On the surface, it is the best of times in Washington and the worst of times in Beijing. The U.S. capital is a pristine monument to world power; Beijing is cloaked in industrial pollution and dust storms from failed agriculture programs to the west.
However, pulling back the cover shows something quite different. Our elected representatives are the progeny of privilege and expect to reap the largesse of government service without serious convictions about the U.S. future; in Beijing their leaders are the offspring of people who survived purges and government upheavals determined to remove 200 years of shame and humiliation at the hands of the West. Simply stated Chinese leaders are more ruthless and driven by a common goal — restoring China to its proper place at the top of the world order.
By the 1960s China had suffered through World War II and a bloody civil war; a combination of the Great Leap Forward and Cultural Revolution cost 30 million lives from starvation and execution. Mao Zedong was surrounded by enemies — Russia, India, Vietnam and the U.S.
We on the other hand were the lone untouched major power from World War II; we had the world's dominant technology, manufactured everything that we consumed, grew all of our food and exported manufactured goods to the world.
The 1970s were a crucial turning point for both nations. Mao broke the siege by normalizing relations with the far enemy — the U.S. After Mao's death, Deng Xiaoping reversed the policy of self reliance and opened China to western technology.
In the U.S., we allowed the importation of products manufactured with low cost labor from Japan, Taiwan and Korea practicing mercantilism — maximizing exports and limiting imports — without reciprocity. Our heavy industries were decimated, leaving the Rust Belt with massive unemployment. Asian imports destroyed the U.S. electronics manufacturing industry. With the outsourcing of other manufacturing and service industries, we hollowed out our entire industrial base.
In the 1990s, U.S. companies, operating on the naive assumption that they would get access to and profit from Chinese consumer markets in exchange for technology transfer, delivered two centuries of U.S. industrial development to the country in two decades. China, adopting mercantilism, used the newly acquired technology, low cost labor and the U.S. free trade policies to sell consumer products to U.S. customers and degrade industries that had not been destroyed earlier. China developed a huge positive foreign exchange imbalance with the U.S. and used the massive inflow of dollars to buy U.S. debt and facilitate a flawed U.S. fiscal policy.
In 2008, holding trillions of dollars in U.S. paper, China was stunned that we had no capabilities in managing our financial system and that their foreign reserves were at risk of default.
China had a blocked internal currency, the Yuan, and conducted all trade in dollars. They were determined to reduce their dollar exposure, turn the Yuan into a freely exchanged currency and ultimately replace the dollar as the world's reserve currency. They have opened their internal Yuan financial system to foreign entities; developed arrangements with trading partners in Latin America and South East Asia as well as Japan, Korea, Russia, India and various oil producers to settle trade balances in Yuan; and reduced the role of U.S. dollars.
The most profound change in the global positions of the U.S. and China occurred unannounced when a World Bank study in 2014 concluded that China had overtaken the U.S. as the world's largest economy.
Germany, with a massive positive foreign exchange balance, has tilted east away from U.S. policies and toward China because of their strong commercial ties. President Xi Jinping is determined that China will not be isolated by the U.S. and has organized the Asian Infrastructure Investment Bank as a competitor to the IMF and World Bank. In spite of strong pressure from the U.S., the U.K., Germany, France and Italy have recently become founding members of the bank.
Tectonic shifts in global economic power in the past have preceded political decline. During the same period that China moved 500 million people out of poverty, our middle class entered a period of stagnation. No country has survived for long with an endemic internal debt or a massive foreign exchange deficit. We have both, and they are intertwined.
The single most important factor in economic growth is a large foreign exchange surplus, which will strengthen the dollar, increase employment in high paying manufacturing jobs and increase tax revenues. Business legends Ross Perot, Warren Buffett and Andy Grove separately protested against our free trade policies and have offered alternatives since the 1990s. Until the political elite correct our trade and deficit spending policies, we will continue to move toward the dust bin of failed civilizations while China continues to thrive.