Why Democratic US, Champion of free speech and markets, needed Autocratic, Communist China’s partnership:
Post 1945, after the end of WWII, USA had established clear economic and political dominion over the globe. Over next 20-25 years US economy saw a very stable and consistent average annual economic growth of 3%. This growth cycle lasted till mid 60s and brought unprecedented wealth and standard of living to American population. But towards the late 60s the US economy started entering stagnation. This is when the American corporations and economists realised that US economy had hit a major roadblock with the economic growth, which was saturation of workforce.
When the economy grows consistently, it provides employment to more and more people. As it further accumulates wealth and approaches full employment, the overall wage rates go up. This process improves the standard of living of the masses. But as the wage rates rise, the production cost of goods also rise which makes production less profitable. This fall in profitability leads to fall in new investments which leads to economic stagnation!
Capitalists in US didn’t like this situation one bit as they wanted their ‘profits’, or in wall street terms, ‘bottom-lines’ to expand infinitely!
Key economic problems that American capitalists and economists faced were:
- How to produce things cheaper in order to expand the profit margins with skyrocketing wage rates in USA
- Where to generate the demand from, with labour market in saturation, there were no new workers being employed in economy and this was leading to lack of growth in demand
To solve these two problems, American economists thought of an idea which they thought was brilliant! The idea was to ‘outsource’ the production of goods to underdeveloped countries where the wage rates were fractional compared to that of US, ship these finished goods back to USA and sell them to American consumers at heavily marked up prices. This boosted their profits multifold overnight with massive fall in production cost. They also hoped to sell American products to the new class of workers in the countries where American factories created employment through outsourcing, this meant new market for the American products leading to more ‘profits’! This idea was named as ‘Globalisation’ for marketing roadshows.
Why Communist China Shook hands with Capitalist US in the middle of cold war:
When American capitalists were cooking up this idea to grow a generation of billionaires through outsourcing, there was also a cold war heating up with Russia, then USSR. A key player in this cold war was communist China, as it was by Russia’s side. China was a large, highly populous nation with nuclear capabilities and it was important for US to befriend China in order to isolate Russia in cold war.
China was a very poor country then (mid 70s), messed up with the massacres of the ‘Cultural Revolution’ under Mao and decades of chaos caused by impractical communist experiments. The ambitious Chinese had realised the lack of pragmatism of communist ideals by then. They knew that a massive infusion of external capital and technologies were needed to create wealth and build their country.
This is when American politicians saw an ‘opportunity’ and shook hands with China. The deal was, China would distance itself from Russia in cold war in exchange for American capital and technology to start mass production.
It’s said in investment banking that ‘There’s always a winner and a loser to every deal’. But the Americans were so happy with their own brilliant political and economic engineering which on one hand helped defeat Russia in cold war and skyrocketed the corporate profits of American corporations on the other, that they didn’t even analysed the merits of this deal for decades! They even coined phrases such as ‘Chimerica’ to highlight the glory of their engineered partnership!
Inception of ‘Chimerica’ – An unnatural Communist – Capitalist partnership which lasted for more than 4 decades:
Chinese used their ultra long term, dispassionate (communists are not so fond of material wealth) communist vision to gauge the ultimate desire of Americans and they found that all that the Americans wanted was dirt cheap production to boost their profitability. If China fulfilled this one desire then were to gain;
- Massive American capital in investments along with cutting edge technology
- Large scale employment of Chinese labourers, with free American training which was developing Chinese human capital at mass
- Valuable foreign exchange, as all the goods manufactured were being exported back to west
After weighing the pros of the deal, the Chinese decided to go a step further to pamper the Americans and to minimise the cost of production. Tailor made policies were developed so that the Americans don’t hesitate to pour in greenback. Policies such as:
- Wage caps that limited the wages paid to different classes of workers. These wage caps were existing till late 2000s and were capping wages at rates lower than poorest South Asian countries including India.
- Chinese pioneered the concept of Special Economic Zones (SEZ). They designated large land parcels where any production made and exported was exempt from all taxes!
- China started investing a large portion of their trade surplus in US T bills. This was a cherry on the top as US loves leverage
On the other side of the pacific, this idea of shifting production to China was gaining a massive traction! All the American corporations lined up to shift their production to communist China. Hence producing their goods at literally fractional cost and overnight multiplying their ‘profitability’.
A very fitting example of is Apple and the rise of it’s current CEO Tim Cook. His rise in apple was credited to a major achievement when he shifted the entire production of Apple to China and hence multiplied profit margin. Also the reach of the brand in the market increased as Chinese excelled at producing massive volumes very cheap and fast. This gave Apple huge market at a massive profit margin which converted in their gigantic market cap, making them the first company to hit $ 1 Trillion in market cap.
Over the period of time, China started producing most of the goods consumed by the west, ranging across many and most of the industries and became THE backbone of the global supply chain.
Ultra long term Chinese Communist planning dominates short sighted Western Capitalist Democracies
This experiment started with west and US helping China overcome poverty by infusing massive capital and technology but within a decade, tables turned and the west became highly ‘dependent’ on China. What were these dependencies:
- Western corporations had developed a strong taste rather addiction for the profits resulting from cheap production in China
- There were no competitive alternatives to China for production as Chinese were offering dirt cheap production with SEZs, wage controls, etc.
