the US $ 947 billion in global business investment in research in 2018, the US accounted for 38% and the EU-27 for 22%. The companies with registered offices in the »Middle Kingdom« had a significantly lower share of 12% in global R&D investments, although their share in 2008 was only 2%.

The 100 companies with the world's highest innovation budgets invested a total of 494 billion US dollars in research and development, accounting for more than half of all global R&D investments. Of the top 100 R&D companies, 36 were headquartered in the US, 26 in the EU-27 and nine in China. The top 100 also include twelve German companies, including four with corporate headquarters in Baden-Württemberg: Daimler (10th place), Robert Bosch (20th place), SAP (43rd place) and ZF Friedrichshafen (68th place). These heavyweights from Baden-Württemberg had a combined innovation budget of 24 billion US dollars, which corresponds to an increase of a good 4% compared to 2017. Looking at the top 30 of the R&D rankings, the dominance of the United States becomes even clearer. Here, half of the companies had their corporate headquarters in the USA. Of the leading industrial companies with the highest R&D expenditure, 2,327 provided information on the number of their employees. A total of around 56 million people were employed in these companies. Almost a third worked for companies headquartered in the 27 member states of the EU and a fifth each for companies in the USA and China.

The world's largest innovation budget came from Google's parent company Alphabet, at US $ 21 billion13 out, an increase of 30% compared to 2017. The US-American group displaced last year's first place, the South Korean electronics group Samsung (17.1 billion US dollars) to 2. The US follows in 3rd and 4th place -American company Microsoft (16.9 billionUS dollars) and the German Volkswagen Group with expenditures of 15.7 billion US dollars. Europe's largest car manufacturer, Volkswagen, invested more money in research and development than any other listed company in the EU, but was nevertheless pushed from third to fourth place by Microsoft within a year. The US company was able to increase its research spending by almost 15% compared to 2017, while the German carmaker only increased its spending by just under 4%. Huawei, the Chinese communications giant, took fifth place with R&D spending of 14.7 billion US dollars (+ 13% year-on-year), making it the best-placed Chinese company in the global ranking (Table 2).

Especially at the top it shows how much US and European companies are diverging. Research and development spending by the top five US-based investors totaled $ 77 billion. The five largest European groups Volkswagen (4th place), Daimler (10th place), BMW (16th place), Bosch (20th place) and Siemens (21st place) - all based in Germany - invested 48 billion US dollars just under two-thirds of the research spending of its US competitors. In addition, major European corporations are increasing their R&D spending much more slowly than their competitors in the USA and China. While innovation spending grew by a total of 16% among the leading US corporations, it rose by only 6% among Europe's top investors. The five largest Chinese corporations were even able to increase their spending by an impressive 27% compared to the previous year. At 28 billion US dollars, their innovation budget was still well below that of the US and German heavyweights.

1 Gross domestic product (GDP) in purchasing power parities (PPP).

2 During this period, the population increased by an average of 13.1 million people per year.

3 UN Population Division, World Population Prospects 2019, Medium fertility variant.

4 Average number of children a woman gives birth to in her lifetime.

5 For values ​​below 100, the GDP per inhabitant in the country concerned was below the EU-27, for values ​​above 100 it was correspondingly higher.

6 CPB World Trade Monitor, January 2020 edition.

7 The Economist coined the term slowbalization, i.e. a slower globalization. See https://www.economist.com/leaders/2019/01/24/the-steam-has-gone-out-of-globalisation (accessed: April 2nd, 2020).

8 For example, trade flows between US states are not recorded as exports. Eurostat also shows exports to non-EU countries in its export statistics.

9 Mexico as a direct neighbor and member of the North American trade agreement USMCA is likely to account for a significant share.

10 During this period, R&D expenditure increased in real terms by USD 322 billion after adjusting for purchasing power.

11 These are comparable to the MINT subjects.

12 WIPO (UN), World Intellectual Property Indicators: Registrations for patents, trademarks and industrial designs reach record levels in 2018. Geneva, October 2019.

13 Amazon is missing from the ranking because Amazon's R&D expenditure is not shown separately. If there were data comparable to other companies, it would be assumed that Amazon would be in first place.

10 months after the original exit date and after several postponements, the United Kingdom left the European Union (EU) on January 31, 2020. This was the first time in its history that the EU lost a member. Despite the exit, the European rules for Great Britain will apply in a transitional phase until the end of 2020. They will be replaced by an agreement that is still to be negotiated from 2021. If no agreement is reached, exports are subject to the rules of the World Trade Organization. Regardless of the outcome of the negotiations, the exit is likely to have negative consequences for both sides. The United Kingdom is likely to be more severely affected, as almost half of British exports go to the EU, while exports to the United Kingdom are proportionally much smaller for the EU member states. The EU is losing weight and influence internationally. With Brexit it will shrink by almost 67 million inhabitants and its economic output will decrease by 2.5 trillion (trillion) euros.1 The article looks at the European Union in its currently valid composition, i.e. excluding Great Britain (EU-27). EU-28 codes supplement (for information purposes) the tables and graphs at a suitable point.

1 Figures from 2019 according to Eurostat. Further information: Debes, Sebastian / Kaiser, Monika: »Brexit? Great Britain's relations with the EU, Germany and Baden-Württemberg ”, in:“ Statistical monthly magazine Baden-Württemberg 4/2019 ”, pp. 29–40.

In addition to the existing economic risks such as global trade conflicts, Brexit or high debt ratios, especially in the corporate sector, there was a further downside risk for the global economy at the end of 2019. Originating in the Chinese province of Hubei, the novel corona virus known as COVID-19 spread worldwide. In addition to the health risks posed by the virus, the wave of infections, which has meanwhile been declared a pandemic, also affected economic activity to an unprecedented extent.

The economies are coming under pressure from two sides. On the one hand via the supply side. Due to the increased risk of infection or quarantine measures, people cannot work in the infected areas, which means that production has to be throttled. By temporarily closing schools and kindergartens, even uninfected employees are impaired in their daily work. But even if the employees of a company are spared the infection, production can get out of step due to a lack of preliminary products.

At the same time, demand is falling in important segments. In order to keep infections to a minimum, public life was reduced to a minimum ("social distancing"). This particularly affects companies that offer their services in "social consumption".2 In addition to the loss of sales, the costs for employees and other expenses remain constant, so that some companies are likely to be heavily burdened and partially threatened in their existence.

At the time of going to press for this article, it is still unclear how long the new type of corona virus will affect economic life. This depends on how much the virus is spreading in the individual countries and how quickly the economy recovers after the wave of infections.3 It is clear, however, that this effect will make the first half of 2020 significantly more negative than forecast weeks ago and that many growth estimates for 2020 as a whole will therefore also be lower.4

1 This includes, for example, hotels, trade fair operators, cinemas, restaurants, retail (except food), concert operators, hairdressers, etc.

2 As in the situation after the financial crisis, there is currently a discussion about how the economic recovery could turn out. This could take the form of a V (rapid return to the initial level), a U (gradual return to pre-crisis levels after stagnation) or an L (prolonged stagnation phase).

3 For example, the joint forecast predicts a GDP decline for Germany of 4.6% in 2020; See joint forecast: Economy in shock - financial policy holds against it. Munich, April 2020. In a scenario calculation, the Ifo Institute puts the growth loss in 2020 with a 2-month shutdown between 7.2 and 11.2 percentage points. After just 3 months, this increases to 10 to 20.6 percentage points; see Dorn, Florian et. al: The economic costs of the corona shutdown for Germany: a scenario calculation, in: ifo Schnelldienst preprint issue 4/2020.