A few years ago, a representative of the UAE told CNN that he believed the UAE was a more important market than China or India because the total buying power of the UAE was greater. The average family income in the UAE is over $18,000 USD per month! Making it one of the highest in the world. On the surface, it made sense that the country with the highest per capita income would be the most important market. So, he had a point. But, with a population of only 7.5 million, no matter how wealthy they are, they will only buy so many widgets per person.

Most economists and business people continue to focus on China and India as the emerging gold-mine markets because of the huge populations of those countries. Parallel to predictions about the rice of China and India is the decline of the US as the world’s number one economic power.

Believe it or not, with all of the unemployment and general slippage in the US since the beginning of the world economic crisis, the IMF, the World Bank and CIA World Fact Book all still rate the US as the world’s number one economic power, with China number two and Canada as number 14. Nearly all of the rating agencies and companies which produce economic data, however, generally have an entry with an asterisk next to it stating that the EU is actually a larger economic power than the US alone, but they don’t seem to feel that the EU is a unified enough entity to remove Germany, Netherlands, and UK from the comparisons and replace them with a single entry for EU.

If we look at the buying power of a nation, we can see the average disposable income of people in that country; plus look at the size of the population, and you will see that the US is still way ahead.

The population of Canada is less than 35 million, with an average income of $68,000 per family. It was impressive to see that the average income in Canada is now quite a bit higher than in the US, and that the Canadian dollar is now worth slightly more than the US dollar.

The US population is over 311 million, with an average income of $46,300 USD.

The UK has a population of 62.2 million with an average income of $63,000 USD.

The population of china is 1.333 billion with an average income of $4,260 USD per year.

Making sense of these numbers:

Canada’s population is about 1/9 the size of the US. So the average Canadian would have to earn 10 times the average American for Canada to be a larger economic power. But the average Canadian earns about 50% more than the average American, meaning that America is still the larger, more important market for export countries, such as China. But more on that later.

The UK has a population of 1/5 the size of US. To make the UK richer, they would have to have an average income of 5 times the US, but they only have an average of 50% more.

China’s population is a bit more than 4 times the US population. So, the average Chinese would only have to earn about a quarter as much as the average American for China to be richer. But the average Chinese earns about 1/10 as much as the average American, making China much poorer.

If we use total trade with China as an indicator of a country as an economic power, we can see that the US is still the largest trading partner of China.

Wikipedia has a table with the fifteen largest Chinese partners with their total trade (sum of imports and exports) for 2009. What you will notice is that the US has a negative trade balance with China, which means that the US buys much more from China than it sells to China. When the US economy tanks, the US stops buying from China and China loses income. It is the continued importance of the US market which causes a hiccup in the US economy to spread to the whole world.

Canada is a primary example of a country which is able to provide a high quality of life for its citizens but because of its lack of size does not become an economic super power. You will notice that even Thailand, which is the world’s 90th economy, trades more with China than Canada does.

For the time being, the US still seems to be the economic power. In addition to Canada, the Netherlands deserves great respect for the incredible economic power that they have achieved with such a small population.

As for China, the strength of the Chinese economy has been in manufacturing products and selling them to more developed countries. To keep China as the number one destination for the export of jobs and manufacturing, the Chinese government has kept wages very low, while refusing to develop China’s internal economy. Most experts maintain that China will eventually have to raise wages and standards of living, and when that happens, the cost of manufacturing in China will go up and China may lose some of its edge.

Reuters, The World Bank, The International Monetary Fund, and the UN Human Development Index…. I find that most experts attributed the US effect on the Chinese economy to such issues as the US trade imbalance, where China was completely dependent on the US as a customer; the fact that China has been buying up US debt; and the fact that China’s hard currency reserves are stored in US (not Canadian) dollars.

China holds 16% or 1.15 billion dollars of US foreign debt, making it the largest holder of US foreign debt. This debt is carried as an asset on China’s books and is in part used to support the value of the RMB, the Chinese Yuen currency. If the US government were to be deemed insolvent, the value of this debt would drop to zero on China’s books, and the value of the Yuen would drop.

When the US economy drops significantly, there is the risk of US debt being decreased in rating by the rating agencies, which then decreases the value of the debt. Once again, this fact of China’s ownership of US debt would explain why a dip in the US economy adversely effected China’s economy .

Another reason why China’s economy is very much dependent on the solvency or general health of the US economy is the US/China trade deficit.

In the month of March 2012, the US imported $34.3 million worth of goods from China, but exported only $8.3 million worth of goods to China. As the US is a customer nation, when your customer loses his income, he stops buying from you. And this is one of the reasons that the US economic crisis affected China.

Another reason why a dip in the US currency adversely affects China is because China’s hard currency reserves or foreign exchange currency reserves are held largely in US dollars. As of 2011, China was holding $3.18 billion in foreign currency reserves. This currency is used to prop up the Yuen. If the US dollar drops, then China has less value propping up its currency.