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Foreign Policy

Is “Chimerica” in Decline?

Apr 30 , 2015

“America in not in decline, her industrial bedrock is resiliently expanding and her high-tech companies monopolize the global market. If one thing is in decline, that is Chimerica; the hybrid phantom state that liberal intellectuals declared as the charismatic child of a global fertilization of liberal, market-based integration. Now as China and the United States engage in geoeconomic balancing the former with mercantilist laws protecting its Hightech industry and the latter with “level playing field” trade agreements the Sino-U.S. commercial relationship is at stake threatening the foundations of a post-cold war liberal global order. Creative action and rational behavior is urgently needed to protect the fruits of peace and reverse a dangerous economic trend. “

Francis Fukuyama

China’s resilient authoritarianism or at least Beijing’s continued adherence to a distinctively non-Western polity has for the moment refuted the democratic telos of history. The first part however of Fukuyama’s polarizing thesis, the liberal part in the “liberal democracy” declaration has been celebrated by political pundits around the world as the irreversible path of human predicament.

Trade, commerce and economic interdependence will make war not simply a prohibitively expensive endeavor, but render it obsolete as states that defy the liberal status quo of free commerce will see their economic networks collapse, and their societal harmony dissolved by rising poverty rates. Nowhere has this thesis been applied with increasing academic and perhaps political intensity than in the relationship between China and the United States.

The term “Chimerica” has been the epitome of the wishful thinking of liberal intellectuals around the world who deterministically infer that economic interdependence between the United States and China will lead to a peaceful hegemonic transition. As both Washington and Beijing engage in a positive sum economic relationship and increase their material position at infinitum, the gates of Janus will be sealed by two prosperous societies who prefer commerce to conquest, consumption to cannons, goods to gunboats.

Neither American nor China will dominate the 21st century the liberals ardently declare. Instead Chimerica – a hybrid state – governed by the invisible hand of the market or by the very visible hands of cosmopolitan business elites will create perpetual prosperity and peace.

Realists however have long challenged this established liberal “orthodoxy.” China and the U.S. are on a path toward escalating confrontation, and both states engage in comprehensive balancing from the economy to military to technology to diplomacy. Chimerica has been a phantom; a figment of imagination defying reality and failing to observe the unabated securitization trend in Sino-U.S. relations, realists declare.

Testing the validity of the Chimerica thesis demands a thorough investigation into the three “liberal indicators,” the fertilizers of interdependence between China and the United States; that is, the very forces that annihilate the nation state, turn boundaries obsolete and dictate policies based on interstate rather than intrastate conditions.

-  Dependence on the Chinese Market

-  Supply Chain Dependence

-   Cosmopolitan Business Elites

Chinese Market Dependence: The end of the Gold rush and rising Indigenous Innovation

Capital goes where returns are high. When China opened up it’s market to foreign capital under Deng Xiaoping, U.S. multinationals followed their “animal instinct” and invested in the world’s most populous country. 35 years later, the Chinese market shows steady growth yet the profitability of American companies that have invested in it has underperformed compared to the returns outside of China.

According to the well-revered “Sinodependency” index that The Economist publishes every year, the past 3 years have seen returns on investments outside China have outperformed returns on investments within China. While this may not be a long lasting trend, the significance of opportunity costs in the decision making of large multinationals can lead many of them to change their focus away from the Chinese market.

More importantly, according to the Sinodependency index, the top 3 US companies that are most dependent on the Chinese market are all high-tech companies (Apple, Intel, IBM). Those companies will most probably see their shares in China undermined by the increasing indigenous competition as Chinese companies climb the value ladder. Such value evolution from the assembled-in-China model to the designed-in-China model will certainly erode the big market margins of U.S. tech giants.

In addition to the “natural” evolution of competition, the Chinese government has also enacted policies that limit the capacity of foreign companies to compete with local ones. Most importantly the draconian anti-terror law has terrified U.S. CEOs as it will immediately outlaw foreign companies that do not share important security codes and software backdoors with Chinese authorities. Beijing has already excluded Microsoft from its public procurement activities and has directed multibillion yuan packages of state support to developing indigenous comprehensive operating system and other technologies where currently U.S. companies hold a significant lead.

While only five years ago Tsinghua and Peking University Science & Engineering students looked to U.S. tech firms for graduate jobs in China, now the majority aims for recruitment in one of China’s Big 5; behemoths like Baidu, Alibaba, Netease, Huawei and Lenovo.

Supply Chain Dependence: Price Factor Equalization & regional trade agreements 

Free trade in a liberal global economy leads to the eventual convergence of real wages among trade partners. As China enjoys enormous trade surpluses, its companies increase their demand for labor, leading to higher wages. On the other side of the Pacific, as the U.S. is dealing with high trade deficit and low aggregate demand, real wages tend to stagnate or even fall over time. Eventually, the Price Factor Equalization law goes, China and the U.S. will have similar levels of average real wages.

