Another View: Interdependence links China, U.S.

In the midst of the globalization trends seen since the fall of the Berlin wall, one bilateral relationship stands out — that of the U.S. and China. Both economies — in terms of total GDP and, more strikingly, their growing economic interdependence — shape the options and competition within the global marketplace.

What has this interdependence meant for the two countries, and what does it hold for the future?

Twenty years ago, China was in the early stages of its reform process from a planned economy to a market-oriented system. U.S. total trade with China, measured as imports plus exports, was just over $17 billion. Last year, total trade reached over $407 billion. While China’s exports to the U.S. far outstrip those of the U.S. to China, half of China’s exports are generated by foreign direct investment, a good deal of which comes from U.S. companies. Hence China has become a welcomed source of low-cost goods for buyers in the U.S., as well as a profitable investment location for U.S. companies.

Likewise, the Chinese government has invested foreign reserves in U.S. government bonds, seeing the U.S. economy as the safest bet. And, in recent years, Chinese companies have also begun to enter the U.S. marketplace.

China has proven to be a golden opportunity for U.S. and other firms, while China has also prospered as a result of its open-door policies.

The U.S. and China are the two largest manufacturers in the world, although China’s progress attracts more attention. To keep perspective, note that California’s economy was larger than China’s until 2001. And the U.S. average GDP per capita is approximately 10 times that of China’s.

Challenges persist, of course. China’s economic system transition is incomplete, leaving it with weak capital markets, inadequate social services, and unsustainable growth in the face of environmental challenges. Ironically, while the reasons are different, the same list of challenges applies to the U.S.

It is a stretch to argue that China’s problems are the result of decisions that the U.S. government and companies have made, just as it is untenable that the U.S.’s problems have been caused by China. The growing market interactions of the two economies did lead to imbalanced trade, but this is a symptom rather than a cause.

China’s academic experts and policy makers are proposing to stimulate China’s domestic market to reduce the reliance on exports. If successful, this would reduce the trade imbalance between the two countries, but would also mean China would not need to purchase as many U.S. bonds as its growth in foreign reserves would fall. Using domestic demand as the future growth engine would help China continue the growth it has come to enjoy and rely on.

In the U.S., this means that households will need to save more so that the U.S. government can finance our own consumption at home. Our mutual prosperity and interdependence can certainly continue, but the terms will need to change for the good of both.

Penelope B. Prime is director of the China Research Center and a professor at Mercer University