Frenemies: Will China and the United States Live Happily Ever After?

Part one: Mercantilism, old and new

Mike Richman

May 29, 2018

In June of 1950, W. Edwards Deming began offering training to the Japanese Union of Scientists and Engineers (JUSE) on the precepts of statistical process control.

At almost exactly the same time, Communist North Korea invaded and nearly overwhelmed their southern neighbors, who were immediately supported by the United Nations. The three-year war that followed resulted in a split on the Korean peninsula that exists to this day, with a state-controlled economy in the north and a free-market capitalist manufacturing behemoth in the south.

Of course, the Korean War would not have happened at all were it not for Red China supporting its North Korean allies with money, equipment, and eventually, soldiers. And the Chinese would not have been there themselves, most likely, had Mao Zedong not persevered in the face of incredible hardships and long odds to win the Chinese Civil War and found the People’s Republic of China (PRC) on Oct. 1, 1949.

Let’s pause for a moment to think about these events within the context of a timeline:

• Mao founds the PRC on Oct. 1, 1949
• Deming first lectures JUSE in June, 1950
• North Korea invades South Korea on June 25, 1950

From the standpoint of macroeconomics, it’s hard to imagine three more consequential moments within any half-year period. Those three pebbles flung into the ocean of commerce nearly seven decades ago resulted in ripples that are still central to our understanding of pretty much every aspect of relations between Asia and the rest of the world. And it all comes down to two very different views of economic planning: bottom-up, laissez-faire, free-market capitalism vs. top-down, controlled, share-and-share alike socialism.

Surprisingly, it’s hard to tell where the United States and China, much less Japan and the Koreas, currently fall on these axes. To understand why, it’s necessary to consider how the world’s two foremost economies reached this particular moment, filled as it is with such promise and risk.

China: the enduring global superpower

The Chinese civilization stretches back at least four thousand years, and the people who would start that civilization were there for thousands of generations before that. Imperial rule began with the Qin Dynasty, founded in 221 BCE—an age when Rome was still consolidating its power. Nearly a millennia later, as Rome fell and the Dark Ages spread throughout Europe, China emerged as the most dominant power in the world. Still later, decades before Columbus “discovered” the New World, there is strong evidence that Chinese treasure ships circumnavigated the globe, spreading Chinese culture and establishing trade. But by the 17th century, a retreat away from internationalism led to a China with dimming prospects and shuttered horizons.

At this point in the story, the rest of the world, especially Europe, had caught up and then surpassed China. When the cultures met, the Europeans were the ones with state-of-the-art warships and firearms (this despite the fact that the Chinese first invented gunpowder in the ninth century CE). Through the age of the European empire, China found itself in the unaccustomed role of conquered instead of conqueror, ruled as opposed to ruler.

China’s history, land area, and population foreshadowed a return to glory… someday.

And yet there was always a latent power there. Even as the Opium Wars raged, foreign influence predominated, and various rebellions rose and fell. China’s history, land area, and population foreshadowed a return to glory… someday.

In a long history of stunning highs and devastating lows, perhaps no event so devastated the Chinese people as World War II. Their long-time rivals, the Japanese, were harsh masters, harsher by far than the British had ever been. The Sino-Japanese conflict broke out in 1931, lasted nearly 15 years, and caused millions of deaths. Eventually, the Communists and Nationalists together, in conjunction with the Americans, British, and Russians, helped throw off the Japanese yoke. And then, of course, Mao’s Communists and Chiang’s Nationalists, uneasy partners through the national crisis, resumed their civil war.

When Mao and his cadres emerged victorious late in 1949, with a millennia of strife behind them, they determined that the mistakes of the past would not be repeated. China, in the middle of the American Century, began to grope toward the start of a century of its own.

The ongoing American experiment

Americans are a tough, resilient people who have stared down their share of trials and tribulations, but it’s difficult to claim that the United States has endured challenges equal to those of the Chinese.

First, there’s simply the scale of time to consider. The Chinese culture seemed to emerge from the land itself, deep in the recesses of human history; the nation that is now the United States emerged from wave upon wave of immigrants going back just 400 years, displacing the natives who were already here. China has always been about density and getting along (or not) with tightly packed neighbors; America is represented by open spaces and individuals’ liberty to ponder and dream without too much regard for others. These are things that play out in the respective national cultures to this day.