China started leveraging this dependancy to unilaterally make changes to the rules of engagement for trade with west. This is when they started currency ‘manipulation’!
The bilateral trade is imbalanced when a country is exporting more to a certain trading partner than it’s imports from it. This phenomenon leads to appreciation of its currency compared to that of it’s trading partner. Normally, this appreciation in the currency acts as automatic stabiliser of trade to level out the imports and exports.
When China started mass production with American capital, their exports grew exponentially. At the same time, China heavily controlled imports from the western economies by levying heavy tariffs and duties. This resulted in huge trade surplus for China (Aka ‘trade deficit’ for the losing trading partner, which Trump generally cribs about). This setting should ideally result in ‘value’ of Chinese currency Yuan to rise. This rise in value of Yuan would in turn subsidise imports of western goods in China and detriment the export of Chinese goods to west till the Yuan loses its ‘value’ enough to level out the imports and exports with the west.
Communist China didn’t play fair as it knew that West won’t be able to withdraw it’s capital so easily even if it cheated! Hence they started ‘manipulating’ Yuan. Basically what they did was, they literally printed huge amount of Yuan to forcefully devalue their currency which was gaining value due to massive trade surplus with west! This way, they consistently ran trade surplus and yet kept up the graph of exports growing and graph of imports flat. Its like, ‘heads I win, tales you lose’!
Awakening in west to the reality of Chinese domination and expansion – Too few, Too late!
The administration on the other side of Pacific was rather ignorant with all of this till Republicans ruled US till 2008 mess. Republicans were only concerned about the wall street valuations of American corporations and these valuations were bulging pretty well and consistently for decades. Valuations are a result of profits and profits in the books of accounts were exploding with cheap Chinese production.
First real initiatives was started by Obama right after he took over in 2009 to check China on currency manipulations! But to his surprise, a lot of big American corporations launched a massive lobbying effort in US against Obama’s move as they wanted to defend their profits! by keeping China in good books.
After Obama, Trump took over the baton of China bashing. Trump’s voters aren’t intellectuals like Obama’s voter to understand the complex economics of currency manipulations and the fallout of the same. Hence, Trump changed the key term from ‘Currency Manipulation’ to ‘Trade Deficit’ to drive his China bashing campaign. He’s been bashing for over 3 years now, very close to end of his term now and yet hasn’t got any tangible progress over China.
on the contrary, there’s a class of Elites in US which still lives in bubble. They advocate US is still;
- The epicentre of the Financial activity
- Has high tech research and patents over cutting edge technology
- Has best of the universities which draw crowd from all across the world
- Has the biggest and mightiest military in the world!
One thing that’s common amongst all these things is, they are intangible, fictitious assets. They are glorious when masses perceive them as valuable.
On the other hand, China has gained massive tangible strength over last few decades, they have grabbed massive wealth from the west riding on decades inflow of foreign investment, exports, trade surplus.
- They are promoting evolution of Crypto currency which can pose a serious challenge to USD over which the whole western Financial order is built.
- They have been leveraging the human capital trained by west for their own production, to imitate western technologies and launch their own products at much competitive prices. All the western patents are useless once Chinese imitate them.
- They have built massive military capabilities. But given, even Kim Jong Un having nukes, military powers are to a great extent irrelevant. The real battle is of socio-economic domination. Just like Chinese, real utility of mighty American Military is highly limited too.
- Since they are the production house for the entire world, they dominate consumption of commodities which drives many industries and natural resource rich countries in the world, hence they have gained a lot of geo-political and economic grip of the world.
Payback of Karma and way ahead..
What has actually happened is, Karma has played it’s full circle. It started with American greed for infinite corporate profits and extremely short sightedness of American politics (A president’s term lasts mere 4 years Vs. Chinese communist party has been in power since 1949).
These two combined led Democratic America, an advocate of free speech and markets to land in bed with Autocratic, communist China!
If we look back in time over last cold war, Russia never stood an actual chance over combined strength of the west. Although Russia tried hard to match the military strength of the west, it never had an economic and demographic strength to stand a chance against the combined free world of the west.
But China has all the things in abundance which Russia lacked, it’s the most populous country in the world with really hard working people. They are very well integrated in global supply chain with the whole world dependant over them for almost every consumable! They are the second biggest economy in GDP terms and the biggest economy in PPP terms, this gives them the monetary and demographic muscle which Russia lacked to back their massive expansionist ambitions. The west has created a much bigger, stronger monster in an effort to destroy one.
This whole situation of the Covid19 crisis, the Chinese origin of the virus, China hiding critical information about the virus, allowing it to spread across the world, followed by their effort to push national boundaries across the region with Hong Kong, Taiwan and India, these things strongly point that the Chinese link to the virus is not a coincidence. There seems to be a high probability of a foul-play. If China did actually resort to such tricks again (which they have history of playing), world is staring at a much more challenging future….
We need to wake up to the reality of the new cold war. We need to unite all the democracies and free markets based economies under one banner as this new enemy is mighty, highly competent and free of any moral baggage with a very long term planning and ambition!