Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It
Zachary Karabell | 2009-10-13 00:00:00 | Simon & Schuster | 340 | EconomicsTHE EMERGENCE OF CHINA
as an economic superpower is now widely recognized, but as Zachary Karabell reveals, that is only one aspect of the story. Over the past decade, the Chinese and U.S. economies have fused to become one integrated system. How China and the United States manage their relationship will determine whether the coming decades witness increased global prosperity or greater instability.
Karabell traces the twenty-year history that began with the suppression of the protests in Tiananmen Square in 1989. The Chinese leadership adopted a policy of aggressive economic reform and courted U.S. companies and expertise. Karabell charts how integral those companies -- including Federal Express, Kentucky Fried Chicken, Avon, and Wal-Mart -- have been to China's success and how integral China has been to their growth. Though accelerated by the admission of China to the World Trade Organization in 2001, the economies began to fuse without attracting much notice. Preoccupied with the threat of terrorism and wars in Iraq and Afghanistan, the United States soon found itself deeply in debt to China while also reaping the rewards of China's growth.
Now both countries find themselves in an unfamiliar and challenging position. After years of seeking closer integration with the United States, China has begun to question the wisdom of that embrace. The United States, buoyed by China's loans, faces a level of dependency that has generated considerable anxiety. The intertwinement has enhanced the global economy but undermined the sovereignty that governments so crave.
Yet, as Karabell argues, the fusion has advanced too far for either to extricate itself without severe harm. The challenge for the United States is to embrace this new world even with some loss of relative power in order to ensure its prosperity in the future; the challenge for China is to recognize that it is now a major player on the world stage with all the risks and responsibilities that entails. We need them and they need us, but the jury is still out on whether either can fully accept that new paradigm.
In a book rich in individual stories, Karabell, informed by his considerable experience, not only provides the first comprehensive account of how these two countries became one economy but also makes a compelling case for why its continuation in the future is a vital element of a stable, prosperous world.
I believe it was in Thomas Friedman's Lexus and the Olive Tree that he writes about President Clinton during a confrontation with China over Taiwan being warned by Treasury Department officials about the effect any conflict might have due to the US/China economic relationship. That story pretty much entirely sums up Superfusion.
If you have read a Business Week article, you have heard all this before. Companies are pouring into China and looking to its growing middle class as the next great area for growth. Some pioneers such as KFC already have a hold there. We import A LOT from China. American manufacturing is disappearing. China helps fund America's debt by purchasing treasuries. The book is a string of Business Week or Economist stories and rarely does the author go much deeper than I just did. He also does not usually state the implications of his point. The US, China, and every other country are more interconnected then ever meaning their actions must be more coordinated. But so what? That has been the trend since at least World War II. The author also engages in broad generalizations, for example discussing how many missed the China story because we were distracted by Monica Lewinsky or 9/11. With the exception of the weeks around 9/11, that just isn't true. He also calls the US a gambling mecca, which I found a little strange since many countries have much more lenient gambling laws than the more rigid US.
One area the author does discuss in bits and pieces is the upside to the US for the relationship (all those US multi-nationals having a new place to do business) and the fact that much of our trade deficit with China shifted there from other places. Meaning our old trade deficits with South Korea, Taiwan, and Japan are supposedly lower and shifted to China. I have not checked to see if that is true. But more discussion of these types of upsides would have done a better job of showing why the two countries are "fusing" instead of China just rising.
The book just does not dig in far enough for my tastes, as I felt like I had read it all before. The best example is when discussing the US takeover (or retakeover I should say) of FannieMae and FreddieMac. China had billions in securities from these companies and its failure would have severely shaken China's confidence in the US, possibly leading to lower purchases of US treasuries. Did the Treasury Secretary discuss this with China? Were we bullied into action or do it on our own? The author does not say, he just assumes. I would have preferred more research and analysis and less sweeping assumptions.
The book's premise is undoubtedly correct, though another reviewer nicely points out China is more like the drug dealer and the US the addict than equal partners. But the author does not tell readers much about the premise they don't already know if they even have a passing interest in the topic.
