It is not America in decline, but Chimerica, the hybrid phantom state that was to be the acme of market-based integration.

It is not America in decline, but Chimerica, the hybrid phantom state that was to be the acme of market-based integration.

China’s resilient authoritarianism – or at least Beijing’s continued adherence to a distinctively non-Western polity – has for the moment refuted the democratic “end of history.” Still, the first part of Fukuyama’s polarizing thesis, the liberal part in the “liberal democracy” declaration, has been celebrated by political pundits around the world as the irreversible path of humanity.

The term “Chimerica” has been the epitome of the wishful thinking of liberal intellectuals around the world who deterministically infer that U.S. and Chinese economic interdependence ensures a peaceful hegemonic transition. According to this argument, as both Washington and Beijing engage in a positive sum economic relationship and enhance their material position ad infinitum, the Gates of Janus will be sealed by two prosperous societies who prefer commerce to conquest; consumption to cannons; goods to gunboats. Neither American nor China will dominate the 21st century the liberals ardently declare. Instead, Chimerica – a hybrid state – governed by the invisible hand of the market or by the very visible hands of cosmopolitan business elites will create perpetual prosperity and peace.

Realists have long challenged this liberal orthodoxy. China and the U.S. are on a collision course, they argue, and both states engage in comprehensive balancing – economic, military, technological and diplomatic. Chimerica is a phantom that defies reality and fails to observe the unabated securitization trend in Sino-U.S. relations, realists declare.

Testing the validity of the Chimerica thesis demands a thorough investigation of the three liberal indicators, the fertilizers of interdependence between China and the United States; that is, the very forces that annihilate the nation state, turn boundaries obsolete, and dictate policies based on interstate rather than intrastate conditions. What are these indicators? Dependence on the Chinese market, supply chain dependence, and cosmopolitan business elites.

Chinese Market Dependence: End of the Gold Rush and Rising Indigenous Innovation

Capital follows returns. When China opened up its market to foreign capital under Deng Xiaoping, U.S. multinationals followed their animal instincts and invested in the world’s most populous country. Thirty-five years later, the Chinese market shows steady growth, yet for the American companies that have invested in it, returns have underperformed other markets.

According to The Economist’s annual Sinodependency index, for the past three years returns on investments outside China have outperformed returns on investments within China. While this may not be a long-term trend, the significance of opportunity costs in the decision making of large multinationals could lead many of them to change their focus away from the Chinese market.

More importantly, according to the Sinodependency index, the three U.S. companies that are most dependent on the Chinese market are all high-tech companies (Apple, Intel, IBM). Those companies will most probably see their shares in China undermined by the increasing indigenous competition as Chinese companies climb the value ladder. Such value evolution from the assembled-in-China model to the designed-in-China model will certainly erode the big market margins of U.S. tech giants and even inspire global competition for market shares.

In addition to the “natural” evolution of competition, the Chinese government has also enacted policies that limit the capacity of foreign companies to compete with local ones, partly in response to National Security concerns after Snowden’s revelations on the National Security Agency’s de facto partnership with U.S. tech companies. Most importantly, the draconian anti-terror law has terrified American CEOs as it will immediately outlaw foreign companies that do not share important security codes and software backdoors with Chinese authorities. Beijing has already excluded Microsoft from its public procurement activities and has directed multibillion dollar packages of state support to developing an indigenous comprehensive operating system and other technologies where U.S. companies hold a significant lead.

If the preferences of China’s top university graduates is any indicator of China’s trend toward indigenous innovation, the omens for U.S. companies are ominous. While only five years ago Tsinghua and Peking University Science & Engineering graduates looked to U.S. tech firms for graduate jobs in China, now the majority aim for recruitment in one of China’s Big 5: Baidu, Ali Baba, Netease, Huawai and Lenovo.

Supply Chain Dependence: Factor Price Equalization and Regional Trade Agreements

Free trade leads to the eventual convergence of real wages among trade partners. As China enjoys enormous trade surpluses its firms demand more labor, pushing wages higher. Across the Pacific, as the U.S. deals with high trade deficits and low aggregate demand, real wages tend to stagnate. Eventually, the factor price equalization law has it, China and the U.S. will have similar levels of average real wages.

To be sure, the average Chinese wage today is much lower than that of the U.S., but the trend has been one of convergence. This as well as the technology revolution in the U.S. has added to the current “restoration” of U.S. industry and has led CEOs to look for new production networks in less developed Asian economies like Vietnam, Indonesia and India. As the complementarity of the U.S. and Chinese economies declines, more and more companies will be outsourcing their production outside of China, further contributing to Chimerica’s decline.

