Globalization tends to integrate trade by disintegrating global supply chains. By breaking up these chains, globalization spreads various segments of production and assembly across those economies that offer the cheapest labor for each particular stage. China has deftly inserted itself into a long list of these chains, becoming the final assembler of note in toys, cell phones, CD players, computers, and auto parts, to name but a few. By doing so, China has consolidated much of Asia’s previous trade surpluses with America into its own burgeoning bilateral trade with the United States. So when you hear about America’s huge trade deficit with China, bear in mind that it’s the same huge trade deficit we’ve long had with Asia as a whole.

Also be aware that this figure hides a lot of complexity. Foreign corporations control the majority (approximately two-thirds) of this production for export. American companies in particular dominate China’s U.S.-export sector, meaning it’s basically our companies renting Chinese labor and keeping much of the profit. The Chinese export that sells for hundreds of dollars in America nets only tens of dollars for the Chinese economy. That’s how Wal-Mart, the single biggest source for Chinese exports in the world, keeps its prices so low. So if you think Western companies are exploiting cheap Chinese labor, then understand that you’re a prime beneficiary.

Naturally, China’s deep penetration of the U.S. market has raised product-safety issues. Any economy that is growing as fast as China’s cuts plenty of corners. But realize that China learns by scandals just as America did over the past century. Frankly, the best crises are the ones you actually hear about, because that means the international press got ahold of them, and those already affected or at risk will get the information they need to protect themselves. Once tracked back to China, Beijing is put on public notice that whatever laxness exists simply cannot be tolerated anymore, with threats of quarantine, bans on exports, cessation of investment flows, and so on.

A generation ago, such threats would elicit yawns from China’s ruling elite, but now, with the Communist Party’s legitimacy riding on economic expansion, they’re taken with the utmost seriousness. In short, China’s government is starting to act more like a business which recognizes that its reputation is often its most important asset, because fierce competition means that today’s mistake allows somebody else to steal your customers by the start of business tomorrow.

Why China Matters