The Rise and Fall of Chimerica

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Questions and Answers

Explain how China's entry into the WTO in 2001 laid the foundation for 'Chimerica', detailing the economic mechanisms at play.

China's WTO entry integrated its labor force and savings into the global economy, pushing up global returns on capital by reducing labor costs, which depressed the cost of capital.

Describe the defensive steps Beijing initiated in 2015 to reduce financial risk and explain how these actions contributed to the divergence of 'Chimerica'.

Beijing implemented foreign-exchange policies and capital controls to stabilize the yuan and prevent a decline in foreign-exchange reserves. These measures reduced the yuan's attractiveness to investors, widening the U.S.-China trade deficit.

Evaluate the claim that President Trump is the primary source of the 'Chimerica' crisis, considering the counter-argument presented in the text.

The text suggests the direction of causation goes the other way, arguing that China's defensive steps in 2015 were the catalyst. Trump's policies are seen as a consequence rather than the sole cause.

Assess the potential dangers of standard trade negotiation approaches, such as retaliatory tariffs, in the context of 'Chimerica', as highlighted in the text.

The text warns that such approaches risk a downward spiral with dangerous implications for global economic stability due to the interconnectedness of the U.S. and Chinese economies. Signup and view all the answers

Explain how import competition from China influenced the 2016 U.S. presidential election, according to the county-level analysis mentioned in the text.

A county-level analysis found that a 1-point increase in import competition from China was associated with a 2.9% increase in support for Mr. Trump relative to earlier Republicans. Signup and view all the answers

Detail the ways in which China has changed since the initial conception of 'Chimerica' in 2007, and how these changes have altered the relationship between the two countries.

China has evolved to resemble the U.S. more closely, with rising household consumption, higher wages, a complex financial system that includes shadow banks, off-balance-sheet entities and a very large aggregate debt burden. Signup and view all the answers

Discuss the implications of China's shift from being merely a "big emerging market" in 2001 to approaching "economic parity and open strategic rivalry" with the U.S. today, as stated in the text.

This shift necessitates an adjustment in the relationship between the two countries, requiring China to give ground and commit to reducing its bilateral trade deficit with the U.S. Signup and view all the answers

Analyze the U.S.'s vulnerability in a potential trade war with China by comparing the impacts on each nation's GDP, citing the percentages mentioned in the text.

The text suggests that the U.S. is much less vulnerable. American imports from China are equivalent to around 4% of China's GDP. American exports to China are less than 1% of U.S. GDP. Signup and view all the answers

Summarize the authors' perspective on Trump's tariffs, explaining why they "beg to differ" with the view that the tariffs are "dangerously misguided".

The authors conclude that tariffs are the right way to force China to change its ways, suggesting a belief that economic pressure will lead to more equitable trade practices. Signup and view all the answers

Elaborate on the concept of 'Chimerica' as a seemingly stable symbiosis, even amidst significant capital outflows in 2015 and China holding over $3 trillion in foreign-exchange reserves.

Despite challenges, the economic interdependence remains. China's vast foreign-exchange reserves, largely held in U.S. dollars, underscore this symbiosis, indicating stability despite outward appearances. Signup and view all the answers

Predict potential global consequences if negotiations between the U.S. and China fail, leading to what the text refers to as a 'Chimerican divorce'.

A 'Chimerican divorce' is likely to be unamicable and would hurt not only China and the U.S. but the entire world economy. Signup and view all the answers

How did the global financial crisis of 2008-09 impact the 'Chimerica' relationship, and what evidence suggests that 'Chimerica' still exists despite this crisis?

The crisis appeared to be the beginning of the end for 'Chimerica'. However, it still exists, making up around 40% of world GDP, and China accounts for half of the total U.S. trade deficit. Signup and view all the answers

In what ways does the text suggest that the backlash against China was an inevitable consequence of 'Chimerica', regardless of Donald Trump's presidency?

The text implies that the backlash was a result of the evolution of 'Chimerica' and would have happened in some form regardless, citing Sen. Marco Rubio's stance as an example. Signup and view all the answers

How has the status of the yuan as a managed currency affected its attractiveness to international investors, and what impact has this had on the U.S.-China trade deficit?

The yuan's status as a managed currency made it less attractive to international investors, contributing to its depreciation against the U.S. dollar, which helped widen the U.S.-China trade deficit. Signup and view all the answers

What alternative does the text suggest to Beijing's negotiators if reducing the bilateral trade deficit with the U.S. seems 'unpalatable'?

The text suggests that if reducing the trade deficit is unpalatable, they should consider the alternative of a 'Chimerican divorce', though it cautions that this would be unamicable and globally harmful. Signup and view all the answers

Explain how 'Chimerica' shifted the fulcrum of the world economy after 2001, and why the authors believe this shift now necessitates a new balance.

'Chimerica' shifted the world economic fulcrum because then China was merely a big emerging market, which has now changed. China is now nearly on par with the U.S., which is why the marriage must be adjusted to take this into account. Signup and view all the answers

The text mentions that the International Monetary Fund (IMF) projects China's GDP will hit 88% of the U.S.'s GDP by 2023. How does the text use this projection to support its argument about the evolving dynamics of 'Chimerica'?

It demonstrates China's growing economic power and its move towards parity with the U.S., suggesting that their relationship needs to be re-evaluated and adjusted to reflect China's increased influence. Signup and view all the answers

Explain how China's large holdings of U.S. dollars (over $3 trillion in foreign-exchange reserves) contribute to maintaining the 'Chimerica' symbiosis, despite the countries' diverging interests.

By holding a large amount of reserves in U.S. dollars, China has a vested interest in the stability of the U.S. economy, as a collapse in the dollar's value would significantly impact their holdings. Signup and view all the answers

Assess the long-term implications of the U.S. identifying China as a "strategic competitor” in its new National Security Strategy, particularly in the context of trade relations and the future of 'Chimerica'.

This designation signals a shift towards a more confrontational approach, setting the stage for increased trade tensions and potentially undermining the foundations of 'Chimerica' by prioritizing competition over cooperation. Signup and view all the answers

Detail how reducing labor costs while depressing the cost of capital in China affected the global returns on capital, thus influencing the relationship of 'Chimerica'.

This made the returns on capital in China substantially higher than in developed markets, resulting in the movement of capital to China and, consequently, an even larger trade imbalance between the U.S. and China. Signup and view all the answers

Flashcards

What is Chimerica?

A term encapsulating the economic relationship between China and the U.S., characterized by Chinese export-led growth and American overconsumption.

Foundation of Chimerica

China joined the World Trade Organization integrating its labor force and savings into the world economy and pushing up global returns on capital by reducing labor costs.

U.S. benefits from Chimerica

Cheaper consumer goods and lower interest rates in the U.S., but also contributed to the housing bubble in the mid-2000s.