In addition to the natural evolution of wages and relative prices, the current increasingly complex system of regional trade agreements promoted by both the U.S. and China will distort market signals and further exacerbate competition between China and the U.S. More and more companies will fall victim to new regulatory barriers and will be effectively ostracized from China’s production networks. Trade friction, decreased complementarity, and unprincipled competition spell doom for Chimerica.

Cosmopolitan Elites: CPC Political and Ideological Resilience 

“Proletariats of the world unite!” Marx and Engels declared in their communist manifesto: There are no nation-states nor are there intrinsic cultural and historical forces that classify people other than the ownership of the means of production and the material conditions. Surprisingly, capitalists and liberal intellectuals have adopted the same thinking. A banker in Shanghai overlooking the Putong from his luxurious office on the 100th floor of the World Trade Center is little different from a Wall Street banker overlooking Brooklyn. Both believe in one god: Money.

Money in a liberal democracy buys influence; in the United States it arguably even buys the White House. Had a similar scenario held for China – that is, had business elites been able to pick the general secretary of the CPC – then perhaps liberal and cosmopolitan elites in China and America could manage Chimerica and perpetuate the status quo of globalization.

However, it is now clear that the CPC is an “adaptable” organization and China’s polity gives no weight to business elites when it comes to setting policy. While Jiang Zemin’s reforms ensure that businesspeople can participate in the collective decision making of the CPC, the ultimate “grand strategy” of China is shaped by the powerful standing committee of the Politburo. The operational code of the Chinese communist party remains deeply anti-capitalist. It utilizes the free market to optimize the power of a Leninist state and any businessman that dares to confront the party cadres ends up bankrupt and humiliated.

To be sure China’s leading elites may have their own vision of cosmopolitanism, one that adheres to different norms from those of Wall Street, but this difference and the inability of both China and the U.S. to openly accept a world safe for diversity is tearing Chimerica apart.

A Post-Chimerican Global Order 

The dream of Hegelian unity has been at the core of visionary leaders throughout history. All of them – from Alexander the Great to Augustus, to Darius, to Napoleon, to Liu Bang, to the Tang and Ming emperors – without a single exception chose hegemony and subjugation to pursue that dream. Eventually they built on culture and ideology to keep the system harmoniously united.

Liberalism instead saw in the market a sui-generis non-hegemonic force that melts nations into an ecumene managed by the invisible hand of profit optimization. Chimerica was born out of this belief, enhanced by the hubris of the era of U.S. hyperpower and the end of history mentality. The liberal global order that ensued and the declaration by U.S. presidents since 1991 that the liberal democratic end of human civilization is irreversible now sounds utterly hubristic.

As Chimerica awaits its demise, perhaps a force of real Athenian democracy can ensure that China and the U.S. will not pursue another dangerous cold or cool war that divides humanity into us versus them. Athenian democracy in its modern updated version calls for massive participation where the street does not envy the rich and the rich do not suppress the street. Such a political transformation in the West would end the primacy of neoliberalism and exercise a powerful demonstration effect on the Chinese people, who could then seek more participation and continue a positive sum engagement with the U.S. and the world.

At the same time, the United States and China must strengthen their strategic economic dialogue and resolve high-tech security concerns. They should abandon commercial regionalism, engage with the WTO, and call for global standards on software and hardware. China and the United States must undertake joint initiatives that promote freedom of goods, capital and people and thus renew WTO negotiations on non-trade barriers, regulatory arbitrage, and safe capital heavens. At the same time they must ensure that trade and economic links are sustainable, and so promote green diplomacy and fair trade for the underdeveloped world. An agenda for both free and fair trade along with a sincere discussion of property rights and shared innovation projects on green energy could be a great step towards saving Chimerica and securing peace in our time.

After 20 years of liberal euphoria and the birth of Chimerica, realists seem to be winning the argument. Still, as the great European psychologist-polymath Karl Jaspers once put it: “Anyone who regards an impending war as certain is helping on its occurrence, precisely through his certainty. Anyone who regards peace as certain grows carefree and unintentionally impels us into war. Only he who sees the peril and does not for one instant forget it, is able to behave in a rational fashion and to do what is possible to exorcise it.” The memory of the perils of great wars and the mental pain we experience when we compare them with the marvelous adornments of peace can indeed revitalize a harmonious U.S.-China relationship, even now that the utopian dream of Chimerica stands in shambles.

Vasilis Trigkas is a research fellow at the Center for China-EU relations at Tsinghua University and a non-resident Handa Fellow at the Pacific Forum CSIS. He has been selected as one of the top-15 young European experts on China by the Mercator foundation in Berlin. This article was originally published at  China US Focus.