The United States came violently to being, birthed into the world by bullets, bluff, and audacious ideals. Less than 100 years after its founding, the nation saved itself (just barely) at the streams of Antietam, the orchards of Shiloh, and the hills of Gettysburg. Fifty years later, U.S. troops helped win the war to end all wars; a great generation after that, they saved the world from evil incarnate. Victory in both World Wars came from a uniquely American proclivity to build lots of materiel fast—an arsenal for democracy the likes of which the world had never before witnessed (and will hopefully never see again).

In 1945, China was broken. Japan was similarly broken. Russia, broken. England, Germany, France, Italy—winners as well as losers of the most horrific conflict the world had ever known, all, equally, broken.

And upon this stage of annihilated industrial competitors strode a relatively unscathed (one million casualties and nearly 300,000 combat deaths aside) United States of America. Never in world history had any one nation stood so far above all others—except, perhaps, for the glory days of dynastic China.

America did not squander its moment. The United Nations, the World Bank, the Marshall Plan, and other initiatives large and small assisted the country in assisting others, and integrating the world into a single sphere based on mutual interests. Wars, famine, greed, and intolerance did not end, but for a time it seemed that the U.S.-led system could overcome all challenges.

Who builds what, where, and why?

At the beginning of the post-war world, U.S. manufacturers had a wide-open playing field; all the other major competitors had pretty much been blasted out of the marketplace. As people put the war behind them, they wanted stuff: cars and radios, vacuum cleaners and dishwashing machines, blue jeans and shiny shoes. And, as mentioned, U.S. manufacturers had a genius for cranking out unbelievable amounts of stuff in short order. Industry retooled from building war materiel to assembling consumer goods faster than one could say, “Harry S. Truman.”

More countries stitched into the global system meant more customers for Ford, GE, AT&T, RCA, Coca-Cola, and dozens more.

At that point in time, free and open international markets were an unqualified good for U.S. manufacturers. More countries stitched into the global system meant more customers for Ford, GE, AT&T, RCA, Coca-Cola, and dozens more. Local competition was practically nonexistent. Well into the 1950s, global trade was essentially a synonym for American trade.

American business had momentum, and the political establishment was not about to do anything to stand in its way. The year 1948 saw the launch of the European Recovery Program, better known as the “Marshall Plan” after then-U.S. Secretary of State George C. Marshall. During the next four years, more than $13 billion was provided by the U.S. government to help rebuild Europe—not to mention $6 billion to Asia. Altogether, more than $44 billion in grants and loans were handed out worldwide, which is equivalent to nearly $500 billion in today’s money.

What did the United States get for this historic level of largesse? Three things: first, prestige; second, stability; and third, markets. These interrelated elements functioned to support and supercharge U.S. business, particularly manufacturing, to never-before-seen levels of global dominance.

All of this came at a price beyond billions of dollars, however. With little if any competition, U.S. manufacturers got flabby. Oh, they competed with one another, of course, but there wasn’t much, if any, urgency to innovate. Want proof? Look, for example, at a 1947 Ford Fairlane as compared to a 1964 Lincoln Continental. Sure, there are differences… just not very many.

By the 1960s, much of the world had caught up to U.S. manufacturing; at the start of the 1970s, in certain areas, U.S. manufacturing had been surpassed. Ingenuity and necessity (as well as support from luminaries like Deming and Joseph M. Juran) had made Japan’s Toyota Motor Co. a world-class brand years before anyone had heard of their now-famous production system.

The advent of international supply chains and the rise of exceptional manufacturers all over the world meant that the “brain drain” of talented professionals emigrating to the United States slowed. By the 1970s, if you were a bright and ambitious engineer in Bangalore, or Beijing, or Tel Aviv, or Munich, or Buenos Aires, you could find opportunity at home instead of California or Boston.

Mercantilism, old and new

The understanding that powerful trading policies are as important to a thriving nation as an overwhelming military presence predates even the Chinese dynasties. The European nations of the 16th, 17th, and 18th centuries raised this doctrine to an art form, none more than the British. Their economic dominance, which fed and was in turn fed by the Royal Navy, was based on mercantilism, a principle by which nations maximized profitable trade and thereby acquired hard currency.

Mercantilism in its most brutal and efficient form was all about exploitation. Small, poor lands gave up their raw natural resources, which were purchased by large, rich countries for a fraction of their true value. Those powerful nations then processed those resources into products of far greater value, which were then sold (generally for gold or silver bullion). Little hard currency made it to the poorer regions of the world.

Africans got some cheap goods in the exchange, Caribbean islanders got slaves, Europeans got some fancy duds, and the British got the money.

