Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It

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9781416583707: Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It
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Now in paperback, Zachary Karabell argues that the intertwined economic relationship between China and the U.S. will affect our long-term prosperity more than any other contemporary issue. As the world continues the slow work of repairing the damage of the financial crisis, it is crucial that the U.S. understands that it cannot go it alone. Its mutuality with China is permanent, essential, and defining. Zachary Karabell’s brilliant book lays out this complex and important economic story.
“Karabell excels at weaving in glitzy tales of the brave new China against the larger backdrop of the Middle Kingdom’s forceful but cautious economic liberalization and the often tortuous, frequently saber-rattling politics of U.S.-China relations....A provocative argument.”
—Los Angeles Times
“The question at the heart of Superfusion is a pressing one: What will happen next? Mr. Karabell says that the U.S. must turn its thinking away from the military and security challenges of the twentieth century and focus more on the economic challenges of the twenty-first.”
—The Wall Street Journal
“A compelling brief on the unlikely convergence of the U.S. and Chinese economies....Essential reading for anyone curious about the increasing economic integration and interdependence between China and America, the public opposition in both nations, and the implication for the U.S. as it faces competition from a nation it cannot coerce.”
—Publishers Weekly (starred review)

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About the Author:

Zachary Karabell is an author, money manager, commentator, and president of River Twice Research, where he analyzes economic and political trends. Educated at Columbia, Oxford, and Harvard, where he received his PhD, Karabell has written eleven previous books. He is a regular commentator on CNBC, MSNBC, and CNN. He writes the weekly “Edgy Optimist” column for Reuters and The Atlantic, and is a contributor to such publications as The Daily Beast, Time, The Wall Street Journal, The New Republic, The New York Times, and Foreign Affairs.

Excerpt. Reprinted by permission. All rights reserved.:

CHAPTER 1
Black Cat, White Cat


THE CONVERGENCE OF CHINA and the United States began when the two were worlds apart. There was nothing inevitable about what took place. It didn’t have to happen, yet it did.

At the end of the 1970s, few societies were more distinct and distant. China was a predominantly agricultural nation mired in poverty and cut off from the world after the excesses of the dictatorship of Chairman Mao. By the 1970s, trade accounted for only 5 percent of China’s gross domestic product, an astonishing low figure for a country of China’s size and scale. In fact, China in the waning years of Mao had become significantly more isolated and detached from the international system than it had been either before the Communist victory in 1949 or during the initial years of the revolution in the 1950s.

The United States, by contrast, was the dominant power in the world in the late 1970s, even though its self-perception was mired in malaise and doubt. The experience of the Vietnam War, the stagflation of the domestic economy, the Watergate imbroglio, and a sense that it was no longer perceived as a champion of freedom all contributed to a crisis of confidence and self-image. The 1970s also saw the beginning of a long and permanent decline in U.S. manufacturing employment, as other parts of world began to produce an ever-larger share of consumer goods for sale in U.S. and European markets. But in both military and economic terms, the United States remained the central force on the globe, even factoring in the military challenge of the Soviet Union and the growing economic strength of Japan and West Germany.

The United States and China had a dramatic and surprising rekindling of relations in 1972, when Richard Nixon traveled to Beijing to meet with Mao in the Great Hall of the People off of Tiananmen Square. It was an extraordinary meeting, made possible by the assiduous back-channel diplomacy of National Security Advisor Henry Kissinger, his Chinese interlocutors in general, and Premier Zhou Enlai above all. Of course, there was also Ping-Pong. China extended an invitation to the U.S. table tennis team as a gesture of goodwill in 1971, setting the stage for the political rapprochement a year later. It was perhaps the most important moment for the game, ever, save the occasional family bonding experience that still takes place in garages, dens, and fluorescent-lit basements throughout the world.

But neither Ping-Pong nor elaborate banquets in Beijing radically altered the cold peace between China and the world. The opening between China and the United States was largely confined to politics. While there was a lessening of tension and an increase in diplomacy, that was the extent of it. Until Mao’s death in 1976 and the resulting turmoil in the two years after, China remained as cut off from its neighbors and the world at large as it had been at any point in its long and complicated history. Relations with the Soviet Union, nominally a cousin and an ally in the global Communism-versus-capitalism battle, were at best frosty. Within the ruling elite of the Chinese Communist Party, there was substantial resistance to closer ties with the West or even the East. The first decades of Communist rule, coming on the heels of more than a century of pressure and encroachments by the West, were devoted to making China autonomous, independent, and self-sufficient. That ran contrary to integration with the world at large, even as the economic policies of the ruling party failed to improve the material conditions of hundreds of millions of Chinese people.

