For decades, gross domestic product (GDP) growth has been the default measure of economic strength among economists, policymakers, and political commentators. On its face, that makes sense: growth is desirable for any nation. But as Americans increasingly register their discontent with the state of the U.S. economy, those who point out the inadequacy of GDP as a primary benchmark of economic health are increasingly validated. Our economic relationship with China remains a primary example.

Comparing the United States and China, one finds competing models of growth: the former’s driven by consumption and the latter’s driven by investment and exports. These models have forged an unhealthy, codependent relationship between the world’s two largest economies, bound by an annual trillion-dollar U.S. trade deficit and trillion-dollar Chinese surplus, driven primarily by the bilateral trade imbalance. These imbalances are further supported by unsustainable and distortive government spending in both nations. If the United States seeks to maintain healthy and sustainable growth and spending levels in the years ahead, trade levels must be brought into balance. 

Measuring GDP

It is helpful to revisit what GDP is meant to measure. The International Monetary Fund defines GDP as “the monetary value of final goods and services…produced in a country in a given period of time.” Taking each component of the term separately, “gross” means total, “domestic” means the figure only measures what is produced within a nation’s borders, and “product” means the figure measures production (as opposed to consumption or spending). The number also includes direct government purchases and investments in things like defense and education. 

The standard formula for gross domestic product is:
GDP = C (consumption) + I (investment) + G (government spending)  + [X (exports) – M (imports)] (net exports)

Notice that exports are counted toward GDP but imports are not. While one could read this to mean imports subtract from GDP, it is important to note that imports are initially captured under “Consumption” as consumers purchase imports and under “Investment” as businesses add imports to their inventories and capital stock before they are subtracted out. GDP is calculated this way because it is easier for the government to track these numbers holistically and subtract imports at the end rather than try to exclude imports from consumption and investment statistics at the point of purchase. But while imports neither contribute nor subtract from GDP directly, trade imbalances do substantially affect growth indirectly.

Rival Growth Models

Understanding what GDP measures, it is illustrative to compare which components fuel growth in the world’s two largest economies. 

The United States increasingly relies on government spending to boost GDP. From 1800 to 1930, peacetime spending across all levels of government rarely surpassed 3% of GDP. The exceptions of the Civil War and World War I saw government spending spike to 13.8% and 24.2%, respectively, before returning to previous levels of under 3%. After the Great Depression, government spending skyrocketed, first to 19.4% before World War II and then to a high of 36.6% during the war. Post-war, government spending returned to 21% of GDP before rising to 35% in the mid-1970s, and it has largely remained since. (Government spending was at 36.3% of GDP in 2023, with major spikes up to 41.4% and 44.5% during the Great Recession and COVID pandemic in 2008 and 2020, up from a low of 31.7% in 2000.)

Not all government spending is directly counted toward GDP. A significant portion of government spending is made up of transfer payments, which are in turn put either toward consumption or investment by recipients of those transfers. (It would therefore be double counting if GDP included transfers under government spending and consumption or investment.) Interest paid on the national debt—another line item in the government’s budget—is also not counted toward GDP, as it does not reflect any production. 

Excluding transfers and interest, government spending directly contributes to 17.1% of U.S. GDP. Comparing that to the topline spending figure of 36.3%, one can see that roughly half of all government spending is made up of transfer payments, which are then reflected in either consumption or investment figures. Thus GDP tells us little about whether consumption and investment levels are “market-driven” or government-driven. In the short term, deficit spending—whether driven by stimulus or lower taxes—provides additional money for consumption, which raises GDP. But in the long term, too much deficit spending can crowd out private investment and drive up inflation, causing interest rates and ultimately payments on the national debt to rise. For reference, the U.S. interest payment on the debt was equivalent to 3.9% of GDP in 2024 and larger than the U.S. military budget.

China’s topline government spending figures are remarkably similar to the United States’. In 2023, China’s overall government spending was equal to 37.2% of GDP, up from a low of 11.1% in the mid-1990s. Of that 37.2%, a similar portion, 16.5%, directly contributed to GDP, but China’s interest payments were equal to only 0.9% of its GDP.

But while their topline spending numbers may look the same, the flow of that spending looks very different. This is reflected in the other components of GDP. Consumption makes up roughly 68% of GDP in the United States compared to only 39% in China. Investment, in comparison, makes up only 18% of GDP in the U.S. versus 40% in China. And where net exports contribute nothing to U.S. GDP, with its trade deficit at negative $918 billion last year (3.1% of GDP), China ran a global trade surplus of $992 billion in 2024, which contributed 5.6% to its GDP. 

These disparities illustrate a stark contrast in economic models. While both nations have similar levels of government spending, China directs that funding to industrial investment and exports, while U.S. spending largely fuels consumption. This has allowed China to capture world manufacturing market share at the expense of the United States. In global terms, the U.S. share of manufacturing dropped from 23% in 1990 to 16% today and is expected to drop further to 11% by 2030. In contrast, China has captured world market share in many industries with its overall global share of manufacturing rising from 3% in 1990 to 32% today and a projected 45% by 2030.

Rival Investment Models

Wider economic policy reinforces these priorities in the private sectors of both economies. In the United States, market demand and profit motive, largely driven by corporate shareholders, drive investment. This means that investments generally don’t happen unless an investor can expect to make a return that covers the principal and enough profit to compensate for the risk of the investment. 

