Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It

The economic relationship between China and the United States is the defining issue of our day. While debates over health care are vital to American society, and while challenges ranging from Iran to Afghanistan to North Korea are real, nothing will determine the arc of the coming decades -- or will shape domestic life and prosperity in the United States -- more than the emergence of China as a global economic superpower unrivaled except by America.

The rise of China is hardly a secret, but because it is a complex economic that is constantly evolving, it gets less attention than hot-button issues. Absent a real crisis between the two, the relationship is more about the flow of capital and the nature of global business than it is about heated battles inside the Beltway or on Main Street. And while the rise of China and America's increased dependency on Chinese loans to fund its deficits certainly generates anxiety, it's mostly amorphous barring some specific issue to focus it.

How that relationship came to be is the subject of my new book, Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It. While this economic fusion has taken more than two decades to evolve, with the crisis of the past year, it has become both a tighter embrace and one more fraught with tension. It's to the credit of both governments -- for now -- that those tensions have not boiled over.

For their part, the Chinese are concerned about the viability of the American economic system and about the long-term value of their more than $1 trillion of investments in American bonds. They are also dependent on the market even a recession-mired America offers, with exports to the United States still near $300 billion a year. Americans are worried about the effect of lower-cost Chinese labor on U.S. jobs, even though most of the lost jobs were lost long ago and have as much to do with the corrosive effects of technology on labor as they do with cheap production in China. Meanwhile, China offers turbo-charged growth for American companies, as the Chinese government turns to companies like Caterpillar and GE to help with the industrial build-out and as Chinese consumers buy more goods -- even a bankrupt GM sold 1.6 million cars in China this year, more than in the United States.

But tripwires abound. Yesterday, the Treasury submitted one of its many required reports to Congress, this one on currency and the Chinese currency especially. The Treasury, Secretary Geithner and by extension the Obama administration decided not to label China a currency manipulator, though the report did express serious concerns that the value of the Chinese currency pegged to the dollar left it undervalued and hence responsible for continued global imbalances.

These reports are dry in nature and are nothing if not wonky. But make no mistake: this was a delicate decision and a consequential one. If the Obama administration had labeled China a manipulator, the next step would be automatic sanctions. That in turn might have generated a domino effect of epic proportions. And given how entwined the U.S. and Chinese economies have become, any negative ripples threaten to halt what is for now a very delicate and incomplete global economic recovery.

For now, the relationship between the two economies is symbiotic, and is providing a degree of stability to both societies. In the absence of Chinese money, the Obama administration could not be spending its way out of recession, and without American companies operating in China and without Americans purchasing Chinese goods, China wouldn't have the money to lend and spend. But no country likes to see its sovereignty eroded and its ability to be master of its own fate undermined -- and that is precisely what the economic relationship between the China and the United States does to their respective governments. National sentiment in both countries is also strongly suspicious, and that is likely to intensify.

But for now and for many years to come, we are joined at the hip, China and the United States, and how that relationship is managed by both will determine whether the world ahead is one of increased prosperity or ever-more conflict between winners and losers, between haves and have-nots, and between powers on the rise and powers on the decline.

 

 

Follow Zachary Karabell on Twitter: www.twitter.com/zacharykarabell

Comments

[nexxtep54]

You can't let the other team borrow your play book and then complain when you lose the game. China, India and Pakistan are all up-and-coming economies relatively close geographically and will soon produce a billion middle class consumers. Do we think they will need our market in future years.

[Nakona]

Strange how left media always frame this issue in this context - when clearly the architect of this arrangement is corporate America itself. I guess we are to believe (hope we believe) that it is just some strange morphing of economic circumstances.

The patent exaggeration of Chinese held American debt perpetuates this propaganda and creates the hype. They own $1 trillion of the "Foreign Held Debt" (which is a part of the Public Held Debt), when the fact of the matter is that US pensions/401Ks own (owned) even more at $1.4 trillion.

But now that they have shifted the weighting, China can now officially say they hold the most "Public Held US Debt."- and we can all officially freak out. No One ever made any fuss about the Japanese, Germans, and English close on their heels when it was at $800Billion earlier this year ( this years military budgeting alone is over $700 Billion).

They wanna do business with us and participate in exploiting our population as a market "in a symbiotic relationship" - they need to ante up and buy shares.

[Nakona]

Too bad Obama didn't let them close GM and move its' assets to China.

