Accounting for over half the of the world's $45 trillion economy it's no wonder the relationship between the U.S. and China and their interdependence has become the headline. In the past calling out China's human rights and environmental transgressions seemed to be in the U.S. realm of responsibility, but now one misstep and the entire wealth of the world could all come falling down.
China's emergence as a world player did not happen overnight, nor did the U.S.'s reliance on China. The grafting of the economies started over two decades ago after China abandoned its closed-door policy. After decades of poverty Deng Xiaoping recognized that the key to wealth would be global commerce. Instead of reforming the government, as Russia did following the post-Cold War collapse, China reformed its economic system and inserted a hyper-charged economic reformation—capitalism.
Over the past 30 years China's economy has changed from a centrally planned system that was all but closed to international trade, to a market-oriented economy. The central figure and main advocate for China's adoption and implementation of an "open" market was then President Deng Xiaoping.
Following the unsuccessful “Great Leap Forward” and “Cultural Revolution” the economy was left in shambles. As Mao's successor Deng Xiaoping and other leaders focused on market-oriented economic development and by 2000 output had quadrupled. "We mustn't fear to adopt the advanced management methods applied in capitalist countries," preached Deng Xiaoping. "Socialism and market economy are not incompatible."
Commenting on the whether China should turn to capitalism or remain strictly in adherence with the economic ideologies of communism, Deng Xiaoping is known to have said, "It does not matter whether the cat is black or white; as long as it catches the mouse, it is a good cat."
China's adoption of a hybrid government system created a One-party autocracy capable of making in-roads in a sterile economy. The "Communist Capitalism" sparked a growth in GDP that was unprecedented. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978.
China recognized that the U.S. was its golden ticket to an effective global economy and started to target U.S. companies in special economic zones throughout Beijing and Shanghai. Following the blueprint of the United States global commerce strategy China started to pick itself up from decades of severe poverty.
On the other end of the pond the U.S. made no attempt to suppress its unruly spending habits, conspicuously wasting away wealth it simply was not producing. The U.S. spent more than it made and China was the primary lender for the U.S.
At one point it all seemed to be working, even though it appeared to be a temporary solution for a long-term problem. China, a developing country, lent vast amounts of money to wealthy America to feed its spending habit. Americans spent the money on Chinese-made goods, sending the dollars back to China, which lent them to America again. The banker to borrower cycle was positive for both economies. The cycle happened almost subconsciously, while both the U.S. and China were cognizant of their transactions neither imagined the two economies becoming one.
Niall Ferguson popularized the term “Chimerica” for the symbiosis between the two. America's increased dependency on Chinese loans to fund its deficits only complicates the situation. The severity of implications and liquidity of the debts are increasing as quickly as the interest is collecting. While this economic marriage has evolved over a two decade courtship, with the economic crisis of the past year, it has become both a closer union and one with increasing strain. For now, both the U.S. and Chinese governments have managed to keep the relationship flourishing thanks to their reciprocated need for one another.
China's global economic philosophy and export figures appeared to support the idea that the country largely depended on overseas markets, and America before all else, for its growth.
In recent years, China has re-invigorated its effort for leading state-owned enterprises in sectors it considers important to "economic security." China continues to explore the landscape of the global economy in hopes of stimulating its own rise.
To help coax China into joining hands with America, President Obama has set up a new annual forum called the Strategic and Economic Dialogue that held its first meeting in Washington, DC, in July 2009. The inspiration behind the forum was to bring together leading policymakers from both countries to discuss the entire range of problems confronting them. “The pursuit of power among nations must no longer be seen as a zero-sum game,” President Obama said as he addressed the gathering.
With more than $1 trillion of investments in American bonds, the Chinese are concerned about the viability of the American economic system and about the long-term value of their investments. Americans are constantly anxious about the effect of lower-cost Chinese labor on U.S. jobs. China's one overwhelming competitive advantage over every other country—India aside—is its considerable man power and labor cost. In contrast, China provides ever-lucrative opportunities for American companies, as the Chinese government turns to American companies like Caterpillar and GE to help with the industrial build-out and as Chinese consumers buy more goods. One industry that could be the tipping point for either economy is “green” technology. China sees America's predicament as a sign to actively look for buying opportunities among America's high-technology industries. China may have growing financial brawn, but it still drags far behind as a technological innovator and creator of global brands.
If China becomes the main distributor for green technologies the United States will miss out on billions of dollars in revenue for a lack of initiative. At a UN climate summit in September 2008, Chinese President Hu Jintao pledged China would take considerable steps in an effort to go green, “out of a sense of responsibility to its own people and people across the world.” To that end, China has set ambitious benchmarks for itself: It is looking for renewable energy sources to account for 15 percent of the country's total energy consumption by 2020.
“I believe this Chinese decision to go green is the 21st-century equivalent of the Soviet Union's 1957 launch of Sputnik—the world's first Earth-orbiting satellite,” explains New York Times Columnist Thomas Friedman. “That launch stunned us, convinced President Eisenhower that the U.S. was falling behind in missile technology and spurred America to make massive investments in science, education, infrastructure and networking” He continues, “China is embarking on a new, parallel path of clean power deployment and innovation. It is the Sputnik of our day. We ignore it at our peril.”
It is not an accident that China is committed to overtaking the U.S. in electric cars, solar power, energy efficiency, batteries, nuclear power, and wind power. China recognizes that in a world of booming populations and emerging middle classes, demand for clean power and energy efficiency is going to skyrocket. The “green revolution” may be China's last chance to detach themselves from the U.S. and vice versa.
A key point from the draft report of the president's Economic Recovery Advisory Board says this: “If the U.S. fails to adopt an economy-wide carbon abatement program, we will continue to cede leadership in new energy technology. The U.S. is now home to only two of the ten largest solar photovoltaic producers in the world, two of the top ten wind turbine producers and one of the top ten advanced battery manufacturers. That is, only one-sixth of the world's top renewable energy manufacturers are based in the United States.”
The lag in energy technologies is not due to a lack of innovation or a lack of infrastructure but rather a lack in concentration. With other pressing issues bombarding a new office, “green” technology has taken a backseat to healthcare reform, among others. In a green economy, we would rely less on credit from foreigners “and more on creativity from Americans,” argues Van Jones, president of Green for All, and author of the forthcoming “The Green Collar Economy.”
A new “declaration of independence” may be in store for the U.S. as they attempt a divorce of dependence on China. The catalyst behind the divorce may be the new wave of revenue created by energy technologies, or the relationship may become increasingly one-sided. And given how intertwined the U.S. and Chinese economies have become, any negative tremors threaten to halt a very susceptible global economic recovery. While there is no doubt both countries have reached a point economically they cannot stand alone, what's more telling is that the entire wealth of the world seems to hinge on the very relationship it covets.
For now, the relationship between the two economies is reciprocal, and is providing much-needed stability to both. Without Chinese money, the Obama administration could not be spending its way out of recession. However, no country likes to see its sovereignty corroded and its ability to be master of its own destiny frustrated—and that is exactly what the economic relationship between the China and the United States does to their individual governments.
The next few years could be troubled ones for the bilateral relationship but one thing is certain you can't have one without the other. The development of the economic relationship between the U.S. and China will determine whether there is increased prosperity or accelerated conflict. It will determine which world power is on the decline and which is on the rise.
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