As Michael Pettis argues in a piece for the Carnegie Endowment, China operates on a very different model. Rather than markets driving investment, China sets its annual GDP target every year and meets it by any investments necessary through government direction and intervention. This often means investment happens regardless of domestic demand and regardless of whether the underlying investments are profitable. In recent years, China has directed much of this investment toward supporting its export industries.

Different Models, Same Drag on Budgets and the Middle Class

China’s model has allowed it to capture a larger world market share in several key industries, while the United States’ model has fueled unprecedented levels of household consumption. While these outcomes may serve the political objectives of leaders in both nations, neither model is sustainable and their benefits to the larger population of each nation remain questionable.

Looking first at the United States, the “consume first and ask questions later” approach has been an abysmal failure. Opening its economy to nations like China, who subsidize production, has resulted in a $1 trillion annual trade deficit and hollowed out U.S industry. This has resulted in industrial production declining 10% between 2000 and 2020 (after nearly doubling from 1980-2000) and manufacturing productivity failing to recover after the Great Recession. These trends followed the “China Shock” that accelerated the decline of manufacturing jobs after 2001, when China was granted permanent normal trade relations with the United States.

These trends create a drag on overall U.S. growth. According to economist Nicholas Kaldor’s “growth laws,” the manufacturing sector generally drives greater gains in productivity than the services sector. A March 2025 report by the United Nations International Development Organization further found manufacturing industries have a greater multiplier effect on jobs and economic development in the rest of the economy, creating wider economic ecosystems. “Globally,” the report states, “2.2 jobs are created in other sectors for every job directly created in manufacturing… These multipliers double those in non-manufacturing industries, and are three times higher than the average multiplier of modern services.” 

Trade deficits also affect GDP through export substitution, where consumers buy imports instead of domestically produced goods. If overall demand for U.S. goods falls and fewer U.S. goods are produced, GDP falls. Economists may counter that cheaper inputs can positively contribute to GDP by lowering the price and increasing the sale of domestically produced final goods, but this is only true and sustainable in the aggregate if trade is balanced. The value of imported inputs is still subtracted when calculating GDP even if they are used for final goods that are assembled or finished in the United States. If the United States still runs a trade deficit, the value added to final goods domestically (reflected in GDP) is still lower than the value added from abroad through the substitution of foreign inputs or final goods (not included in GDP). 

There also may be cases where shortages of foreign inputs would stop or significantly lower production, but that is more an argument to secure and diversify supply chains than to fuel growth with cheaper inputs from abroad while trade remains unbalanced. 

For these reasons, trade deficits have created a drag on overall U.S. economic growth, which has failed to reach 3% since 2005 (with the exception of the government-spending-fueled COVID recovery in 2021). Of the growth the United States has seen, much has been sustained through consumption fueled by government deficit spending and loss of general wealth. To pay for the $1 trillion in goods it doesn’t produce, the United States must either issue debt or sell off assets. 

This has directly resulted in the United States amassing a negative $26 trillion net foreign asset position, meaning foreign entities now own over $26 trillion more in U.S. assets than U.S. entities own in foreign assets. (Despite their economic significance, asset transfers are not reflected in GDP because they don’t correspond to new production, though fees for processing such transactions are). Indirectly, the U.S. trade deficit has contributed to the $36 trillion national debt as political demand for consumption has outpaced private sector growth’s ability to sustain it for much of the middle class. That debt will continue to be a drag on GDP as interest payments continue to grow as a percentage of overall spending.

That isn’t to suggest the Chinese alternative doesn’t face its own severe problems. In the Chinese economy, investment comes at the expense of consumption. Given the opacity of the Chinese economy and the prevalence of state-owned and -directed enterprises, it is hard to trace how much “investment” is driven by the private sector versus the government, but the aggregate number is sufficient to consider. If consumption in China represents only 39% of GDP versus 68% in the United States, and investment 41% of GDP in China versus only 18% in the United States, it is clear that China directs more of its economy toward production at the expense of consumers and households. This concentrates more power in the hands of the Chinese Communist Party and prevents the formation of a middle class in China capable of asserting its economic interests.

While China’s state-driven investment strategy has been successful in capturing world market share in key industries, it now faces significant headwinds. Nations like the United States, which have previously been willing to absorb China’s subsidized exports, are waking up to the threat those exports pose to their jobs, industries, and economic security. Misallocated investments have also yielded great instability in China’s property sector and saddled its local governments with unsustainable levels of debt. China’s debt-to-GDP ratio, based on a measure called “total social financing” preferred by China analysts, now stands at a whopping 303%, with debt increasing at roughly twice the rate of growth last year. With fewer sectors in which to make productive investments and more pushback from its trading partners, China is now finding it takes increasing levels of debt-fueled investment to generate the same levels of GDP growth achieved in previous years. 

The Bottom Line

The relationship between trade balances and GDP growth is complex but significant. Nations like China, whose growth is fueled by a significant trade surplus, achieve growth through predatory and inefficient government subsidies at the expense of their trade partners and consumers. Nations like the United States, whose growth must overcome a significant trade deficit, often rely on government support for displaced workers and face inflated asset and services prices rather than ever-improving living standards. Both strategies are likely to prove unsustainable in the long run due to runaway debt levels, wasteful investments, political blowback, or retaliation by trading partners. If the world’s two largest economies are to continue growing at a healthy and sustainable rate, it would benefit both to better balance consumption, investment, and overall trade levels. With these larger dynamics in mind, it would also benefit economists and commentators to pay more attention to the sustainability of a nation’s growth strategy, informed by trade and budget deficits, rather than static, low-resolution pictures drawn from topline GDP figures.