In 1978 Deng Xiaoping consolidated his hold on the party and the country, and he pushed through an agenda of reform and modernization. Too many of China’s people were mired in poverty, and Deng wisely understood that unless that changed, the tenuous compact between the party and the people would disintegrate. Deng was an unlikely visionary. He had survived purges, internecine battles within the Communist Party, bouts of internal exile and disfavor, the animosity of the Red Guards of the Cultural Revolution, and what could best be described as an up-and-down relationship with Mao. Already seventy-two years old when Mao died, Deng was at an age when most people look back at their lives. But he had no intention of going gently into that good night, wizened and gnomelike that he was. He had the grudging respect of many of the older party cadres and the utter loyalty of a younger generation that venerated his long service to the party and marveled at his ability to escape death—political and actual—for so long.

Deng intended to remake the way that the party governed the economy. To that end, he first undertook agricultural reform and began to abolish the collective farming system. Then he allowed for the creation of a few select special economic zones along the southern coast. These zones were allowed to design their tax regimes to be more hospitable to private industry and foreign business ventures, and to give individuals more latitude to do business separate from the mandate of the state. In spite of the Communist Party’s hostility to the West, the main criteria for the zones were that they were proximate to centers of Western commerce and trade—namely, Hong Kong, Macau, and in related fashion, Taiwan.

This limited opening was meant to be a laboratory, but the hunger of people for more autonomy and for raising their standard of living led to a rush of activity. Trade spiked dramatically, as did industry in formerly sleepy regions such as the Pearl River Delta north of Hong Kong. That did not please many in the party, who would not speak out directly against Deng but who could fall back on deep-seated and widely shared ambivalence about trade and too much entanglement with the West. Many old-time party members held fast to the belief that fewer exports were better than more, and that no imports were better than some. There was also resistance to welcoming foreign capital into the closed loop that was China’s economy in the 1970s and early 1980s. Many feared—rightly, as it turned out—that once foreign capital began to flow into China, the days of Maoism and even Chinese Communism would be numbered.1

But there was no going back. Throughout the 1980s, while the pace of reform sometimes accelerated and sometimes sputtered, it never ceased. The results were impressive. Economic growth averaged nearly 10 percent during the 1980s, while inflation was moderate. Some years growth was 7 percent, some years it neared 15 percent, but the overall trend was up. That said, the starting point was so low that even such rapid growth still left China a poor country compared to the rest of the world. It would need many more years of growth before it would even enter the ranks of a “middle-class” nation. And the big-picture statistics masked huge regional variations. While the new economic zones thrived and expanded rapidly, many parts of the country, in the interior and in the western provinces, grew not at all.

During these years, Deng championed an approach of “crossing the river by touching stones,” which meant being flexible, nimble, and heterodox. There was also a concept of “one country, two systems,” which meant a socialist system governed by the absolute authority of the state and the party for the bulk of China, while for the special economic zones and eventually for Hong Kong (once it was unified with the mainland) market forces would be predominant. There would be one state and one government, but there would be two distinct approaches. These ad hoc, somewhat confusing policies had wider implications for China’s development. While Deng may have been clear in his own mind about the differentiation, he was at heart a pragmatist who shifted plans, labels, and slogans to fit the needs of the moment. It was left to others to debate and flesh out the implications of his ideas.

The result was a system in flux. Some resisted the move toward more openness with the world and fought the very idea that market rules should have a place in China. Others wanted the opening to go faster and extend more broadly throughout Chinese society. Most of the discussions occurred behind a veneer of party unity, but soon the debate began to seep out in public. Intellectuals and poets joined the discussions, while millions in the special economic zones set up small business enterprises and cast off the bland ideological straightjacket that had stifled change and growth for the past decades. Of course, the fact that the government relaxed its restrictions and was less prone to the indiscriminate use of force as a tool of control allowed for that loosening.

Part of the debate was purely about the best path to modernization and economic growth. But with that came the more radical debate about democracy and political openness. Inside the party, there had long been discussions about democracy within the framework of Communist Party rule, but now there were rumblings about democracy as a separate reform that could jeopardize party rule. By the end of the 1980s, some of the defenders of democracy were making their claims in public. While they were assailed as “bourgeois liberals” bent on undermining the revolution, the fact that they were even able to publish and discuss their views in public without being arrested and jailed was more notable than the acrimony they generated. Of course, they did face harassment, and when certain invisible lines were crossed, they could be stripped of their posts, confined, and in other ways silenced. The rising volume of these debates was the direct precursor to the democracy movement that culminated in the Tiananmen Square protest during the spring of 1989.

