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America's New Competition

By Peter Coy, with Michael Arndt in Chicago

How the U.S. could beat the gloomy projections.

Take a ruler out of your desk drawer, lay it down on top of some economic trend graphs, and extend the lines out to 2015. What you're seeing is one vision of what lies ahead for the U.S. as China and India rise, and it ain't pretty. Three million U.S. manufacturing jobs have been lost in the past half-decade, so by the ruler method 6 million more will go poof in the coming 10 years. The U.S. merchandise trade deficit with China has been growing 20% a year, so the ruler says it should surpass a trillion bucks by 2015. By straight-line projection, China stands to trounce Detroit in autos and Silicon Valley in infotech, while India captures software and high finance. That would leave Americans to export raw materials, colony-style, and give each other haircuts. No wonder Paul Craig Roberts, a senior fellow at the conservative Hoover Institution, says that the U.S. is heading toward becoming a "Third World country."

Now put away the ruler, because real life rarely goes in straight lines for long. Remember the predictions about Japan's coming dominance in the 1980s? Or how Britain was called the sick man of Europe in the 1970s? Again today, the world economy may be on the verge of changes that will twist current patterns beyond recognition.

The rise of China and India will be better for the U.S. than the direst predictions hold -- yet worse than the Panglossian projections of boosters in America and Asia. On the upside, American consumers will clearly benefit from the availability of inexpensive goods and services. American shareholders of well-positioned multinationals will enjoy higher profits. And Americans employed in successful U.S. export sectors will benefit because China and India will buy more Western-style goods and services -- from cosmetics to jets to banking -- as they get richer and increase their consumption.

On the downside, life will be tough for those who are less skilled, less educated, and less able to adapt as the world changes around them. Even many highly skilled American service workers, from programmers to financial analysts, will suffer as low-cost Asian giants target U.S.-dominated businesses. "The individuals who are able to take advantage of the new opportunities do extremely well. Those who are poorly situated get hammered," sums up Gordon H. Hanson, an economist at the University of California at San Diego.

While it's impossible to say exactly who will feel the blow, it would be a mistake to assume that the trends of recent years will persist unchanged. For one thing, the U.S. won't keep producing less than it consumes forever. The winds of change blew this spring when the U.S. trade deficit shrank in the April-June quarter. That boosted GDP growth by 1.6 percentage points, trade's biggest contribution to economic growth since 1996. In coming years, India and China will consume more goods and services from the U.S. and elsewhere -- both because they will be richer and because they will shift somewhat from export-led growth toward meeting serious domestic needs. In China, the shift will mean more money for health care, housing, and the environment, and less for steel and chemical plants. China's health-care spending per dollar of GDP is only one-third that of the U.S., so there's lots of room for improvement. India, too, will divert more of its newfound wealth toward uplifting its poor. This will create opportunities to sell American products and services.

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