China and the U.S. Joined at the Hip

Random Thoughts from the High Desert

Global Economic Intersection has many regular contributors with extensive knowledge of China and Asia in general. I thought I would try to integrate recent articles published by John West, Michael Pettis and Frank Li to see if looking at their three perspectives together provided additional insight.

I have summarized here the major points made by these three authors:

John West

Michael Pettis

Frank Li

China seeks constructive relationship with the U.S.

Their GDP per capita is only 10% of the U.S.

The aging Chinese population and disproportionate role of state owned enterprises creates headwinds for rapid catch up to the U.S.

Large capital flows into the U.S. including illicit gains by members of the Chinese Elite

All nations go through cycles of rapid growth followed by periods of retrenchment

China has an unbalanced economy that has reached the limit of rapid GDP growth based on infrastructure investment

The rapid growth in China has been at the expense of consumers through a process of “financial repression” that favors borrowers over savers. This is potentially politically destabilizing

China can no longer be an undeveloped nation with a vibrant export sector if it wants to have a modern economy

Historically, China has not been aggressive towards its neighbors

Both the U.S. and China are rules by Elites but the Elites in China are more decentralized with power shifting towards the more accomplished and experienced.

The U.S. has moved beyond its phase of being a vibrant economy which can provide the growth engine for the world.

The net result of the above is that we are more important as a balance for China and other developing nations than we are as the Imperial Power managing and extracting wealth from the periphery. The Center/Periphery model no longer applies or as the Marxists would say…we no longer have hegemony.

But China also, other than in its region, has not obtained hegemony either. Being resource deficient they are very dependent on having a peaceful world as they are not powerful enough to obtain their required resources by force of arms. So their strategy is based on international investment and commerce.

Thus we now have a co-dependent relationship. Both China and the U.S. could exist and prosper with no financial interactions between them. But this would be far less optimal for either. China benefits from having a place to park the value of labor it extracts from its masses and we benefit from the work product of those masses.

From a foreign policy perspective, both nations have sought and supported the efforts of each other to subjugate revolts against each other: the older U.S and the younger (but chronologically older) Quasi-Capitalist China. Thus to a large extent John West has identified the need for broad cooperation between China and the U.S.

In a recent paper presented by Paul Krugman and reported on by John Lounsbury, it is clear that China does not have the ability to utilize its creditor status to seriously harm the U.S. Thus we have two superpowers who cannot achieve domination over each other but can benefit from cooperation.

As Frank Li points out, Americans are no longer interested in working and prefer to simply receive and China needs to provide employment for its masses and have a place to send the products which are produced but which their masses currently do not have the ability to purchase.

Thus China needs the U.S. and the U.S. needs China since policing the World has become too burdensome for the U.S. to handle on its own and the availability of low-cost imports is critical for the U.S. elite to be able to continue to extract wealth from the middle and lower classes in the U.S. As Marx pointed out, the working class must have sufficient means to be able to reproduce itself and low-cost imports from China and other developing nations is critical for the U.S. elites to retain control

Although the advantage currently possessed by the U.S. is likely to dissipate over time, the recent increase in energy independence by the U.S. is likely the slow its decline so one can imagine the U.S. remaining the senior partner in this arrangement for many years.

One can see this relationship lasting for a long time. Five years ago, it may have looked like China might gain the upper hand but fracking and horizontal drilling and the challenges of rebalancing within China have provided a half century more domination for the fading superpower currently named the United States of America. I phrase it that way because we may see boundary changes for the U.S. prior to the demise of this empire.

The three referenced authors have provided us with a lot of information for understanding the relationship between China and the U.S. But what they have not told us is how this temporary mutual interdependence can evolve into something more stable.

It appears that both China and the U.S. have dysfunctional governments although the dysfunctionality of the U.S. government is more widely recognized. Thus the coordination of economic policies let alone the foreign policy of the two independent and culturally very dissimilar nations would appear to be a situation where the unexpected could be expected.

And of course China and the U.S. are not the only players on this large stage. There are others including Japan, Russia, Europe, Brazil and Canada which have their own interests and which may not be amenable to a U.S.-China run World. So what is a temporary condition of being joined at the hip may be surgically separated as events unfold.

I would end this article by expressing a hope that our leadership would use this extension of time to prepare for a future when we are no longer the senior partner, but I see very little wisdom coming from the leadership of the U.S. Similar to China, the primary function of our elite appears to be to extract wealth from the middle and lower classes. My major disagreement with Michael Pettis is that I see the processes he describes in China as being similar to that which is happening in the U.S. The sectors involved are different but the process of financial repression (artificially low interest rates) to enrich the wealthy at the expense of the poor and middle class is the policy of both U.S. Political Parties. They each use a different branding strategy to disguise their enslavement of the general population but that is a subject for a future article.

So not only are China and the U.S. joined at hip, they indeed are very similar in their approach to management.

References