Peter Zantal is in charge of globalization at the Port of New York. His hands are more than full. Every week, 24 ships disgorge thousands of containers, most of them arriving from Hong Kong and Shanghai via the Panama Canal. Their cargos are unloaded within 18 hours. Cellphones, refrigerators and computers - all made in China - begin the final leg of their journey to America's shelves. "The traffic's getting heavier by the week," Zantal says.

In some ways he is pleased by the development; in others, he finds it troubling. For one thing, half of the containers head back to China empty, and the contents of the other half are hardly designed to boost American confidence: They are filled with waste paper. The Chinese recycle it into packaging - for more cellphones, refrigerators and computers destined for New York.

High tech vs. recycled paper. There is no more vivid illustration of the trade imbalance between China and the United States. More and more products are being churned out in the low-cost factories of this new Asian economic wonder, causing more and more jobs to be lost in the U.S.

"This is an earthquake for our industry," Zantal says. "How many jobs will be left for our children?"

This question has begun to preoccupy the entire nation. Beijing's precipitous rise has left Americans in a collective state of shock.

Appalled, they have begun to realize that their own decline is making their low-priced competitors rich - dollar-rich. And that these competitors know just what to do with all of this cold, hard cash. Last December, for instance, the Americans watched the Chinese seize control of a national treasure - the computer wing of IBM. When the People's Republic made a move on an icon of the American housewife - the home-appliance producer Maytag - and tried to swallow one of the country's major energy companies, fear of the new red threat washed over the entire country.

 

 

No other issue can unify the divided Americans more than this. With hardly a peep of resistance, the House of Representatives lodged a protest against the sale of the Unocal oil company to the Chinese dragon. Republicans and Democrats alike feared the Chinese might strengthen their hold on oil supplies. Faced with such strong political pressure, the Chinese withdrew their takeover bid.

But Americans have no reason to breathe a sigh of relief. The actions directed at IBM and Unocal are the first harbingers of an epochal shift that will realign the global power structure from the ground up. The era of American supremacy is drawing to an end. The Asian century - with China in the vanguard - has dawned.

Initiated under Deng Xiaoping in the 1970s, China's reforms have gathered momentum fast. For 25 years, the Chinese economy has been growing at an average annual rate of 9 percent. Skeptics have repeatedly warned that the country could not keep up the pace and that a major setback was inevitable. So far, they have been wrong every time.

For most experts, it is only a matter of time before the Chinese economy goes barreling past the United States'. Some economists think it will take 20 years; others expect China to become the world's top economic force in 40. Only a minority considers this scenario unlikely.

With fascination and growing irritation, the world at large - and the United States in particular - has watched the Chinese advance toward economic preeminence. The initial amazement gave way to respect. Today, anxiety has set in. The disconcerted citizenry is numbed by the never-ending news of their new rival's trade records.

China is the prime mover behind the biggest trade deficit in U.S. history. Its exports to America have climbed 1,200 percent since 1990. The currency reserves at China's central bank - a good $710 billion - are so huge that a well-placed comment from a top Chinese official would put the greenback in a vise. At the end of Appalled, they have begun to realize that their own decline is making their low-priced competitors rich - dollar-rich. And that these competitors know just what to do with all of this cold, hard cash. Last December, for instance, the Americans watched the Chinese seize control of a national treasure - the computer wing of IBM. When the People's Republic made a move on an icon of the American housewife - the home-appliance producer Maytag - and tried to swallow one of the country's major energy companies, fear of the new red threat washed over the entire country. No other issue can unify the divided Americans more than this.

With hardly a peep of resistance, the House of Representatives lodged a protest against the sale of the Unocal oil company to the Chinese dragon. Republicans and Democrats alike feared the Chinese might strengthen their hold on oil supplies. Faced with such strong political pressure, the Chinese withdrew their takeover bid. But Americans have no reason to breathe a sigh of relief. The actions directed at IBM and Unocal are the first harbingers of an epochal shift that will realign the global power structure from the ground up.

The era of American supremacy is drawing to an end. The Asian century - with China in the vanguard - has dawned. Initiated under Deng Xiaoping in the 1970s, China's reforms have gathered momentum fast. For 25 years, the Chinese economy has been growing at an average annual rate of 9 percent. Skeptics have repeatedly warned that the country could not keep up the pace and that a major setback was inevitable. So far, they have been wrong every time. For most experts, it is only a matter of time before the Chinese economy goes barreling past the United States'. Some economists think it will take 20 years; others expect China to become the world's top economic force in 40. Only a minority considers this scenario unlikely. With fascination and growing irritation, the world at large - and the United States in particular - has watched the Chinese advance toward economic preeminence. The initial amazement gave way to respect.

Today, anxiety has set in. The disconcerted citizenry is numbed by the never-ending news of their new rival's trade records. China is the prime mover behind the biggest trade deficit in U.S. history. Its exports to America have climbed 1,200 percent since 1990. The currency reserves at China's central bank - a good $710 billion - are so huge that a well-placed comment from a top Chinese official would put the greenback in a vise. At the end of June, China including Hong Kong passed Japan as the world's largest holder of foreign currency reserves for the first time.