[khanti]

The problem is not about China affecting the US ecomomy. US products had long out priced itself in the International market. While US quality is the main stay of US products other countries like South Koea and Japan have caught up with their quality improvements. In the aviation industries Japan and S. Korea definitey lags behind but there are plenty of competition fron Europe and Russia.
From heavy equpiments to automoblie Japan and South Korea are the tops now in the Asian market. Their brave forage into the potential China market have paid dividend. There are also affected by the downturn but their companies manage to survive from bussiness in China. US products cater for the domestic market only due to the huge buying power of the locals. South Korea, Japan and Taiwan all had help from the US to kick start their economy and their product qualities initially were poor limited to copying but over the years they care to listen to their customer's complain and have made vast improvement since then.
China will also learn from complains and emerge in the future. I think the rest of the consumer World will enjoy and benefit from the competitions among these economic Giants or Dragons. I am not going to complain about cheaper quality foreign products are you? In the mean time I will avoid foodstuffs imported from China. Watch out for India as the next emerging economy. You won't be surprise to find made in India label soon.

[Ergon]

The Chinese don't quite see it the way you do, hence the Shanghai Cooperative Organisation, to coordinate an economic agreement, without America.

[den1953]

If America don't soon get it's arms around this substandard materials shipped to our country ie the drywall & lead paint we will be all dead in a few years, it is time we make our on things to save our country!

[shanghaislim]

Like Ground Beef......­..Strawber­ries......­...Spinach­..........­Peanuts???­??

Hummers...­........Ha­nd Guns......­.......???­??

Definitely SAVING America.

[khanti]

It is interesting to see how a deperciatng US Dollar will affect China which will happen. US export will increase for sure and if it falls low enough, there is a possibilty to compete with Japanese products Internationally.

[HMDMSR]

There is enough slack in China to produce everything the US and Japan make. Both American and Japanese capitalists will be more than happy to build all their new factories in China, or India, if that's what it takes to improve profitability.

[shanghaislim]

Even Taiwan builds all their factories in China?????­??????????

[dobberdoss]

I put it too you mr Karabell that the US is bankrupt and is keeping the world form "prosperity"? I also put it too you that China will go down with them eventually when the US IOU's get to much for even them to bare. Then we will see a world with real prosperity based on living on reality, not credit.

[HMDMSR]

The world's citizens must initiate a debt-repudiation plan. This plan should be organized by an international association of working folks. This will require a new political organization that will exist outside of the current institutions of neoliberalism--the IMF, World Bank, NAFTA, GATT. The neoliberal project will have to be mercilessly torn apart, and replaced by what amounts to national planning councils. Perhaps the U.N. could participate in this project, after the five permanent members of the Security Council have become impermanent members of such.

[S1m0n]

Hey, welcome to the peculiar humiliation of what 70 years of british politicians have called it's 'special relationship' with the US; a relationship of significance only on their side of the pond.

[Viper]

All of ASIA including China buy but 10 percent of our exports... While for every 4 containers they ship here we ship less than one back.

And much of our exports are raw material, scrap and agriculture and they ship back manufactured goods, high value labor added items.

There are no positive stats for the U.S. since 1980 that I can come up with since the outsourcing of MFG to ASIA began and now its high tech.

You can quote sales by CAT.. yes .. but the condition of those sales as with aircraft and cars is that they also move their plants there within so many years which they have done. China has a make it their policy (as does the rest of the world alonmg with a national industrial policy) and effectively gets a 50% interest in the business. After Boeing moved operations there and trained workers... China set up its own Government Airplane MFG company. CAT sales there are infact mostly of high end products made in Germany, not the U.S..

Pls note it is the Chinese with the huge trade surplus and the money to loan us to buy more of their products. We are the worlds largest debtor nation with declining wages. We cant place 75% of college graduates in science and engineering. Our infrastructure is crumbling.

Regards

[OldHick]

Outsourcing companies were thinking short term - and now it is the long term. They had record profits last year, and large drops in profits this year. GE profits are down 40% in the third quarter, compared with last year. They gambled that 1) Market in China would pick up. Never did, and traditionally does not , and 2) Somehow miraculously the US economy would recover from unemployment - it has not.

OOOOOOOOOO­OOoooooooo­ooooOOOooo­OOOooo

[siegfried]

How can the U.S. economy recover? All the jobs have been shipped to China and India.

