The U.S. and Chinese Economies Are ‘Superfused’

“This is not a detachable relationship,” Zachary Karabell said, referring to the U.S.-China relationship, at the EastWest Institute yesterday. The visit by the author of “Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends On It” could not have been better timed, coinciding with President Barack Obama’s trip to the world’s third-largest economy and the largest owner of U.S. debt.

“There is an interdependence that has begun to erode the sovereignty of both nations,” Karabell said, outlining the premise of his new book. According to Karabell, after the suppression of the Tiananmen Square protests in 1989, Deng Xiaoping accelerated China’s economic modernization that he had launched a decade earlier. American companies began to sink billions of dollars into the New China, setting the stage for the inextricable relationship between the two powers today. He emphasized that it is not the economic crisis that has linked the two nations, but rather seeds planted long ago, below both governments’ radars. China provided an alluring, largely untapped market, and U.S. companies submitted to what Karabell calls the “wooing of American capital.”

Over the past 20 years, U.S. companies have invested almost $2 trillion in China, something to keep in mind when considering the recent U.S. bailout of the financial system. In a mind-numbingly complicated scenario, Karabell used the oscillating fortunes of Morgan Stanley as an illustration of his overarching point: Our antiquated 19th-century model for global economics no longer applies in today’s real world.

Beginning in the U.S. economic boom of the ’90s, Morgan Stanley has invested a combined $5 billion in China. As the American economy began its freefall last year, China lent the U.S. government $5 billion, which was in turn used to bail out the failed Morgan Stanley. In order to pay back the $5 billion to the U.S. Treasury as quickly as possible, Morgan Stanley then sold assets of the company, of which China purchased a large portion.

And so it goes with many other companies, with the U.S. government acting as an intermediary for a decades-long business transaction.

Karabell says that though history can be a useful tool for making predictions, there has never been anything like modern China to use as a comparison. He did however offer two loose adaptations that could vaguely illustrate what the future of the U.S.-China relationship may hold.

Scenario A: The European Union-like relationship. In this scenario, both China and the United States embrace the melding of their economies for a greater good. Karabell discusses how the EU model allows both parties to maintain sovereignty of identity, while offering the United States the protection represented by China’s economic potential in the current uncharted waters.

The provocativeness of his analogy is intentional, and Karabell says he understands that an EU-type relationship would be near impossible for two powers that have shared none of the decision-making that took place during the formation of the European Union. The unfeasibility is further illustrated by Wen Jiabao’s comments today that suggest the possibility of a “G-2” is premature.

Scenario B: The U.K.-U.S. post-World War II loan structure. (The United States would in this case be the U.K. and China would be the United States. Got that?) In this scenario, China would extend a massive loan to the United States, so that it doesn’t default on international commitments. In return, the U.S. would relinquish its global empire and the prominent global standing of the dollar.

There are big questions for both the United States and China when it comes to the future success of this delicate relationship. Karabell asks, “Can we act with the urgency that China demands?”

Of China, he wonders if, 15 years from now, the world might have a new image of what freedom looks like. As China’s youth grows up with more personal freedoms, will they yearn for democracy? As long as the poor continue to get richer, Karabell says, we could be dealing with an entirely new beast. The challenge for China will be making sure that’s the case.