David Rubenstein: U.S. is losing its competitive edge

October 1, 2010: 9:23 AM ET

The Carlyle Group co-founder says the U.S. threatens to fall behind China, thanks to our growing deficit and government debt. Meanwhile, Treasury Secretary Tim Geithner downplays the threat of a looming trade war. China hedge fund

Ever since China's economy surpassed Japan's this past summer, speculation has escalated over when the country might take over the United States as the world's largest. The estimate has ranged from 2030 to 2035, the latter date being the one Carlyle Group co-founder David Rubenstein highlighted at a forum Wednesday in Washington DC of some of the day's biggest newsmakers.

Rubenstein says the U.S. faces the harsh possibility of losing some of its competitive edge amid the rapid rise of emerging economics – in particular, China. The U.S. overwhelmingly dominates the private equity and venture capital industries worldwide, the prominent investor notes. China and other emerging economies have become eager players and companies such as private equity firm Carlyle have increasingly been spending more time in these regions. To date, Carlyle has invested $3 billion in China, he says.

But several pressing factors are threatening America's competitive edge. Rubenstein lists huge deficits and government debt, high unemployment, and widening income disparities.

His remarks echo what other business executives have said recently.  In a report released by the World Economic Forum in August, the U.S. slipped two notches down the ranks of competitive economies – falling behind Sweden and Singapore, which rose to the No. 2 and No. 3 spots, respectively. Switzerland took the top spot.

The report, which combines economic data and a survey of more than 13,500 business executives, commended the U.S. for its innovation, excellent universities and flexible labor market. But what has hurt America's competitiveness, in particular, is the country's huge deficits and rising government debt. While China ranked far below the U.S. at No. 27, the Asian powerhouse outperformed all major developing economies.

"We have to recognize as Americans that we're not going to be as dominant a force in the global economy as we have been," Rubenstein says, adding that unless the U.S. lowers its debts and deficits, improves joblessness and narrow widening income gaps, future generations will have a lower quality and less affluent lifestyle.

Facing the inevitable decline

Rubenstein couldn't have been more straight-to-the point about the depths of America's economic turmoil. But perhaps more important, he points out that it's virtually inevitable that China and even India might eventually surpass the U.S. economy – simply because they're just bigger, not necessarily richer.

As far as income per capita, America boasted $42,240 last year, while Japan came close at $37,800. For its size, China has made incredible progress in raising individual incomes. However, the country lags far behind at just under $3,600. Even if China tops America's economy, income per capita will still trail far behind.

And while America's economic woes are deep, China must overcome a plethora of issues. This include everything from a shortage of workers in their prime working age of 20 to 35-year-olds, as well as escalating costs of growth as demand rises for cleaner air and water. Also, China's leaders know all too well its export-led economy is unsustainable without enacting more policies, such as better health care, to encourage its citizens to save less and consume more.

And the latest concern for China is what appears to be a trade and currency war escalating with the U.S. On Wednesday, the House of Representatives passed legislation that would essentially allow the U.S. to impose tariffs with the aim of helping American companies compete. This comes amid charges from lawmakers who argue China's currency is unfairly cheap.

"We're not going to have a trade war, we're not going to have a currency war," says U.S. Treasury Secretary Timothy Geithner during an interview with New York Times reporter David Leonhardt at the Washington forum.  Though Geithner shunned such characterizations of the legislation, he added that doesn't necessarily mean he disagrees with it.

No doubt China and the U.S. are increasingly going head to head. And while China may very well land the top spot by 2035, each country faces incredible economic hurdles. How China and the U.S. deals with them will not just impact their own countries, but also each other's.

See also:

Carlyle's Rubenstein: Hey, put your hand down

China to dominate in 2030? Maybe not

House passes bill aimed at Chinese currency

A Chinese stake in GM? Bravo!

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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