To be sure, today the average Chinese wage is much lower than that of the U.S., however the trend has been one of convergence. This as well as the technology revolution in the U.S. has added to the current “restoration” of U.S. industry and has led CEOs to look for new production networks in poorer Asian economies like Vietnam, Indonesia, and India. As U.S. and Chinese economies become less complementary, more and more companies will be outsource their production outside of China, further contributing to Chimerica’s decline.

In addition to the natural evolution of wages and relative prices, the current increasingly complex system of regional trade agreements promoted by both the U.S. and China will distort market signals, and further exacerbate competition between China and the U.S. More and more companies will be victims to new regulatory barriers and thus de facto ostracized from China’s production networks. Trade frictions, decreased complementarity, and unprincipled competition will annihilate Chimerica.

Cosmopolitan Elites: CPC Political and Ideological Resilience 

Proletariats of the world unite! Marx and Engels declared in their communist manifesto. There are no nations, nor are there intrinsic cultural and historical forces that classify people other than the ownership of the means of production and the material conditions. Surprisingly, Capitalists and liberal intellectuals have also adopted this similar forma mentis. A banker in Shanghai overlooking Pudong from his luxurious office in the 100 floor of the World Trade Center is no different from a Wall Street banker overlooking Brooklyn. Both believe in one God: Money.

Money in a liberal democracy buys influence and particularly in the United States it could perhaps even buy the White House. Had a similar scenario held for China; that is, had business elites been able to pick the general secretary of the CPC then maybe liberal and cosmopolitan elites in China and America could manage Chimerica and perpetuate the current status quo of globalization.

However it is now well evident that the CPC is an atypical organization and China’s polity gives no preponderance to business elites in decision-making. While after Jiang Zemin’s reforms business people can participate in the collective decision making of the CPC, the ultimate “grand strategy” of China is shaped by the powerful standing committee of the Politburo. The operational code of the Chinese communist party remain deeply anti-capitalist. It utilizes the free market to optimize the power of a Leninist state and any businessman that dares to confront the party cadres ends bankrupt and humiliated.

To be sure China’s leading elites may have their own vision of cosmopolitanism; one that adheres to different norms from those of Wall Street, but this difference and the inability of both China and the U.S. to discuss value misperceptions and differences is catastrophically tearing apart Chimerica.

After Chimerica 

The dream of Hegelian unity for our “Shared spaceship” earth has been at the core of visionary leaders throughout history. All of them from Alexander the Great to Augustus, to Darius, to Napoleon, to Liu Bang, to Tang and Ming emperors without a single exception chose Hegemony and subjugation to pursue that dream. Eventually they built on culture and ideology to keep the system harmoniously united.

Liberalism instead saw in the market a “divine” force that melts cultures, politics and diverse beliefs into a pragmatic uniformity managed by the invisible hand of profit seeking harmony. Chimerica was born out of this belief enhanced by the hubris of U.S. “hyperpuissance” era and the end of history mentality. The ensuing Liberal Global order and the declaration by every singe U.S. president in each and every U.S. national security report since 1991 that the liberal democratic end of human civilization is irreversible now sounds utterly hubristic.

As Chimerica stands in fables waiting at its deathbed, perhaps a force of real Athenian type democracy can ensure that China and the U.S. will not pursue another dangerous cold or cool war and divide humanity into camps of Us vs. Them. Athenian democracy in its modern updated version calls for massive participation where the masses do not envy the rich yet the rich do not suppress the masses. Such a political transformation in the West would end the primacy of neoliberalism and exercise a powerful demonstrative effect toward the Chinese people who would ask for more participation and continue a positive sum engagement with the U.S. and the world.  After all both Western and Chinese traditions draw their power from extremely rich, diverse and cosmopolitan philosophical traditions.

At the same time the United States and China must continue its strategic economic dialogue and resolve security concerns on high-tech industries. They should both abandon commercial regionalism, engage with the WTO and call for global standards on software and hardware. China and the United States must undertake joint initiatives that promote the freedom of goods, capital and people and thus renew the WTO negotiations for non-trade barriers, the elimination of regulatory arbitrage and safe capital heavens. At the same time they must ensure that trade and economic links are sustainable and thus promote Green Diplomacy and Fair trade for the underdeveloped world. An agenda for both Free & Fair trade along with a sincere discussion about property rights and shared innovation projects on Green energy could be a great step into saving Chimerica and securing peace in our time.

After 20 years of liberal euphoria and the birth of Chimerica, realists seems to be winning the argument, however as one great European psychologist-polymath, Karl Jaspers once put it:  “Anyone who regards an impending war as certain is helping on its occurrence, precisely through his certainty. Anyone who regards peace as certain grows carefree and unintentionally impels us into war. Only he who sees the peril and does not for one instant forget it, is able to behave in a rational fashion and to do what is possible to exorcise it”. The memory of the perils of great wars and the marvelous adornments of peace and free trade can indeed be the safest path for a harmonious U.S.-China relationship even now that the utopian dream of Chimerica stands in shambles.

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