The United States and China are the two largest economies and largest traders and among the top destinations for foreign investment in the world. But that’s where the economic similarities end.
Consider the latest results from the Global Competitiveness Index from the World Economic Forum, an independent, international, nongovernmental organization. The index looks at factors such as a country’s markets, human capital, quality of education, and intensity of competition. The United States beats China in every category. Overall, the United States is Number 1 and China is 28th. (Singapore came in second).
The United States also comes out ahead in the World Bank’s “Ease of Doing Business” index, where China ranked 78th out of 190 economies, 72 places behind the United States (6th).
The World Bank bases its ranking on factors including the ability to get credit, ease of starting a new business, and protections for minority investors. New Zealand came in first.
Both rankings help businesses decide where to invest and trade and can guide policymakers in shaping their economic strategies.
A government-controlled economy
The difficulty of doing business in China comes down to the Communist government’s dominant role in the economy, including top-down policies favoring Chinese businesses over foreign investors. That creates an unfair playing field for international businesses and distorts global markets. It can be compared to the more organic, bottom-up approach of the United States, which provides a fair playing field that allows for greater innovation.
Though China has made progress toward market-oriented policies in recent decades, the government is still heavily involved in the economy through its dominant network of state-owned enterprises, its directives for channeling investments through state-run banks, and opaque regulations that discriminate against foreign firms.
For example, as part of China’s “Made in China 2025” industrial policy, the government directs investments into high-tech industries with the goal of growing local firms at the expense of international competitors. Through this policy, Chinese companies get an unfair advantage in accessing credit, securing business licenses, bidding on contracts and acquiring resources.
In contrast, the U.S. government generally does not own stakes in important businesses and the U.S. government does not discriminate between local and foreign business. It has an efficient, privately operated capital market.
As these rankings show, making the kinds of reforms that would put China back on the path to a true market economy would not only be fairer for the world, but also benefit China itself.