U.S.-China ‘win-win’ game

by Andrey Borodaevskiy

In spite of the polar positions of the United States and China in the global system, during the past dozen years their economies have become intertwined to such a degree that one is tempted to speak of an emerging new giant macroeconomic entity with a common metabolism — at least with regard to some of the more important modern industrial sectors like carmaking or electronics.

Integration or “twinning” of the two economies includes as its major process relocation of a considerable part of the U.S. automobile industry to China. This has contributed to almost overwhelming outsourcing practices that have become typical for this multilayered industrial sector of truly global dimensions.

It was conventional economic integration, in its regional form, that helped North American carmaking survive the first surge of global competition in the 1960s when the U.S. market had been challenged by European and Japanese companies.

The Automobile Agreement of 1965 between the U.S. and Canada transformed this vital industrial sector and paved the way for more comprehensive free trade arrangements. The North American Big Three remained intact, while foreign competitors began switching from export operations to building up their production facilities first in the U.S. and Canada, then in Mexico.

In recent decades, it was again the battle for survival that gave strong impetus to U.S. big business to change its production mode, although the scenario was quite different. This time, North American carmakers first began to establish outsourcing relations with the existing cheap-labor producers in Mexico (via NAFTA) and in China, and later to relocate considerable parts of their own operations to the same destinations (mostly through foreign direct investment and joint ventures). Thus “delocalization” of the automobile industry, as well as of some other high-tech sectors, began and gradually took macroeconomic dimensions and a peculiar form of “twinning.”

As a result, U.S. production went down from almost 12.8 million cars in 2000 to 11.9 million in 2005 and, under the impact of the global crisis, to 5.7 million in 2009. During the same periods, Chinese output grew from less than 2.1 million cars to 5.7 million, and to 13.8 million (crisis or no crisis). Of course, those were not only U.S. producers that went to China to outsource components and arrange assembly there. European, Japanese and South Korean firms are well represented in “Chinese” carmaking, but it is the scale of American presence that looks so awe-inspiring.

In this connection, it is worthwhile to note that, in the course of the current global financial and economic crisis, it was primarily foreign-owned companies engaged in production of cars and components that first got into trouble in China, with some of them even compelled to declare bankruptcy. One could think “twinning” was in serious jeopardy.

Nothing like it! The bankrupt companies simply changed ownership, coming in most cases under local control without — and this is the most important point — giving up their production profile or existing technological ties. The official China stimulates this process and gives the new owners its backing, helping them survive and go on with fulfilling their international obligations. Thus industrial cooperation and outsourcing practices remain intact and may develop even further through measures directed at modernization and diversification.

New opportunities are opened for such firms — both in the field of satisfying local demand and through enhanced involvement into cross-border technological chains and networks as their reliable and effective links.

In their turn, many Chinese companies in various sectors of manufacturing and services have recently shown ambitions to use their rich cash balances to buy out foreign assets and become the new global challengers. The financial crisis has led to significant discounting in foreign assets. It seems that Chinese companies are no longer satisfied with just producing cutting-edge goods. They want to upgrade, in other words — to create their own intellectual property and to get rid of the reputation of being mere original equipment manufacturers.

To a strong degree, both modern U.S.-China outsourcing and investment capital migration have become streets with two-way traffic — a striking contrast to the pattern of industrial cooperation developing between China and Japan.

Although it has originated from the strict necessity to survive cutthroat competition and the hard times of the global crisis, the widespread system of U.S.-China outsourcing entails important political consequences. It gives impetus to geoeconomic thinking, although the latter has been stimulated also by other factors (such as China’s trillion-dollar purchase of U.S. government bonds).

Let us also not overlook the very positive impact of cheap yet high-quality products of Asian origin on the U.S. supply of consumer goods and services, which helps to sustain the high level of living of American citizens.

It seems that geoeconomic considerations and interests, connected first of all with technological specialization and production cooperation, are already stimulating new approaches to traditional foreign policy so strongly that — in the U.S. case at least — an integrated geo-political/economic doctrine is now obviously in the making. The 21st century will probably come under the strong influence of rivalry between the U.S. and Greater China. There are some economic and political issues that make this relationship especially sensitive to the smallest changes.

At least two vivid examples of such stumbling blocks — China’s still undervalued yuan and the human rights issue — come to mind.

Yet, serious frictions between the two great powers are very unlikely and armed conflict is not even feasible — if for no other reason than to keep intact the independent status of Taiwan.

An increasing number of people in China including members of its party elite can see that tight and long-standing bilateral cooperation with the U.S. is indeed a “win-win” game. It seems that due attention to geoeconomic principles would also serve well many other countries including Russia, which is in bad need of working out a positive foreign economic and political strategy.

Russian professor Andrey Borodaevskiy is coauthor of the recent monograph “Russia in the Diversity of Civilizations” (Moscow, 2011).