[davidly]

Totalitarian Capitalism: Too big to fail.

[William50]

China needs America to stay weak economically, you then buy from China, and socially in the idea that we are in danger. Both facts are wrong. You are the key to America's future and China and our own government i afraid of you.
First we can put billions of dollars back into the US markets in less then one month. If the O'man declared that we were in a financial hardship and stated that all home loans would be cut in half and all principal amounts on the homes would be cut by thirty three percent across the nation and fifty percent in the hardest hit areas, the average home owner would have between three hundred and six hundred extra dollars every month. Ten percent have been foreclosed, just think what the other 90% would have each month......Second instead of giving money to banks give each state a billion for new investments in real business/m­anufacturi­ng. This would be to start any company that would produce anything that has been shipped over seas.
Now we have billions in real money and new jobs to boot!
middleamerican2010
Casey

[yaznaioutibia]

Youl left out one large issue and that is the US military. Our military is unrivaled and no country is within 50 years of matching its global dominance. The US military and particularly the US Navy is the backbone of free trade. Without it, every 3rd rate failing State and others would tie up in knots the vital life lines that support the global economy. I am not and have never been a military person, although I admire the US military immensely as one of the best institutions that the world has evern known and I am a progressive liberal. But China will die were it not for the US military and that essentially goes for the rest of the world. Free trade would not exist.

[au6553]

What happens when the U.S. dollar suffers from rapid inflation because foreign governments won't purchase our t-bills, and the only way we can service our debts is to print more money? The U.S. dollar becomes worth far less, soldiers desert, and the U.S. can't afford to provide the petroleum necessary to fuel its war machines. You can't be a military superpower without being an economic superpower.

[Viper]

You are kidding!. Per The head Air Force general.. America is so weak now we cant make our own weapons.

Yes we spend 20 times more than any one else does on Military. Thats a negative not a plus. And to spend that much we have to borrow money from Communist China. If they dont loan us money next week.. our economy, whats left collapses and your Navy is in dry dock! You think being the worlds largest debtor nation with the largtest trade deficts and currecny that under BUSH was devalued by more than 50%, make sus strong?

Pls tell me how China depends on our Navy or how it helps us get better trade deals?

Military is an insurance policy... but it is one of the worst job creators , low mulitpliers effects you can waste money on... We pour out 200 billion on 700 foreign basis .. thats money that flows out of the U.S. economy!

China is laughing.. they dont need a military to fight us.. they just dont send us money and we close down in weeks.. And by the way our trade deficits with them each years pays for their entire military budget 5 times over.

Get a glue...

Regards

[seawolf77]

Our military , with rare exception nuclear powered subs and carriers to be precise, is completely and unequivocally dependent on petroleum. In fact the DOD is the sigle largest consuming entity of petroleum produts in the world. When petroleum products increase in price the ability of the US military to exercise hegemony will diminish exponentially.

[phlashba]

Thanks a lot Wal-Mart. You and the American "Consumer" (of cheaply made crap) have destroyed the world economy and now China has us all by the short hairs.

[edejan]

How can you blame Wal-Mart? Why put American citizens down for buying cheap as our incomes consistently dwindled decade after decade? This whole pickle is the result of the same forces which have destroyed our economy - Wall Street and banking greed and lawlessness. The entire culture of corruption and greed which have tied the destiny of our country to our landlords - China.

[Viper]

Its a chicken and egg question. Your salaires dropped because we lost 82% of our industry. That left a surplus of people competing for the remainig jobs, lowering wages.

As MFG moved overseas, you then lost the plant managers, data processing departments, the cost accountants and etc, the diner outside the plant , the local cleaners and etc. For each MFG job you lost , you lost another 5 jobs.

Finance became more important and bigger, because we became a consummer not a producer country.

You like to blame Wallstreet, because you are not part of it and dont have to accept any of the blame. However more than Wallstreet is America buying cheap goods produced by very cheap labor while their neighbor lost his high paying job at the local plant that closed. Bringing back MFG is going to be far tougher than fixing Wallstreet... it will take decades.

A Trade deficit is a transfer of wealth out of this country which was made up for by borrowing for a time. Thats over! Our economic bucket has a hole in it... and the cost to keep putting more water in is now too high. As the dollar is devalued, those cheap goods will not be cheap! All that will have happened long term is that your wages and std of living decliined.

Regards