Can US economy thrive as China rises?

The US economy retains top status, but Beijing's economic engine is shrewdly built – and set to propel China forward fast.

President Obama's recent State of the Union speech carried a blunt message: Continued US prosperity depends on figuring out how to stay ahead of other nations that are out to eat America's lunch.

It's a theme that Mr. Obama has continued to hammer over the past week, and he cites China as a prime challenger -- a nation that's now home to the world's fastest computer and largest private solar-research site.

When it comes to China, many Americans agree. Some 47 percent now see it as the world's leading economic power, according to a January poll by the Pew Research Center. Only 31 percent chose the United States.

So just how big an economic threat is China? Is this really a "Sputnik moment" for America, as the president said? The challenge to America is real, but it also shouldn't be exaggerated. The notion that China is already No. 1 is flatly wrong, most economists and Asia experts say.

"It's a gross misperception," says Robert Sutter, a China specialist at Georgetown University. China is "just not a dominant economy."

Measured in dollar value of output, the US economy is still more than twice the size of China's. And because the US population is about one-quarter that of China, this means the typical person in China has a living standard far below US norms.

If you had to pick a global economic superpower, it's still America.

China's manufacturing is also much less efficient, using far more energy than advanced nations do to produce a given product. And more than half of China's foreign trade, Professor Sutter says, is controlled by foreign firms operating there.

All that said, China is undeniably a force to be reckoned with. It appears to be just a matter of time before China does have the largest economy. Unlike the Soviet Union, which sent the Sputnik satellite into space and later saw its economy unravel, China has built its growing might on a blend of shrewd government guidance, home-grown entrepreneurial drive, and partnerships with the outside world.

China's growth rate isn't remarkable compared with that of other East Asian nations. But its huge population makes China more important – and its government has used that marketplace leverage to lure multinational firms and to arrange for the transfer of valuable know-how in joint ventures. That raises the prospect that China may catch up with the developed world faster than anyone expected.

"Those concerns are legitimate," says Matthew Slaughter, a Dartmouth College economist who specializes in trade issues. In many industries, from automobiles to aerospace, China's advance "has surprised business leaders [and US] government leaders."

According to a 2010 United Nations survey, China is the world's most popular destination for multinational corporations' investment in new factories and other facilities, while India and Brazil bumped the US from second place (in 2009) to fourth.

Little wonder that China feels able to push back against the Obama administration in some global forums.

But the rise of places like India and Brazil as investment magnets makes clear that America's competition is not just from China. The larger story is that the global economy is becoming multipolar rather than dominated by one superpower.

"It's a good thing when other countries are developing capabilities and their standards of living are going up," says Gary Pisano, a Harvard Business School expert on technology strategy. It creates new opportunities for the US – new export markets and imports that boost productivity or enhance the quality of life in the US.

Unlike competition between individual companies or sports teams, countries typically reap mutual benefits from trade, Professor Pisano says.

But some economists worry that other nations' rapid catch-up could come at America's expense, and even Pisano argues that the US needs policies to ensure its prosperity.

Obama sketched his own policy prescriptions in his Jan. 25 speech – a mix of proposals that include research funding, infrastructure support, education efforts, and reforms of taxes and immigration. But while many economists support those ideas, others call for different approaches, such as tougher trade policies with China or a fiscal austerity plan that might make America less beholden to China as a buyer of Treasury debt.

"The solutions are right here at home," says Joseph Quinlan, chief market strategist at US Trust – Bank of America Private Wealth Management.

A central theme of his new book, "The Last Economic Superpower," is that America can gain by coaxing forward the trend of globalization, and would be greatly harmed if US-China rivalry degenerated into an economic cold war.

The prescriptions that he and others offer in many ways echo those Obama proposed in his address. "The president's got it right, in terms of we need to invest more in the future," Mr. Quinlan says.

Topping Quinlan's list is better education and retraining of less-skilled workers, and grappling with America's dependence on foreign oil (a problem China shares).

Others emphasize the role that government can play by supporting basic research. And although the private sector excels at applied research, Pisano points to the Internet as an example where government-backed investment paid big dividends.

The list from economists and business groups goes on: Improve outdated infrastructure, reform the tax code to make America a more attractive place for multinational firms, welcome more highly trained immigrants.

Even some free-trade conservatives call for a tougher stand to protect US interests against China. Irwin Stelzer, a contributing editor of the Weekly Standard, argued recently that the US must keep closer watch on the transfer of technologies that China pushes for. He says a General Electric joint venture in avionics, which GE claims is nonmilitary, could well help the Chinese advance "the brains" of their military jets.

Despite all its challenges, the US still has considerable strengths, from its entrepreneurial tradition to a consumer culture that serves as a test bed for honing new products. The need, economists say, is to keep building on those strengths, so America remains a magnet for centers of innovation such as Silicon Valley.