The rise and fall of the world's most successful joint ventures
U.S. and China once happily relied on each other; but now, not so much
For more than a quarter century, the fortunes of the United States and China were fused in a uniquely monumental joint venture.
Americans treated China like the mother of all outlet stores, purchasing staggering quantities of low-priced factory goods. Major brands exploited China as the ultimate means of cutting costs, manufacturing their products in a land where wages are low and unions are banned.
As Chinese industry filled American homes with electronics and furniture, factory jobs lifted hundreds of millions of Chinese from poverty. China's leaders used the proceeds of the export juggernaut to buy trillions of dollars of U.S. government bonds, keeping America's borrowing costs low and allowing its spending bonanza to continue.
Here were two countries separated by the Pacific Ocean, one shaped by freewheeling capitalism, the other ruled by an authoritarian Communist Party, yet conjoined in an enterprise so consequential that economic historian Niall Ferguson coined a term: Chimerica, shorthand for their “symbiotic economic relationship.”
No one uses words like symbiotic today. In Washington, two political parties that agree on almost nothing are united in their depictions of China as a geopolitical rival and a mortal threat to middle-class security. In Beijing, leaders accuse the United States of plotting to deny China's rightful place as a superpower. As each country seeks to diminish its dependence on the other, businesses worldwide are adapting their supply chains.
Chimerica has yielded to a trade war, with both sides extending steep tariffs and curbs on critical exports — from advanced technology to minerals used to make electric vehicles.
American companies are shifting factory production away from China to less politically risky venues. Chinese businesses are focused on trade with allies and neighbors, while seeking domestic suppliers for technology they are barred from buying from American companies.
Decades of American rhetoric that celebrated commerce as a wellspring of democratization in China have given way to resignation that the country's current leadership — under President Xi Jinping — is intent on crushing dissent at home and projecting military might abroad.
For Chinese leaders, the once-prevailing faith that economic integration would undergird peaceful relations has been relinquished to a muscular form of nationalism that is challenging a global order still dominated by the United States.
“In a perfect political world, these are two countries that are made in heaven, exactly because they are complementary,” said Yasheng Huang, an economist at the Massachusetts Institute of Technology Sloan School of Management. “Essentially, these two countries kind of got married without knowing one another's religions.”
But divorce is not a practical option. The United States and China — the world's two largest economies — are intertwined. Chinese manufacturing has evolved from basic areas such as footwear and apparel into advanced industries, including those central to efforts to limit the ravages of climate change. The United States remains the paramount consumer marketplace. Even as geopolitical tensions fray their ties, these two countries still depend on each other, their respective roles not easily replaced.
Apple makes most of its iPhones in China, even as it has been shifting some production to India. A Chinese brand, CATL, is the world's largest maker of electric car batteries, and Chinese companies dominate the refining of critical minerals such as nickel used in such products. Chinese businesses make up more than threefourths of the global supply chain for solar-energy panels.
China is a leading source of sales for major global brands, from Hollywood studios and multinational automakers to manufacturers of construction equipment such as Caterpillar and John Deere. Computer chipmakers such as Intel, Micron and Qualcomm derive roughly two-thirds of their revenues from sales and licensing deals in China.
The powerful tug of those commercial entanglements was the background of discussions last week between Xi and President Joe Biden. The meeting, at a global conference in San Francisco, was their first in a year.
Never going to last
Still, the prospect that their political schism will endure is altering global supply chains. In place of relying on China as the factory floor to the world, businesses are increasingly exploring ways to diversify. Mexico and Central America are gaining investment as companies that sell to North America set up factories there.
Some trade and national security experts celebrate these shifts as an overdue adjustment to decades of growth propelled by a perilous codependency between the United States and China.
Beijing's purchases of American debt — though steadily declining since 2012 — kept borrowing costs low but also encouraged investors to seek out greater returns. That led financial speculators to gorge on low-grade mortgages, delivering the global financial crisis of 2008, said Brad Setser, a former U.S. Treasury Department official and now an economist at the Council on Foreign Relations.
