The great China challenge: America's G7 deputy makes the case that when China succeeds, America succeeds.

• Author: McCormick, David H.

The United States and China are global economic leaders: they have accounted for over 40 percent of total global economic growth in the past five years, and each is an important market for the other. For example, U.S. exports of services to China support some 37,000 jobs in high-paying, high-productivity sectors of the U.S. economy. And imports from China provide U.S. consumers and companies with greater consumer choices and access to more efficient global supply chains. For China, access to the U.S. and international markets--and openness to international investment--has helped to create a world-class export sector and to drive the spectacular rates of economic growth that have turned this country into the global economic leader it is today.

But China's economy has changed fundamentally over the past thirty, and even ten years, and the Chinese now face a set of new and different challenges in sustaining future economic growth. The growth model that has transformed China from a largely homogeneous, agricultural economy into a dynamic, increasingly technologically sophisticated economy has been hugely successful to this point. But some of the policies developed for a far different China are now responsible for the buildup of large and rising imbalances.

China's most senior leaders have clearly identified these imbalances. They include imbalances in growth between rural and urban areas, between the coast and the interior, between economic and social advancement, between reliance on internal and external demand, between rich and poor households, and between economic development and environmental protection.

Based on China's current growth model, these challenges are likely to grow. China's growth model for the past several decades has featured high levels of investment in physical inputs to production, such as plants for producing manufacturing exports, but has done comparatively less to foster innovation, and the development of deep and competitive markets. The current growth model has served China well to this point, but it is now exacerbating some of the challenges in achieving balanced growth.

First, growth has been increasingly energy-intensive and environmentally unfriendly despite Chinese leaders' efforts to strengthen and enforce environmental regulations. Since 2001, the ratio of growth in energy demand to GDP growth in China--a good measure of the energy-intensity of growth--has tripled relative to levels of the previous two decades, putting more pressure on energy supply and...