DFI Technocrat
Oct 10, 2009
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How China and America became one economy, and why the world's prosperity depends on it.


Companies like Kentucky Fried Chicken did more than remake themselves in China; they also transformed Chinese society and the global economic system. That is the unwritten story of the past 20 years. Multinationals and the Communist Party of China should have been strange bedfellows, but much of history is the product of odd and unexpected alliances. As companies such as Procter & Gamble, Kentucky Fried Chicken, Avon, Nike, General Electric, Siemens, and IBM went to China in the late 1980s and 1990s, they constructed a new international system of trade, production, and capital flows. Yes, China produced cheap retail goods, and the United States and Europe consumed them. Less noticed but equally important was that China itself became a voracious consumer not only of imported goods and services but above all, knowledge.

Everywhere, there is deep discomfort with what this system has done to the world. In the United States and Europe, China has been blamed as the cause of job loss. Then the implosion of the U.S. economy in 2008 and into 2009 cast into sharp relief just how much America's economic sovereignty had been eroded and how much China's economic power had increased. In China itself, attitudes are more optimistic, yet the events of the past two years also shook China's leadership and led to questions about the wisdom of closer integration with the West and with the United States.

Even as they speak of interdependence as a fact, Chinese and Americans continue to see themselves locked in a great power rivalry. Chinese leaders in 2009 did not disguise their blame of Wall Street as the cause of the economic crisis, yet they rarely took full responsibility for their role in shaping the global economy. American leaders have their own blind spots. In its annual assessment of global threats, the U.S. intelligence community in 2008 emphasized China's rising power and its potential to use its economic leverage for political aims, and the Pentagon in early 2009 warned that China was seeking new weapons to counter the U.S. military in the Pacific Rim.

These old ways of approaching the world -- these us-versus-them dyads -- are not just benign anachronisms. Clinging to them can and will have serious consequences, most of them negative. The current global economic system is unlike anything the world has known before. National economic data do not capture the mutual interdependence and exaggerate the quaint, and false, idea that each country is its own economic island. The longer we cling to old theories and past precedents, the longer it will take to grasp what is going on. The fusion of China and America is more important to divining what the future holds than most of the economic and political theories that have guided governments, academics, and business leaders over the past century.

The path ahead offers at least two possibilities. Either America -- and to some extent Europe as well -- works with China to refine and develop this system to our mutual benefit, or we fall back on old binary concepts that see every gain for "them" as a decline for "us." For the United States, if we choose to embrace our interdependence with China, we stand a chance of not only working through our current challenges and retaining our prosperity but enhancing it meaningfully in the decades ahead. While that may mean a shift in the relative position of the United States in the world, the benefits will far outweigh the costs.

As of now, however, the United States has a "China problem." It is not, as commonly assumed, a problem with the challenges of China as a rising economy. It is a problem with the very fact of China as a force to be reckoned with. For a half century, the United States fought for the creation of a global capitalist system. Now that one exists, however, Americans seem to have forgotten one little thing: capitalism means risk and sometimes chaos, and the global position of the United States is not a birthright.

The fundamental question for the United States is whether to accept or resist the fusion with China and all that it entails. While the election of Barack Obama signifies a return of a more pragmatic approach to the world and a wiser recognition of the limits of both economic and military power, many Americans remain locked in a mentality that sees the United States as a nation that can remain powerful only by being more powerful than everyone else. The likely outcome? Rather than recognizing that this old framework is flawed, Americans remain wedded to it, and contest the rise of China every step of the way. The outcome will not be good. Rather than hobbling China, the United States may end up hobbling itself. In response, China will forge partnerships with others in the world who are more willing, including -- oddly enough -- U.S. corporations that will then become even less tied to the United States and in time become American only in name, and perhaps not even that. In trying to prevent China from assuming its place at the table, we instead evict ourselves.

Because companies have been the most obvious beneficiaries of this superfusion, it has been easy to portray this emerging system as simply one more example of the way that capitalism and corporations satisfy the interests of the few and fail to enrich the many. Witness the populist anger at Wall Street and avaricious companies that generated obscene, and illusory, profits while the vast majority of everyday people saw their incomes pressured and their purchasing power eroded. Then, to add to the insult, these companies proved to be not just venal but incompetent, and placed the entire financial system in jeopardy.

There can be no argument that U.S. companies reaped extraordinary profits from the growth of China. For more than five years, I ran an investment fund that focused on American, Chinese, and multinational companies whose growth was being fueled by China. And for nearly seven years, I helped run an asset management firm in New York. Before that, I spent many years as an academic, writing, studying, and teaching about international relations, and my perspective stems as much from that experience as from my years on Wall Street. Whether or not the rise of China is desirable, it is a fact. How that is managed, by the Chinese themselves, by the United States, and by other vital actors in the international system, will determine the arc of this century.

From SUPERFUSION by Zachary Karabell. Copyright © 2009 by Zachary Karabell. Reprinted by permission of Simon & Schuster, Inc.
Superfusion - by Zachary Karabell | Foreign Policy

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