Opinion | A US-China trade deal can end ‘Chimerica’ on a positive note

A main demand of US Treasury Secretary Steven Mnuchin’s delegation to Beijing last week was that China cut its trade deficit by US$200 billion. China was busy preparing for the 200th anniversary of Karl Marx’s birth, so the trade discussions were not exactly the centre of attention in the People’s Republic. But if a point was missed, it is that United States needs that US$200 billion. 

Actually, it needs US$375 billion, the full trade deficit it claims with China (in the form of cut-rate Chinese loans priced at America’s own low interest rates, that is). After all, China can only lend to the US if it first accumulates dollars via trade surpluses.  

Behind this unbalanced trade relationship, there is a more fundamental reality; the unavoidable unwinding of “Chimerica”. Coined by Niall Ferguson and Moritz Schularick in 2006, the term refers to the symbiotic but unbalanced economic relationship between the two global powers. China’s excess savings turn into trade surpluses, while America’s craving for capital results in trade deficits.  

For nearly two decades, both sides have benefited from Chimerica. China’s development was fuelled by foreign corporations investing and producing for global markets, while Chinese firms raised their competitiveness by exporting to advanced Western countries. Americans enjoyed depressed interest rates and consumption beyond their means, while corporations made more profits than ever.

In the 1980s, current US President Donald Trump was bashing Japan, to him a mercantilist upstart taking advantage of free and open American markets. He saw destroyed American jobs, battered American firms and distorted economic activity. Today Trump still has issues with the fairness of Japan’s trade practices, its monetary policy a device for a weaker yen. Yet, perceiving China as the US’ main rival, he appointed Peter Navarro, author of Death by China: Confronting the Dragon – A Global Call to Action and The Coming China Wars, as director of the White House National Trade Council. 

Japan seems not to have realised that trade surpluses accruing through the keiretsu system, favourable exchange rates or activist industrial policy, eventually make the export champion poorer by transferring labour and wealth to the importing country. Do China’s leaders understand Japan’s 30-year stagnation and how mercantilism backfires? Sure, but on a per capita basis, China is only about a quarter as rich as Japan, and so needs growth to avoid the dreaded middle-income trap. The necessary productivity increases will come via exports and government support for innovation.