The Sino-American Economy: Mutually Assured Destruction

This week's New Republic has two interesting articles about China's economic rise, and its implications for the global economy.

In the first piece, This Giant Isn't Sleeping, Zachary Karabell argues that Chinese growth is both sustainable and here to stay, and that doubts about the Chinese economic model are overblown: 

China has produced more growth over the past 25 years than any country, ever (averaging more than 9 percent a year). And after stalling in the fall of 2008 and in the early months of 2009 along with the rest of the world, China has been growing at an astonishing rate in the past six months--manufacturing has been expanding, exports have been surging (more than $20 billion a month to the United States alone), property prices and activity have soared, and stocks are on fire. Interior cities have replaced the coastal provinces as the engine of growth, and that process has barely begun.

Karabell goes on to say that rising commodity prices (the price of copper has doubled over the past six months) mean that the Chinese economic engine is alive and well. 

Meanwhile, Noam Scheiber discusses the impact of the crisis on Chimerica, which has largely limited American leverage over China, while forcing China to re-think its export strategy:

There's at least one potential problem with owing so much money to a strategically critical country: We have a vast range of interests at stake with the Chinese, and the focus on all the money we owe them may, at the margins, deprive us of leverage we need to advance those interests.

Perhaps more interestingly, it turns out there's at least one way the recession has increased our leverage over the Chinese. For years, economists and policymakers around the world have worried about the structural imbalances in the global economy: The major exporting countries in Asia and Europe rely on American consumers to vacuum up their manufactured goods; in order to do that, American consumers have taken on vast quantities of debt. Suffice it to say, any arrangement that relies on a large group of people piling on debt for years on end will necessarily come to tears.

But, however much we've pleaded with the Chinese to stop leaning so heavily on American consumers and start leaning more on their own (whose saving rates are extraordinarily high and whose standard of living would improve substantially if they spent more), our efforts have largely been futile.

The beauty of the recession, such as it is, is that American nagging on this point no longer has the toothless character of a spousal plea for self-improvement. With imports initially plunging and U.S. saving rates way up, it's a lot easier to make the Chinese believe that the American consumer will no longer save them. "They sort of see the future, and they don't want to be as vulnerable," says Geithner. That leaves the Chinese with little choice but to move ahead on their reform agenda, some of which should benefit Americans by increasing demand for U.S. exports. If nothing else, this would explain the unusual Chinese receptiveness at the S&ED to ideas for boosting domestic demand--such as bank liberalization that would pay depositors a higher interest rate

Karabell's article is the weaker of the two, as it does little to dispel rumors of a China bubble. Instead, Karabell argues that China's remarkable growth rates, coupled with higher commodity prices, portend future economic growth. Nevertheless, he makes a fascinating link between China's appetite for commodities and unemployment in the West:

China now consumes close to 8 million barrels of oil a day. But what if it grows 10 percent a year and if cars sales expand by double-digits in China (as they have been)? What if China doubles its oil consumption in the next few years, just as it has in the past few years? No one believes that the global supply of oil is ready to provide another 8 million barrels a day. And what about the rapid rise in raw materials? Those costs directly affect the economics of global companies. If China is buying up the world’s available iron ore--and it is--that makes the cost of steel everywhere more expensive. If China is buying up the world’s copper--and it is--that puts pressure on everything from air conditioner systems to housing. And if China needs more fertilizer for the increased appetite of its increasingly affluent populace, that makes it more expensive for food companies to operate.

All of those costs erode the profitability of companies. In years past, companies would have simply raised prices. But in the United States and Europe, they haven’t been able, because consumer wages are flat and their access to credit is limited. So what do they do to remain profitable? They try to become more efficient, and they try to cut costs. And one of the best ways to cut costs is to cut people, which is one reason for the 9.7 percent unemployment in the United States. In short, there is a direct link between Chinese growth, higher input costs and higher unemployment in the United States.

For better or worse, the United States and China have become the yin and yang of the global economy. The virtues and vices of their economic models have brought increased prosperity within their respective borders and beyond. The crisis has begun to fundamentally reshape this relationship, for the better.

China needed the US consumer in order to emerge from economic autarky into the global economy's rising star. The global economy, and the US in particular, now need the Chinese to start spending in order to preserve the economic order that allowed China to rise up in the first place.