Pandas, Pegasus or the Chimera

Heads of state meet all the time, without investors paying too much notice. Last week’s meeting between US President Joe Biden and his Chinese equivalent, Xi Jinping, was different.

Tensions between the world’s two superpowers have been rising in recent years to such an extent that it is no longer an exaggeration to talk about a second Cold War. Some go further, believing that a military ‘hot’ war is inevitable over the future of Taiwan.

This deterioration in the relationship between the two biggest economies is a worry not just for the health of the global economy, but also for humanity. The fight against climate change requires their cooperation, while it is also crucial for containing regional conflicts such as the wars in Ukraine and the Middle East

To be clear, the talks between Xi and Biden in San Francisco delivered little by way of concrete outcomes, and fierce competition and mutual suspicion between the two countries is likely to continue. However, the mere fact that this face-to-face meeting took place is important and suggests that some of the more extreme scenarios are much less likely (at least until next year’s US presidential election). Afterwards, Xi met with US business leaders, also a sign that he wants to shift the growing view that China is ‘uninvestable’ from the point of view of Western capital. Foreign direct investment into China has fallen sharply since the pandemic. Xi also promised to send new pandas to an American zoo, a symbolic act of friendship China has occasionally engaged in since 1972 when bilateral relations were first normalised.

Chimerica
Historian Niall Ferguson and economist Moritz Schularick coined the term ‘Chimerica’ in 2006 to refer to the increasingly symbiotic relationship between the two countries, with China being the low-cost manufacturing hub for American businesses, while becoming the largest buyer of US government debt, effectively lending the Americans money to buy from them. The term is a clever reference to the Chimera, the fire-breathing monster from Greek mythology with a lion’s body, a snake’s tail and the head of a goat on its back. She is ultimately killed by the hero Bellerophon. He was ordered by the king of Lycia to slay the Chimera, not knowing that the king secretly hoped that the monster would kill Bellerophon. But riding the winged horse Pegasus, Bellerophon easily shot down the beast.

A chimera is also a term describing hoped-for but illusory things. The evolving relationship between the US and China is indeed turning out to be chimerical. It was expected to bring growing peace and prosperity to the world, and greater liberalism to China. It did not quite pan out that way. While China managed the incredible feat of lifting hundreds of millions out of poverty, the impact of the ‘China shock’ on American jobs has belatedly become apparent (and not just in America or Europe; South Africa’s own manufacturing base was hollowed out, particularly the clothing sector).

This in turn destabilised American politics and contributed to the rise of Trumpism. As for China, since Xi’s coming to power in 2013, hopes for a more open society have vanished as he has increasingly consolidated power in his own hands.

After spending much of the 21st century deepening trade ties and interweaving supply chains (China joined the World Trade Organisation in 2001), the last five years have seen an unpicking of many of those arrangements, starting with the imposition of import tariffs by President Trump. These largely remain in place. In the wake of the pandemic, many Western multinationals have taken steps to reduce reliance on China. The US government has also restricted exports of key high-tech items to China, notably semiconductors.

The result is already visible in the data. Chart 1 shows how the value of US imports from the Chinese quadrupled in the first 18 years of the millennium but have declined substantially since. Meanwhile, countries like Mexico and Vietnam have benefited. In other words, it is not so much a retreat in globalisation as a reorientation. But ‘reshoring’ is also definitely happening. Construction spending on manufacturing facilities in the US has shot up from a pre-pandemic average of around $80 billion per year to almost $200 billion, supported by US government subsidies and the need to manufacture critical items such as batteries and semiconductors closer to home.

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