Here’s How Americans Should Be Thinking About China’s Rise

I did a two-part dance on China and the United States this week. I tried first to explain to a group of senior Chinese business leaders visiting Wharton why China is often viewed negatively in America today. Then came the easier part for me with them, but what I suspect is a harder sell with Americans: talking up the often overlooked pluses of the Chinese economy for the U.S.

I began by outlining to my Chinese colleagues the economic context in the US—stagnant incomes since 2000, reaching way up the income distribution—that has focused minds on the loss of good jobs and the rise of contingent employment in middle America. Even though technological change has probably had a much bigger impact than globalization, there is no denying that China’s rise as the world’s biggest manufacturer and exporter has hurt less skilled American workers.

Add to this anxiety about China’s ambitions, fueled by things like not accepting the recent Hague decision against its territorial claims in the South China Sea and the opaqueness of Chinese government involvement in FDI in America, and it is easy to see why the China card is being played in this year’s presidential election. China’s rise is a perennial cause of friction with the U.S. And with this year’s political climate, and against the economic backdrop, I’m not surprised it is looming even larger.

I have long been struck with how grown up senior government leaders on both sides have been when it comes to living with their differences, focusing on the importance of engaging with each other, and always looking for win-win opportunities. But with Xi Jinping’s authoritarian nationalism in China and the inward turn in the American presidential election, managing China-U.S. relations is likely to be a bigger challenge in the coming years than it has been since at least Tiananmen Square a quarter century ago.

Here are three tips for how Americans can help ensure we maximize the upside possibilities of China’s rise and minimize its downside risks, with a focus on economic relations between the two countries—the largest and most complex bilateral economic relationship in human history.

1. Acknowledge China’s “rise” is really a “re-rise”

I am always struck when I visit China by everyone’s very long view of history. Contrast China’s “civilizational” history going back thousands of years with what is generally a much shorter time line in the U.S., focusing on the nation’s founding in 1776 and then the transformational impact of the industrial revolution in the 19th century.

This difference in historical perspective matters psychologically and culturally. But it also really matters economically. China was the world largest economy from about 1000 until 1820. It was only then that first Europe and then the U.S. leapt ahead. Fast forward to today. The “rise” of China is in fact a “re-rise.” And “back to the future” is certainly how people in China feel—with great pride. China is not an economic upstart; it is merely returning to its natural place atop the global economic order.  

2. Focus less on the trade deficit with China and more on the importance of the Chinese market

The trade deficit the U.S. runs with China has risen dramatically and consistently over the past 15 years, to more than $350 billion at the end of last year. Over the same period, Chinese holdings of American government debt have mushroomed to about $1.2 trillion. Here is a simple rendering of this “trade for Treasurys” relationship: China lends the U.S. money so Americans can buy Chinese goods. There is real truth to this syllogism, and it certainly fan the flames of anti-China sentiment in the U.S.

But international economists are adamant the bilateral trade deficit is actually beside the point economically. They are right too.

Look on the back of any Apple device and you will see the words “designed in California by Apple. Assembled in China.” You could add to them “assembled in China by Foxconn” (a Taiwanese company) “from components made in Germany, Korea and Japan.” Then consider the fact that Apple’s sales in China account for about ? of the company’s total revenue.

Apple is of course not only big; it is also very profitable. The big profit margins on Apple devices don’t come from how components are sourced or how they are assembled. Apple’s profits come from its design premium—from Apple employees in California and benefitting them an all shareholders. Now multiply those per device profits by the size of the Chinese market for Apple.

China is a very new good news for Apple, and for America. You just wouldn’t know it from the trade statistics. Every Apple device assembled in China that is shipped to America only shows up as adding to the U.S.’s trade deficit with China. On the other hand, Apple’s China sales aren’t in the export statistics of the U.S., because its devices are assembled in China.

The same story holds for GM, which sells more vehicles in China (through its joint venture with SAIC) than it does in the U.S. Good news for GM corporate, workers and shareholders. But, no positive impact on U.S. exports to China. Because the cars and trucks GM sells in China are made in China (again, often with imported parts), not Detroit.

The emergence of China’s massive consuming middle class is often overlooked in story’s on China’s growth slowdown. But it is very real, and the Chinese market really matters—for an iconic American company of the 20th century, GM, for an American icon of the new millennium, Apple, and for so many other American companies. But the best way to sell in China is to be in China. Just as foreign firms like Toyota know the best way to sell in America is to be in America.

3. Embrace co-dependence with China as good for the economy and for geopolitical stability

There is no doubt the Chinese economy needs America—American products, American knowhow, American capital. But the U.S. needs China too—less these days as an assembly line and more as a market. And in the future, more as a source of foreign investment. Add to this all the trade and all the Treasurys. Political scientists often talk about economic interdependence. I think when it comes to U.S.-China the better term is co-dependence.

And of course the world needs its two biggest economies too. China and the U.S. are the world’s biggest growth engines. The U.S. remains the world’s leading innovations. China turns innovations into growth at gargantuan scale.

But to paraphrase Immanuel Kant, this economic co-dependence is also critical for geopolitics. There is so much at stake, both countries, in the China-U.S. economic relationship that the incentives are overwhelming for both to manage, mitigate and ultimately minimize their differences. Tensions are inevitable. But the incentives to manage them are irresistible.

That is why I remain optimistic that when the political temperature cools in America after November, and even more so when Xi Jinping begins his second term as China’s president a year later, cool heads will prevail in focusing on the big win-wins in Sino-American economic relations.

Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania. Follow Geoff on Twitter.