Superfusion: How "Chimerica" Will Shape This Century
By Ravi Nagarajan
Published on February 2, 2010 at 10:38 am
Few topics generate as much controversy in the United States as the question of whether free trade has been beneficial for our society. In the early 1990s, the main focus was on trade with Mexico and the impact of the North American Free Trade Agreement (NAFTA). Protectionist sentiment still occasionally results in trade disputes with Mexico such as the restrictions on Mexican trucking that resulted in higher tariffs last year. However, the main target of trade skeptics today is China. The widespread failure to grasp the nature of the complex relationship between the United States and China has led to periodic trade disputes and could seriously harm both countries in the years to come.
Zachary Karabell has made an important contribution to the debate in Superfusion: How China and America Become One Economy and Why the World's Prosperity Depends on It. Mr. Karabell attempts to trace the history of China's remarkable rise over the past twenty years by presenting a wide ranging "thirty thousand foot" view of political and economic forces as well as individual case studies of American companies that penetrated the Chinese consumer market. The underlying thesis is that China and America have "fused" into a single economy of "Chimerica".
Expanding American Brands into China
While Mr. Karabell's big picture observations receive more space in the book, from a business and investing standpoint the individual case studies are equally interesting. The question of how a business can establish, maintain, and grow a brand over time is difficult enough to answer when one is dealing with a single culture and society. Even within a country like the United States, there are many brands such as See's Candies that have not gained traction outside one region. What steps must be taken to expand brand loyalty into a very different culture?
The case studies of Kentucky Fried Chicken and Avon were both revealing in terms of the missteps that American firms are prone to making when expanding into different cultures as well as the eventual placement and branding of the products. Some amusing anecdotes are discussed such as KFC's mistake in translating the "Finger Licking Good" slogan into a Chinese phrase meaning "So Good, You Suck Your Fingers." But the most interesting aspect of both KFC and Avon's entry into China is that they transformed middle market brands in the United States into high end "aspirational" brands in China.
This is actually not very surprising because countries that are experiencing rapid growth in personal incomes often want to emulate richer countries and by consuming American brands, these consumers were demonstrating their economic success in small ways. Of course, the American brands had to be adapted for local tastes and the book provides useful details on how this can be done. KFC has been so successful due to its "early mover" advantage in China that it is now the largest fast food operator in the country with over 2,300 outlets including more than 200 in Beijing alone.
Taking a Broader Perspective
While the individual case studies are of great interest, Mr. Karabell's major focus is clearly on the broader macroeconomic forces that are driving America and China into a single unified economy that he calls "Chimerica". The use of that term is perhaps unfortunate because it is likely to serve as fodder for political sound bites promoting protectionist policies. The book clearly shows that not only are these economic ties mutually beneficial in many ways but that they have reached the stage where China and America are integrated to the point where attempts to reverse course would lead to disaster.
Proponents of isolation often gloss over important questions with sound bites such as "buy American", but what does this really mean when American companies have manufacturing facilities in foreign countries while foreign companies have facilities in the United States? When one buys a Toyota Camry manufactured in Kentucky, is that choice more or less "American" than purchasing a Ford Mustang manufactured in Flat Rock, Michigan simply because Toyota is a Japanese company? The same example applies to American companies that outsource manufacturing to foreign countries and then import these goods into America for final sale. Should the litmus test be the question of where the company's stock is listed? Or the question of what percentage of revenue is generated from various countries? Or the ownership of the company's shares based on the citizenship of the shareholder?
All of these questions may be of interest from a public policy perspective but the bottom line is that in a global economy companies are increasingly focusing on leveraging the comparative advantage of different countries in an attempt to operate in the most efficient manner possible. One can object to this by correctly claiming that American manufacturing jobs have been lost over the past several decades. However, it is disingenuous to not also examine the benefits that American consumers have enjoyed in the form of more affordable consumer goods produced by overseas manufacturers or the benefits of American brands expanding into China.
Mr. Karabell concludes the book with a discussion of how the United States can avoid a fate similar to Great Britain's after World War II. After the war, economic, political, and military dominance of the West clearly shifted from Britain to the United States and has resulted in six decades of undisputed dominance for America. With China's economy growing at a much faster rate than America's, is it inevitable for the United States to follow the path of Britain in the coming decades?
This is a sobering question particularly in light of the massive government deficits facing the United States that neither political party shows any sign of addressing. The fact that China is playing a major role in funding these deficits will eventually force the United States to come to grips with the problem. The question is whether this will be done on America's terms or in a way decided by the Chinese.