New rivals are emerging in every part of the world. Almost every day, Americans are confronted by an unfamiliar feeling: that of being outmaneuvered, outplayed.

The world's largest shopping mall is no longer located in the Canadian city of West Edmonton, but in Beijing. Most of the world's engineers no longer receive their degrees from universities located between Berkeley and Harvard, but in China: 440,000 every year, more than twice as many as in the United States.

The giants of Washington and Beijing have locked horns in a duel. Fifteen years after the end of the Cold War, the sole remaining superpower is uneasily preparing to receive a newcomer to its stratosphere. "While we have been focused on 9/11 and Iraq, China and America have become, in economic terms, Siamese twins," says bestselling author and New York Times columnist Thomas Friedman (The World Is Flat). "The real issue," he contends, "is that we have slipped into a symbiotic relationship with another major power that is neither a free market nor a democracy."

For years, carefree Americans snapped up cheap products from the Far East - and on credit, at that. Today they are taking a closer look at the bill - and discovering to their horror that it includes domestic layoffs, the relocation of entire industries, cutbacks for research and development and the downfall of the once-almighty dollar. And the payee? A population of billions. American book titles like China's Master Plan to Destroy America and Red Dragon Rising play on fears of a doomsday scenario. A recent Pentagon report warns of a rapidly growing weapons arsenal in China, the country that ranks third in military spending behind the U.S. and Russia. While China tells the United States to stay out of the dispute over Taiwan, Washington is making eyes at India, a Chinese rival, and has given its official blessing to that country's nuclear weapons program. U.S. President George W. Bush has even dropped China's status as a "strategic partner" and redefined Mao's heirs a "strategic competitor." In his worldview, "It's a complicated relationship." The two superpowers are wrestling over jobs, energy resources and access to markets worth billions. But there is actually much more at stake - supremacy in tomorrow's world. This battle royal puts two unequal partners in the ring: in one corner, the Chinese. They are brimming with confidence, burning with ambition, eager to display their prowess to the world: in business (but that's obvious), in sports at the 2008 Olympic Games in Beijing - and perhaps even in military might.

 

In the other corner, the United States. The U.S. is by far the world's leading economic and military power. But it is already battered and increasingly plagued by self-doubt. For years now, the country has been living well beyond its means, allowing foreign nations, particularly China, to finance its gigantic trade deficit. Despite the United States' overwhelming military force, it cannot win the war in Iraq, a conflict costing the country billions of dollars and its international reputation to boot.

This face-off between the superpowers of today and tomorrow recalls ascents of other great powers and the unfriendly reception they received from the rest of the world. Industrial late sleepers Germany and Japan began to stir at the end of the 19th century. And America's dramatic rise threw the world's political and economic balances of power into chaos.

Once again, the world is facing a new order. When the Soviet Union collapsed, the global supremacy of the United States seemed to be sealed for decades. Today a new, incomparably more dangerous challenger has appeared on the world stage. It is one that threatens to beat the West with its own best weapon: the economy. This one sneaks up behind its opponents, lures and addicts them with its cheap goods, while quietly stashing away cash as currency reserves.

For many, China's rise proves that free trade does not benefit everybody - notwithstanding standard economic theory. At breakneck speed, this new "Orient Express" has emerged from a dark tunnel as the world's factory. It already produces two-thirds of all DVD players and other electronic equipment, not to mention textiles and toys. At the same time, more and more industries and jobs are heading to the Far East.

Wal-Mart is a case in point. The biggest company in the United States, the retail chain posts sales seven times higher than Microsoft's. It employs 1.6 million people - more than Ford, General Motors, General Electric and IBM put together. The fact is, when a company like Wal- Mart turns China into its biggest supplier, American industry has a giant-size problem on its hands.

Until his death in 1992, patriotic company founder Sam Walton swore by U.S.-made products ("American workers can make a difference"). Not so his successors. Their reliance on the Far East is unparalleled: 80 percent of Wal-Mart's suppliers, 5,000 companies in all, are located in China. If the retail giant were a country, its trade volume of $18 billion would place it just behind Germany and ahead of the United Kingdom on China's roll call of importers.

The Szenzhen Baoan Fenda Industrial Company is one such supplier. Each month, 2,100 workers at its Hong Kong factory assemble 360,000 stereo systems for Wal-Mart. They wear no ear plugs or protective goggles, and earn $0.55 to $0.65 cents an hour. "Work hard today or you'll be looking for a job tomorrow," warns a sign on the factory wall.

Wal-Mart also encourages American suppliers to offshore their own operations. Take Lakewood Engineering & Manufacturing: Ten years ago, Lakewood fans cost $20 - too steep for Wal-Mart; production was shifted to Shenzhen, where workers can expect 25 cents an hour. At the company's Chicago base, American workers had been earning $13 an hour. The fans now cost $10.

The Wal-Mart story represents a new and fundamental paradox in American society: Over the past 10 years, cheap imports have saved consumers more than $600 billion, according to the investment bank Morgan Stanley. The low prices have helped increase the standard of living for the country's own low-wage earners, but the party may be over. In a sustained trade war, the most vulnerable segments - as identified by the U.S. magazine Foreign Affairs - would be American importers, consumers and shareholders; a prolonged conflict "would hurt these groups more than anyone else," the publication predicts.