“It was certainly a form of interdependence,” Setser said. “But the notion that China saves and the U.S. spends, China lends and the U.S. borrows, and all is good because we are two sides of the same coin, we're complementary, that was never sustainable.”
China bets on trade
Beginning in the late 1970s, under the leadership of Deng Xiaoping, the Chinese government sought to rescue the country from its state of poverty and isolation by unleashing a series of market reforms. National wealth would be amassed by making products and selling them to the world. Officials courted foreign investment while building out infrastructure — highways, ports, power plants.
The culmination came in 2001 when China joined the World Trade Organization, winning global access for its exports in exchange for promising to open its own markets to foreign competitors.
American leaders championed China's inclusion in the global trading system as far more than an effort to sell Big Macs and bulldozers to the world's most populous nation.
“By joining the WTO, China is not simply agreeing to import more of our products,” President Bill Clinton declared on the eve of a key congressional vote in 2000. “It is agreeing to import one of democracy's most cherished values: economic freedom.”
Yet, beneath such highminded
rhetoric, American brands pushed for greater access to China for the simple reason that its factories could turn out goods more cheaply than anywhere else.
“China makes products that working families can afford,” said Clark Johnson, CEO of the then-prominent chain Pier 1 Imports, as he represented the National Retail Federation during congressional testimony in 1998.
That formulation carried the day.
In the two decades after China became part of the WTO, American imports from China multiplied fivefold to $504 billion a year, according to census data.
There was truth to the notion that Chinese industry was breaching the rules of international trade. The government lavished credit on the largest companies via loans from state-owned banks. Chinese industrial ventures could evade environmental and labor laws by sharing a cut of the profits with local officials. The Chinese market remained full of barriers to competition from foreign companies. Those that invested in China suffered brazen theft of intellectual property and rampant counterfeiting of their products.
Yet, in many ways, the United States benefited from trade with China. Cheaper goods helped households cope with stagnating
incomes while padding corporate coffers. The trouble was that most of the gains flowed to the shareholders of companies making products in China, while Washington failed to cushion those left behind.
A federal program called Trade Adjustment Assistance was supposed to compensate those rendered jobless by cheap imports, offering cash and training for other work. But Congress vastly underfunded the program. Fewer than one-third of those eligible for benefits in 2019 received help, according to an analysis of Department of Labor data.
In a triumph of simple political messaging over the complex accounting of trade, the public increasingly came to believe that Chinese industry was solely a predatory force — that Americans “were just taken advantage of,” said Jessica Chen Weiss, a China expert at Cornell University and a former State Department official in the Biden administration. “We didn't do a good job of distributing the benefits, but they were nonetheless real.”
The Chinese government used its trade winnings to expand its military capabilities, while menacing neighbors such as the Philippines. It constructed an Orwellian surveillance apparatus, wielding it against the Uyghurs, an ethnic minority
in the western region of Xinjiang.
For decades, foreign automakers were forced to team up with state-owned car companies as a way to get a crack at the Chinese market. Now, a fresh crop of Chinese companies is harnessing the know-how gleaned from those ventures to take markets from foreign automakers.
In the end, the engagement policy led to the moment at hand: a messy and bewildering process of disengagement.
The Biden administration argues that, by reducing dependence on Chinese industry, the American economy will become more resilient and less vulnerable to disruption in the face of shocks and conflict.
But many factory goods made in countries such as Vietnam contain large parts and materials produced in China, according to research by Caroline Freund, an international trade expert at UC San Diego.
As Chimerica dissolves, the world could end up with greater complexity in its supply chains — more factories in more countries — yet still reliant on critical components made largely in just one.
“You still depend on China — it's just that it takes more steps along the way,” said Setser. “There's more places where things could go wrong.”