Market commentary
“Chimerica” consciously uncouples
The symbiotic, yet unsustainable, relationship started fraying about 15 years ago in the aftermath of the financial crisis.
“Chimerica” consciously uncouples
Niall Ferguson, a well-known historian and Harvard University professor, coined the term “Chimerica” in 2006. It was a clever way to underscore the fact that the Chinese and American economies had become so intertwined that they could be viewed as one economy. As Professor Ferguson pithily observed in a 2009 article, “The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing.” 1
That symbiotic, yet unsustainable, relationship started fraying about 15 years ago in the aftermath of the financial crisis. The excruciatingly slow U.S. recovery from its deepest economic recession of the post-World War II period, and the economic pain sustained by those who lived in communities that lost their manufacturing base, led to widespread disillusionment about the benefits of free trade. At the same time, there was a growing belief that China was no longer living up to the spirit of its World Trade Organization (WTO) agreement to open its markets to other countries in exchange for full integration into the global trading system. Subsidizing Chinese state enterprises, thereby giving them an unfair competitive advantage, and forcing foreign companies to share proprietary information and technology as a quid pro quo for market access, became irritants as well. China’s muscle-flexing in the East China Sea and the South China Sea under the regime of President Xi Jinping, not to mention its frequently intimidating behavior around the island of Taiwan, created a geopolitical dimension to the rising economic tensions between China and the United States. This deterioration picked up steam during the first Trump Administration and was compounded by the COVID-19 pandemic, which underscored the unreliability of China as a trading partner of critical goods such as personal protection equipment.
The ratcheting-up of trade-war tensions between the U.S. and China has now reached the point where the flows of goods and services between the two nations will fall precipitously in the absence of a scaling back of the sky-high tariffs that both countries have imposed on the other (145% on Chinese goods, 125% on U.S. goods). This is a battle between two economic elephants; other countries will try to avoid getting trampled. Whatever happens between them has implications globally across economies and financial markets. As shown in Exhibit 1 on the following page, China and America together accounted for 43% of world nominal gross domestic product (GDP) last year, with shares of 17% and 26%, respectively, in U.S. dollar terms. No other single country comes close: The other big trading bloc―the European Union (EU)—comprises 18% of world GDP. However, that grouping is composed of 27 countries. The biggest member of the EU is Germany, which accounts for a mere 4.3% of world GDP.
1Ferguson, Niall. “’Chimerica’ Is Heading for Divorce,” Niall Ferguson (blog), Newsweek/Daily Beast, August 18, 2009, https://www.newsweek.com/us-china-economic-partnership-through-79067
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