These developments were largely invisible to the outside world. There was an increase in the number of foreign tourists in China (though given the complete absence of tourists previously, any number would have represented a significant increase), and there was a sharp rise in the number of Chinese students studying abroad. But the internal dynamics of Chinese society were watched only by academics and to some extent intelligence agencies. The former did a relatively good job tracking the changes and the debates but tended to see China’s evolution through a prism of “Communism and the party, bad; democracy and the market, good.” Intelligence agencies were mostly focused on counting men in uniform and numbers of missiles, and on predicting whether China would take action against Taiwan.

Though the party was always on guard against internal challenges, the central leadership, including Deng, was surprised by what happened at Tiananmen. While the square had been the scene of protests in the past, including just after Mao’s death, what made the spring of 1989 different was that students from other parts of the country journeyed to Beijing to join the movement. That in turn spawned other protests throughout the country, which united a hodgepodge of dissidents, factory workers, peasants, and students, each of whom had their own grievances and shared only a common anger at the party and the central government.

The swift and brutal end to the movement did lead to a period of repression and fear. Many thousands were arrested and jailed, and more were detained and beaten as the government used its considerable powers to end any possibility of a revival. But like the general in his labyrinth, Deng retreated and recouped. He knew that something had not gone according to plan, and he was determined to set a future course that would not see a repeat of the protests on the one hand, or the chaos that he saw as endemic in China’s past on the other. China over the previous 150 years had been buffeted by a never-ending series of civil wars, invasions, and self-imposed crises, and Deng was determined not to perpetuate a destructive cycle that had left the country on the sidelines of history.

First he had to protect his own flank. There was a risk after June 1989 that he would be ousted by younger hard-line factions who would hold him accountable and use the protests as an excuse to clamp down on reform and shut China off from the world once again. Deng believed that would be tantamount to digging the collective grave of the party and the future of China. As a result, he renewed his commitment to reform and decided that the pace needed to be accelerated, the scope expanded, and the results magnified. Unless more people saw material improvement in their lives, and quickly, there would be nothing but trouble ahead. Always armed with an aphorism, Deng remarked, “We certainly must not stop eating for fear of choking.”2 Continuing on the path of the 1980s remained an imperative, Tiananmen notwithstanding.

Deng’s willingness to embrace a market economy and adopt an open door approach to the world at large was anything but ideological. Years earlier, observing party members anguishing over some proposed policy, Deng had remarked, “Black cat, white cat, what does it matter as long it catches mice?” The ends above all mattered for Deng, and both before and after Tiananmen, the goal was the continuation of the Chinese state led by the party for the betterment of all of China. The material prosperity of the masses was an integral component to that end, and he had the foresight to understand that the rising affluence of neighboring Asian countries such as Japan, Singapore, South Korea, and Thailand was making it impossible for the party to maintain legitimacy unless it delivered on the promise of prosperity.

Looking back, we now know that China embarked on a path of economic modernization that managed to transform the country more quickly and more effectively than anyone could have imagined. At each stage along the way, of course, other paths were available, many of which might have led to very different outcomes—including the collapse of the government, much as the ossified government of the Soviet Union fell apart in the early 1990s. Historians and scholars tend not to narrate the past in light of future outcomes. That can lead to selective memory and to emphasizing details and decisions that were understood to be more important only because of what happened subsequently, even if other things were more important at the time. In China of the 1980s and early 1990s, it was far from apparent that the outcome would be a dynamic market economy that would end the Communist experiment and leave in its wake something new and unprecedented. Most people at the time believed that Deng’s policies would result in a modern, more open, and more prosperous Communist China, not the fusion of China and America. But in charting the evolution of Chimerica, the paths that were taken matter more than those that weren’t.

In 1992 the pace of reform accelerated again, due once more to Deng’s initiative. China had suffered a recession in 1990–91, and the reform agenda had come under attack. To shore up support, Deng took what would become a symbolic trip to the south. Touring the special economic zones, Deng proclaimed his enthusiasm for more change, and everywhere he went, he celebrated the notion that getting rich was consistent with the goals of the party and the state. In Shenzhen, which would soon become a metropolis of millions of people and would be one of the anchors of the industrial boom of the Pearl River region, he announced that there was no inherent conflict between a market economy and a state-planned economy. Deng’s ability to hold simultaneously to contradictory ideas was either the mark of a genius or a madman, but he had a better read of the pulse of his society than anyone else. He was willing to embrace contained turmoil and his tour was taken—rightly so—as a green light to...

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