Chimerica: The Honeymoon and Distortions of Interdependence

In the mid-2000s, an economic historian threw a coined word into the world. A word that stitched China and America together: Chimerica. It was a metaphor for the fact that the two countries had begun to move not as separate economies but as a single, monstrous creature. One side of the beast made without rest; the other bought without rest. The creature’s blood circulated through cargo ships crossing the Pacific and through US Treasury bonds flowing back across the sea.

As described in the fourth installment, America made a bet called ‘engagement.’ It welcomed China into the world economy, trusting that prosperity would change the regime. In 2001, China joined the World Trade Organization. Beyond that opened door came an upheaval on a scale no one had precisely foreseen. The workshop of the world had begun operating in earnest.

Cargo Ships Crossing the Pacific

In the first decade of the twenty-first century, American storefronts quietly transformed. Appliances, toys, clothing, furniture: flip any of them over and the same three words were engraved. Made in China. The shelves of giant retailers filled up with inexpensive goods produced along China’s coastal regions.

For consumers, this was an unmistakable benefit. Goods of the same quality could be had more cheaply than before. Inflation was held in check, and the real purchasing power of households was lifted. The lives of America’s middle class were quietly sustained by factories across the Pacific. Most people did not even notice it, but behind the low prices were countless workers laboring on the production lines of Shenzhen and Dongguan.

For China too, this was a current that changed the nation’s destiny. Industrial parks sprang up one after another along the coast, and hundreds of millions of workers, by some estimates, migrated from inland farming villages in search of jobs. Foreign currency earned through exports piled up, and China grew rich at a furious pace. Deng Xiaoping’s vision of ‘let some get rich first’ was becoming reality, carried by the immense tailwind of the global market.

This bond went beyond mere trade figures. America’s giant retailers could keep prices low and their shelves stocked because Chinese factories met production with unbelievable cheapness and speed. Meanwhile, Chinese factories could keep running without pause because beyond them lay a vast consumer market that kept buying. Supply and demand formed a single circuit straddling the Pacific, and neither side could any longer explain its own prosperity without the other. The two economies had become deeply interwoven before either realized it.

US Treasuries Flowing Backward

While cargo ships carried goods from west to east, another current flowed backward across the sea. Money.

China did not let the enormous dollars earned through exports simply sit idle. Much of it went toward purchasing American Treasury bonds. In time, China rose to become one of the world’s largest holders of US debt. It was a strange arrangement. America bought goods from China, and the dollars paid in return came back, by way of China’s hand, as loans to the American government. America could keep buying Chinese goods with money that China had lent it.

Economic historians named this cycle Chimerica. One side saved, the other consumed. One side made, the other bought. Two opposite natures meshed like a matching key. For all the distortions it carried, the relationship was, for the time being, far too convenient for both parties. For China, US Treasuries were a place to safely park its earned foreign currency and, at the same time, insurance to keep the economy of America, its largest export market, from collapsing. For America, it was a device for raising funds at low interest and tasting a boom and low inflation at once.

This word spread through the world at the end of the 2000s and was even listed among a US newspaper’s words of the year. Everyone sensed that the center of the world economy was shifting toward a paired relationship straddling the Pacific. Yet the very fact of being consumed as a buzzword also hinted at the fragility of this balance. What is spoken of too much often comes to seem too obvious, and the precariousness beneath its feet goes overlooked.

In 2008, that balance was struck by its first great tremor. The financial crisis that began in America, the Lehman Shock. As the world economy froze over, China did not dump its US Treasuries but instead turned to propping them up. It did so to protect the value of the vast claims it held, and to keep a collapse of the world economy from directly striking its own exports. Ironically, America, the epicenter of the crisis, came to depend even more on China, its creditor. The honeymoon seemed, if anything, to deepen within the crisis.

A Gulf Spreading at the Bottom of the Honeymoon

But behind the prosperity lay another story. Inside America itself.

For Chinese products to sweep the market meant that American factories making the same products could no longer survive. In the manufacturing towns of the Midwest and the South, factories closed one after another and jobs were lost. Later, economists would call the impact of the surge in imports from China on American manufacturing the ‘China Shock,’ and would point out that it led not only to job losses but to the exhaustion of local communities and even to political division. Consumers who benefited from cheap goods, and workers who lost their jobs. Within the same country, the fruits of Chimerica were distributed unevenly.

The two countries, which seemed to be sharing prosperity, were in fact quietly storing up discontent toward each other as well. On the American side, voices grew louder that China was manipulating its currency and stealing jobs by unfair means. On the Chinese side, resentment mounted that America had its debt-laden economy propped up by China’s savings while continuing to lecture.

And no matter how deep economic interdependence grew, there were domains that would never merge. The political system, and values. The original expectation America had placed in ‘engagement,’ that prosperity would change China into a country resembling their own, showed no sign whatsoever of becoming reality, however much the trade figures swelled. If anything, China grew rich in its own way, grew strong, and grew more confident.

The monster called Chimerica was, in economic terms, indeed a single body. Yet that single body was driven by two different hearts. The deeper the honeymoon grew, the more the gulf in values lying at its bottom also quietly sharpened its outline.