For that, a more relevant consideration is, for example, how much money China can contribute to the International Monetary Fund and other multilateral agencies, and how much voting power it should get in return. Another consideration is the view from other countries with rival claims in the South China Sea: how many ships can China buy, build, and deploy? For these and other geopolitical questions, it is more useful to rely on China’s GDP at current exchange rates. The issue isn’t how many haircuts Chinese consumers can buy, but what the RMB can buy on world markets.
To be sure, some point out that the IMF itself presents GDP in PPP terms for certain very limited purposes in its World Economic Outlook. But the IMF takes no stand on the question of which economy is bigger.
The closest it comes to offering an official position is with its formula guiding the assignment of quota shares to member countries. Here, the measurement of GDP is weighted, with 60% counted at market exchange rates and only 40% at PPP rates. (The GDP index accounts for half of the total formula; other measures, such as trade openness, comprise the other half.)
The IMF takes quota sizes seriously. If China were to attain a higher quota than the US, for example, the Fund’s Articles of Agreement would require it to move its headquarters from Washington, DC, to Beijing.
For now, China has far less clout than the US at the IMF. But under President Donald Trump, the US is surrendering its influence in multilateral organizations such as the World Trade Organization, NATO, and the World Health Organization (even in the midst of a pandemic). It should surprise no one that China is filling the vacuum.
The US does not lack the economic or financial power to sustain its 75-year leadership of the international order. But under Trump, it has forgotten why that leadership position is important, and is flushing its power, and its reputation, down the drain.
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers.