Zachary Karabell on U.S.-China Relationship

As the United States racks up ever higher budget deficits, China has bought ever greater quantities of American debt. Now many observers—including the U.S. and Chinese governments—are concerned about imbalances in the relationship between the two countries. Author Zachary Karabell says that conventional wisdom may be wrong. In his book Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends on It, he argues that the Chinese and American economies have become a unified system that can benefit both parties—but can't be undone.

A podcast of Karabell’s conversation with NEWSWEEK’s Daniel Gross can be heard here. Listeners can also subscribe to Gross’s Every Day I Read the Book podcast on iTunes.

Your book is an argument that the U.S. and Chinese economies are essentially one integrated system. Most people see it as the Chinese making cheap stuff out of plastic for us and then buying our debt.
In my view that's only one aspect of a much more complicated relationship that has seen many many large U.S. companies finding their most robust and dynamic growth in the last 10 to 20 years in China—some of which, granted, doesn't go directly into the U.S. economy, but a lot of which does. A Caterpillar plant in Mississippi is kept open because it provides couplings for equipment that's made in China and used in China. It's also a relationship that sees China depending very heavily on U.S. intellectual know-how on setting up business systems and frameworks. That doesn't show up in trade statistics, but so much of China's growth over the past 20 years has been a product of utilizing and adapting American intelligence to fuel that economy.

When do you date the beginning of Superfusion?
It began in baby steps in the 1980s when China made a few brief little experiments in creating an open market in a few select regions, mostly along the southern coast of China. It really gathered steam, oddly enough, after a moment that many people assumed was the end of a story, not the beginning: the suppression of the revolts in Tiananmen Square in June of 1989. The leader of the Chinese Communist Party, Deng Xiaoping, made, I think, a very clear choice, which is you could have political reform or you could have economic reform, but you can't have neither. The choice in China was, "We will have no political reform, but we'll have hypercharged economic reform." And if you were going to integrate with the global economy in the early 1990s, you had no choice but to deal much more intimately with the United States. And they started to create this odd hybrid system, which was a closed domestic economy with a huge amount of local regional variety and entrepreneurship and also a huge degree of appetite and willingness to accept foreign capital. It's not as well understood just how much American investment there's been in China for the last 15 years.

It's also less well understood how consumer-oriented businesses have found a stake in China. Tell us about how Kentucky Fried Chicken made it big in China.
KFC was not doing so well in the late '80s and '90s and was looking for international growth. They go into China and they allow local managers to have a lot of latitude to rebrand Kentucky Fried Chicken. They change the name to KFC, because Kentucky Fried Chicken would be kind of meaningless in Beijing, and they changed the look of the Colonel so he starts to look a little bit like a cross between Fu Manchu and Colonel Sanders. And they make these cool hip places with table service and clean gleaming stores. The result: suddenly KFC, which is about the opposite of hip in the U.S., becomes ultracool, and it because it's ultracool in China, they get to charge more money. By the late 1990s, KFC's China operations were providing 25 percent of all of KFC's global revenue. Avon has the same experience. So suddenly you've got these two kind of low-end brands in the United States become these high-end brands in China because they represent the modern world.

You write that this is a two-way street. Chinese companies have increasingly been looking to buy American brands, and get footholds in this market. How has that gone?
To one degree, the U.S. government and many Americans are apprehensive about having the Chinese buy American companies, just like they were about having the Japanese buy American companies in the 1980s. The problem with China is there's real suspicion of the government and motives. Whenever a company tries to buy any American company where there's any type of technology that could be construed as having a military use, the U.S. government tends to nix that deal. More problematic, there's been a lot of pressure on the part of the Americans and the part of labor unions that China is unfairly manipulating its currency to give it an unfair trade advantage. Well, if China does revalue its currency, which it had begun to do before the crisis of last year, it actually would give the Chinese more purchasing power to come into the U.S. and buy U.S. companies. I don't know if Americans are prepared for the Chinese coming in buying up today's equivalent of Pebble Beach. They, by the way, are not yet as interested in that. They're much more focused on their own domestic economy than they are on buying things abroad.

How has the financial crisis and its aftermath affected this process of Superfusion? Has it brought it to a halt? Has it led it off in a different direction?
If you could poll most people in either the U.S. or China about what they feel about closer economic engagement or dependence on each other, the vast majority would say they … would prefer a China-U.S. divorce. Unfortunately this marriage is more like a 19th-century marriage than a 21st-century marriage. Both parties may want to get divorced, but there's actually very few options for them to do so. And so what you have is this increasingly close economic relationship, partly in the form of the Chinese holding ever larger forms of U.S. debt. But also, China wouldn't have the hundreds of billions of dollars to spend on propping up its own domestic economy if it didn't have a vibrant market in the U.S. If anything, the crisis has propelled the two more closely together, because they're the two most dynamic forces in the global economic system.

Projecting from existing trends can be a dangerous tendency, but when you look at this and try to roll this forward, what do you see?
Once you get past a 10-year period, you're basically in fantasy land when it comes to forecasting. It's certainly true that at the current rate and judging from the past five to 10 years, China will surpass the United States as the world's largest economy sometime between 2025 and 2030. At a per capita level, China's going to be much poorer than either anyone in the European Union or the United States for so many decades it's not even worth projecting. Could this be one of those moments when Americans in particular get all agitated and concerned that their place in the world is slipping, and there's another power on the rise, and it turns out that we just have a blip, and we'll rediscover our mojo and reengage that engine and become the great dynamic force? Look, that might happen; but China seems to be so much different. It's a more complicated society, it's an incredibly confident society, and it still has 800 million people mired in intense rural poverty. And they seem to have come up with a formula that, while it violates every Western notion of how a country should develop and become rich, works better than most of the formulas Westerners have had for the last 40 years.

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