The economics of Chimerica: between competition and interdependence

Economics Perfect competition graph

Economics Perfect competition graph (Photo credit: Wikipedia)

Dec 13, 2012 Gauri Khandekar

Economics will play a major role in the USChina relationship. Remarkably, the US presidential elections and the once-in-a-decade Chinese leadership change took place in quick succession. Both parties will need to take a hard look at respective economic priorities and at the terms of their relationship in the years to come. US-China relations will be shaped by the balance struck between deepening interdependencies and geoeconomic competition.

US debt remains overwhelmingly large and will be President Obama’s number one domestic priority besides creating jobs at home. At $16 trillion, it is significantly larger than the nearly $10 trillion that Europe as a whole owes. China owns nearly $1.4 trillion of that debt and a total of $3.3 trillion in reserves. China has been diversifying its foreign currency reserves and has also made efforts at internationalizing the Renminbi, agreeing international payments with trade partners in local currencies rather than US dollars. The Chinese leadership’s preoccupation on the other hand will be the transformation of the country’s export based economy to a more sustainable consumption based model.

Recent trends show that Chinese foreign direct investment in the US has been decreasing, mostly in favour of the EU. A recent Deloitte report affirms that the EU is expected to be a priority region for China and will absorb nearly 45 per cent of China’s total outbound investment in 2013, up from 38 per cent in 2012, while that for North America will decrease from 38 per cent to 26 per cent in the same period. The new leadership will also seek to deepen commerce with the Union, the main source of cutting edge technology for China’s modernization plans. While China’s main worry will be growing US protectionist tendencies on trade policies, US worries will largely revolve around China’s increasing share of international markets, its control over rare earths (China currently accounts for nearly 93 per cent of global rare earth production), and its dumping policies given low (albeit rising) production costs at home and its as yet export-oriented growth model.

On international trade, there has been a massive role-reversal. While in 2006 the US was the top trade partner for 127 countries and China for 70; in 2011 China became the number one trading partner for 124 countries and the US for 76. In Asia, the race between the US and China will mainly be for large-scale, plurilateral FTA initiatives. The US will push for the Trans Pacific Partnership (TPP), potentially including as many as 16 major Pacific economies, except China which would incur great loss just by virtue of its exclusion. China on the other hand will push for a major trilateral FTA with Japan and South Korea as well as the ASEAN championed Framework on Regional Comprehensive Economic Partnership (RCEP) which would create a free trade area between the 10 member ASEAN economy and its major existing FTA partners:Australia, China, India, Japan, New Zealand, and South Korea.  RCEP would remove 95 per cent of tariffs on goods and include a market with a combined GDP of $23 trillion. In the race between the TPP, the China-Japan- South Korea FTA and RCEP, RCEP and the trilateral FTA stand a better chance for three reasons. First, negotiating multiple major FTAs will create strains on national negotiating capacities and Asian nations especially Japan and South Korea have already indicated domestic priority for the RCEP and the trilateral FTA. Second, RCEP would build on existing FTAs and also take into account the development priorities of negotiating countries. Third, the US backed TPP would be the most stringent on regulatory stipulations.

The rise of the Dragon and the return of the Eagle will depend much on the economics of their relationship and how the balance between cooperation and competition is struck. The international implications of this relationship however will be monumental since the future of Chimerica will also define the direction of the changing global order.

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