In the classic example, the British traded rum in exchange for slaves from Africa, which they carried to the islands of the Caribbean, where they were traded for cotton, sugar cane, or tobacco, which was then shipped back to England and manufactured into food or clothing desired throughout Europe. Africans got some cheap goods in the exchange, Caribbean islanders got slaves to work their plantations, Europeans got some fancy duds or delicious treats, and the British got the money.

The global trading systems that emerged during the 20th century, and really expanded after World War II, mimicked mercantilism in some ways, chief among them the exploitation of poor countries by rich ones. For this reason, many economists refer to it as “neomercantilism.” Commerce in this system relies not as much on cheap raw goods and slaves (although both are, sadly, still involved in global trade), but more on technology, components, and finance. Nations engaging in neomercantilism seek to expand high-value exports and maximize reserves of foreign currency, which is crucial to the kind of aggressive monetary policy that permits a particular country to deal from a position of strength. This is a policy which China has mastered.

In July 1944, at Bretton Woods, New Hampshire, representatives from 44 Allied nations met to discuss the future of trade and monetary policy. Even then, locked in a death struggle with the military dictatorships in Germany and Japan, the U.S. and British organizers of the Bretton Woods Conference were able to look forward to the kind of post-war world that would both ensure peace and allow the democracies to make money hand over fist. Out of Bretton Woods emerged the International Monetary Fund and the World Bank. Another legacy of the conference was the General Agreement on Tariffs and Trade (GATT), which evolved into the World Trade Organization (WTO).

The frameworks established at Bretton Woods have proven to be long-lasting and resilient, but what has made it all work is an active American presence in all world affairs, whether those are economic, social, or military in nature, plus low tariffs and a general support for the freest possible trade. U.S. tariffs, for example, have fallen steadily from the 1940s until today. Yet it’s now entirely possible that the United States’ federal government has adopted a policy of higher trade barriers and become far more interested in “winning” in a short-term, transactional way that runs counter to what the country’s stated interests have been for several decades.

So which is the “real” America today? What will it be tomorrow? What will that mean to the state of the world? The answers are dependent not only on what kind of nation the United States is and will be, but even more so on the reemergence of a very old kind of China.

In part two of this article, we’ll discuss the changing nature of the U.S.–China trade relationship, and consider what the future may hold.

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Mike Richman’s picture

Mike Richman


Good Article

Hi Mike-

Some good history in this article for those that enjoy that type of thing. I wrote an article last year on what I felt would be important to addressing global competitiveness. However, I did fail to mention the IP stealing done by the Chinese in this article.

In general, I don't agree with tariffs as they make markets inefficient. However, I do want fair trade vs free trade - because the US is getting killed right now by free trade. The trade deficits reflect this - and yes I now most economists say trade deficits are good, but I have never been impressed by economists and their theories as they are mostly wrong (look at the 2008 financial crisis for evidence or the mantra that competition makes things better).

However, the Goldman report on tariffs reflects the US tariffs and doesn't reflect other countries tariffs on US goods. This is where fair trade disappears. Politicians have lined their pockets from lobbyists with foreign interests and in the process have sold out US interests and the backlash from workers gave us a different political field.

Dr. Deming said that the manufacturing advantage the US once enjoyed is gone. We (the US) must manage "with brains" for the future. There are industires vital to the future that the US needs to play in - national security, and high tech equipment are two that come to mind. This will require education in engineering and sciences - we don't need more philosophers and liberal arts. This will require a different view of education. For instance, too many US students fail out of calculus and have to move to other fields. US education needs to quit passing and failing students and stick with them UNTIL they get it - I compare to a baby learning to walk if they fail to walk do we just give them a grade and move on?

Dr. Deming said we didn't have much time that the "fuse was short." I'm afraid without major change quickly in the US - the future is bleak - complacency is not an option any longer. We may need a burning platform to save the US. I am remain skeptical but optimistic.

Thanks for reading!

I appreciate your comments, Tripp. Skepticism and optimism don't often meet and mingle, but when it comes to the U.S. economy (especially our trade policies), that reaction is warranted. As much as things tend to go sideways with our divided government regularly offering a variety of mixed messages, we must remember that America is still a place of incredible innovation, opportunity, and passion for success, not to mention the inherent liberty to pursue greatness. It's a curious mix that's always on the edge of disaster and earth-shaking breakthroughs at the same time. I honestly don't know which way this will all break in the coming years, but (as with most things) a sensible approach might be to blend a continuing expansion of our service-based economy while at the same time supporting industry and being open to fair, if not completely free, trade. The fuse is short, indeed, but if we're not optimists, what will we be?