Recent events in Washington are troubling to say the least. Politicians are calling for a commission to address tax and spending questions that our elected Representatives have decided to punt on. This reveals an abdication of duty of the highest order and does not inspire confidence that the matter will be decided on America's terms.
It would cost less than $14,000 (at the full retail price) to send each Member of Congress and the President's cabinet a copy of Mr. Karabell's book. It would be money well spent if they actually bother to read the book.
China, the USA's largest creditor, buys billions of dollars in U.S. Treasury bills. That allows us to keep interest rates low. Low interest rates encourage Americans to spend more money than they have. Americans especially like to consume low-priced Chinese goods. So China has been happy to fuel this cycle of investment and consumption. Thus our two countries have become partners, says Karabell: "The Chinese and U.S. economies have fused to become one integrated system. Americans should embrace this fusion."
Karabell downplays the fact that the relationship is more a codependency than a partnership--like drug dealer and addict. Now the USA has overdosed on debt, while China keeps saving, investing, and growing. China's premier Wen Jiabao stated that he is worried about the safety of China's investment in the USA. How long can the "partnership" last? Karabell underestimates the potential for conflict and the impediments to the happily integrated system that he envisions.
For example, some American politicians scold China for keeping its currency undervalued, its banking system inefficient, its savings rate high, and consumption low.
Zachary Karabell's book,"Superfusion", is a stunningly blunt but realistic assessment of America's current position in the global economy as well as China's ascendancy. There are several important themes that emerge from his book.
While practicing their own version of American capitalism, the Chinese are succeeding in transforming their economy and society to achieve a level of economic stability and potential economic hegemony. There are myriad political implications.
Meanwhile, the United States, the epicenter of capitalism, seems to have abandoned the spirit of the capitalist construct. Turning inward and decrying free trade, behaving in a reactive fashion to the recent global economic crisis; if continued, these behaviors do not bode well for our relative economic position. We are in danger of not only looking askance at the Chinese but looking away from our own political and economic shortcomings.
The nation-state model and the impetus to maintain economic and political sovreignty at all costs is perhaps outmoded. It seems counterintuitive to the inevitable dynamic of globalization and all the complexities that implies. Political and business leaders at every level must recognize that it's a small planet replete with competing ideologies and political and economic constructs. Capitalism, however implemented, will allow civil societies around the globe to flourish.
Chimerica is a phenonmenon that developed over the last 20 years. Both the United States and China were largely unaware that it was happening, much less the "unintended consequences" of the relationship. Zachary Karabell's book is an informative history of this phenomenon and a call for better understanding of our intertwinement. It is a call we must heed.
Zachary Karabell, president of River Twice Research, is one of the few original thinkers out there who also has a sense of humor. So there's more than one? Zach has brought his considerable talents to bear on the current state of the Chinese-American relationship in a new book, Superfusion: How China and American became One Economy and Why the World's Prosperity Depends On It. International trade has fused the two countries into a single economic unit that accounts for a quarter of the world's population and a third of its GDP, despite wildly different cultures, much like the loose confederation that makes up the European Community. The Middle Kingdom now has reserves of $2.3 trillion, which is overwhelmingly invested in the US. Where else can it go? That enabled them to step up and play an important role in the bail out of the US financial system this year. But it is an imbalanced agglomeration, with Americans over consuming and under saving and the Chinese doing the reverse. This has to stop, lest the symbiotic relationship tears itself apart. The tit for tat, storm in a tea cup, where the US imposed punitive import duties on Chinese tires and the they retaliated with a ban on American chicken feet (yes, they eat them, yuk!), is a recent example. The reality is that old, boring industries that once might have fought tooth and nail for protection are now migrating to China en masse and finding new life. Bet you didn't know that General Motors sells more cars in China than in the US, some 1.6 million this year? Don't hold your breath waiting for China to float the Yuan, as it is one of the few tools that give the Mandarins in Beijing direct control of a huge, disparate economy. Chinese military spending is so parsimonious that it won't remotely comprise a threat to the US. What little they have is directed at potential regional aggressors, like Japan, India, and Russia. The greatest risk to the existing relationship is that Chinese growth continues so rapid, that it pits them against the world in resource bidding wars, which could get ugly. With crude at $82 and copper at $3, has that already started? The book is well worth a read for some excellent "out of the box" analysis. Does anyone have any good recipes for chicken feet?
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