November 5, 2009

Letter from America

Chimerica: A Marriage on the Rocks?

By RICHARD BERNSTEIN

NEW YORK — “Superfusion” — that’s the name of a new book by Zachary

Karabell, which describes how “the unique relationship between China and the
United States has become the axis of the world economy.”

It’s a catchy concept in a world that struggles to find the terms to keep pace with
a rapidly changing economy. It’s pretty much identical to another neologism,
coined a couple of years ago by the economic historians Niall Ferguson and
Moritz Schularick to describe the Sino-American economic relationship. That one
was Chimerica.

China and the United States are of course enormous economies with an
enormous volume of business — $150 billion in trade in 2002; nearly $450
billion in 2008, and not much less than that in 2009, despite the economic
turndown. But superfusion and Chimerica suggest something beyond mere
amplitude. The analysis is, as Karabell describes it, that the two giants have
become “one intertwined, integrated hypereconomy.” Or, as Mr. Ferguson has
put it: Chimerica is “the real engine of the world economy.”

That would seem to indicate a great deal of agreement, a consensus even, and yet
Mr. Karabell’s book appears at a moment of debate, in which the coiners of the
new expressions are on very different places in the spectrum of opinion.
Essentially, Mr. Ferguson, warns both of dangers and fragility in Chimerica.

In recent speeches and articles, he has blamed Chimerica for contributing

substantially to the global financial crisis, even as he’s been arguing that its days
may be numbered, possibly to be replaced by new conflicts and antagonisms.

By contrast, Mr. Karabell, thinks that superfusion is both permanent and mostly
good.

It mitigated the effects of a global crisis that would probably have been a lot
worse without it, he says. And he feels that superfusion’s continuation will be a

1
lot like its creation, something that happened largely outside the control of
national governments and that will remain largely outside their control.

“Normally a time of crisis like this would be the perfect time for attempts at
economic retaliation, like trade restrictions and higher tariffs and the like,” he
said in a telephone conversation this week “In fact very little along those lines
has happened.” One reason for that, he says, is that “the ability to take measures
is pretty limited.”

The different perspectives of Mr. Karabell and Mr. Ferguson reflect something
fairly consistent about the analysis of China, which is that experts examining the
same data often come to different conclusions about what China means to the
United States. Even such basic questions as whether China will be a partner or a
rival remain unresolved, and that lack of resolution is illustrated in the different
perspectives on the two countries fusion into a single interdependent economy.

Mr. Ferguson is a professor of history at Harvard whose numerous books include

“The Ascent of Money: A Financial History of the World” and “Colossus: The Rise
and Fall of the American Empire.”

For him, Chimerica comes down to a simple formula: China does the saving;
America the spending. One has lent more than $2 trillion; the other has
borrowed it. “For a time,” he wrote in a recent Newsweek article, “Chimerica
seemed like a marriage made in heaven. Both economies grew so fast that they
accounted for 40 percent of global growth between 1998 and 207.

“The big question now is whether or not this marriage is on the rocks,” he added.

In the worst possible case, Mr. Ferguson has been arguing, China could end up
quite a lot like Germany did at the beginning of the 20th century, a rising power
whose extremely high level of economic integration with the rest of the world
did not prevent World War I.

“With China decoupled from America — relying less on exports to the U.S.
market,” Mr. Ferguson wrote in The American Interest Online a few months ago,
the “end of Chimerica would have arrived.”

In Mr. Karabell’s overall position is that too much has been made of such matters
as China’s trade imbalance with the United States and China’s holdings of
American debt, while other matters have been given less importance. Among

2
these other matters is a pattern of increasing sales to China by companies that
have, essentially, been saved, because they had run out of other markets.

“There can be no argument,” he writes in his book, “that U.S. companies reaped
extraordinary profits from the growth of China,” and he includes case studies of
companies as diverse as Kentucky Fried Chicken, Federal Express, and Avon in
his account.

At the same time, he argues, the often overlooked amount of American

investment in China lessened the impact of the financial crisis, because that
money didn’t go into such things as the real estate bubble and its attendant
financial instruments, like credit default swaps.

Moreover, if China’s manipulation of its currency contributed to the American

housing bubble — one example of superfusion at work — Chinese lending to the
United States has also financed the stimulus package, which has prevented things
from being a lot worse.

But what of Mr. Ferguson’s argument that conflict could come, spurred by such
things as China’s naval development in the Pacific and Indian oceans, its search
for natural resources in Africa — so reminiscent of the scramble for empire of
the late 19th century — and its willingness to maintain close, even protective
relations with countries high up on the American disapproval list, like Sudan and
Iran?

“The two economies have become so intertwined that neither can extricate itself
without considerable harm,” Mr. Karabell said. “The U.S. remains not only the
most important market for Chinese goods but the source of much of the
innovation and investment that has fueled China’s domestic growth. China is not
only a vital source of funding for U.S. government spending but an essential
market for companies large and small looking for a new frontier for growth.

“Close economic ties don’t preclude conflict,” he said, “but there is no sign on
either side that conflict is either desirable or feasible, and the economic fusion is
the primary reason.”

E-MAIL pagetwo@iht.com