On the other side of the balance sheet, some 2.5 million industrial jobs have been lost in manufacturing alone since mid- 2000. According to Clyde Prestowitz, the U.S. has a "de facto economic strategy, and right now it is to send the country's most important industries overseas." A former economic adviser to Ronald Reagan, Prestowitz conjures up the "nightmare scenario" of an "economic 9/11." Prestowitz's latest book delves into the relocation of prosperity and power to the East. Three Billion New Capitalists is a must-read in Washington.

Today, the land of free trade and unchecked capitalism is increasingly turning to protectionism - as it did in the 1970s. Back then, angry American workers took sledgehammers to Toyota cars and Toshiba TVs. Using quotas and threats of sanctions, American politicians fought to stem the rising tide of lowpriced imports from Japan.

Toyota, Nissan and Mazda were not only cheaper. They were also usually better than the products "Made with pride in the U.S.A." General Motors, Ford and Chrysler were stunned. They saw that the Japanese had surpassed them in productivity - not with legions of slaves, but with modern factories equipped with armies of robots.

Industrial America took up the gauntlet. At the beginning of the 1990s, the superpower suddenly struck back, exploiting the high-tech areas that the complacent Japanese had overlooked. It was time for chipmaker Intel, software giant Microsoft and the new Internet start-ups to call the modernization shots. At the same time, the Wall Street banks launched a capital- istic offensive against both Japan and its copycats in the region, the Asian tiger states. The banks couldn't care less about Confucian-style Asian values that included a life-long job guarantee; they demanded open markets and shareholder value. After Japan's speculative bubble burst at the beginning of the 1990s and the tigers were declawed by a financial crisis in 1997, the U.S. media toasted the victory of "American standards."

But the American chattering class celebrated too soon. Now it is the Chinese dragon that is driving out Japan Inc. and its retinue of tigers. And this new world power is not just challenging the United States economically. It is staking political, ideological and military claims as well.

 

The rise of China as a global economic power started tentatively, in the slipstream of America's de- feat in Vietnam. In 1972, to close down one of America's two Cold War fronts, President Richard Nixon opted to break the ice with China - through ping-pong diplomacy. A few years later, the red rulers introduced their first economic reforms.

China catapulted itself onto the world stage just as the United States was reeling from the impact of Sept. 11, 2001, and focusing on its war on terror. As neoconservatives were preaching that the hegemonic capitalist power shape the world order through preemptive strikes, Beijing had already undercut its dominance. Using a "socialist market economy with Chinese characteristics" - in reality a turbocharged breed of unbridled capitalism under the flexible control of an authoritarian government - the new "red bosses" had already created a pragmatic response to the ideologically paralyzed industrial power of the United States.

China is back, along with one-fifth of the world's population, all of them with a burning ambition to escape personal and national poverty. The same desire fueled the economic miracles in Japan and South Korea. But the 1.3 billion Chinese are being driven by more powerful forms of energy: an historic claim to cultural superiority and a yearning, cultivated by the party and state through patriotic school curricula, to dispel the humiliating defeats suffered during the Opium Wars of the 19th century - and the decades of oppression that followed.

With idealistic pathos, the youthful United States rushed to proclaim an "end of history" at the beginning of the 1990s when the Soviet Union collapsed. To a country with a proud history extending back five millennia, that sounded like the immature histrionics of a teenager.

Even during the Middle Ages, the Chinese were developing major technological innovations, including the compass, gunpowder and printing. During the Song dynasty (960 to 1279), they created a unique network of artificial waterways and introduced the world's first modern paper money. Under the Ming emperors (1368 to 1644), China continued to blossom - abroad as well. Eighty-seven years before Columbus set off for America, the eunuch Admiral Zheng He sailed around India on an imperial mission. With a huge fleet of more than 300 ships and 28,000 sailors, he explored the Near East and eastern Africa - bringing back copper, ivory and hardwood.

To commemorate the 600th anniversary of the expedition this year, China's communist leadership sponsored a series of exhibitions. A new museum was built in Nanjing - at a cost of $50 million. This expensive propaganda piece is designed for international consumption as well: Beijing is parading Zheng He as the chief historical witness to its peaceful expansionist motives.

Back then, after their castrated commander died, China's conservative Confucian courtiers really did halt the country's overseas adventures. In the centuries that followed, particularly during the Qing dynasty (1644 to 1911), China forgot about its fleet. At the beginning of the 16th century, the country was surpassed in terms of riches and trading by the Portuguese. The Spaniards rose to power as well. Then came the British and, finally, the Americans. In 1820, China was generating onethird of the world's gross domestic product. By 1950, that share had fallen to 5 percent.

The Manchu emperors' primary concern was to cement their control within the country and on the fringes of their empire. Insurrection was brutally suppressed, the island of Taiwan annexed; Tibet was declared a protectorate and the Muslim area of Xinjiang in the West subdued. Around the end of the 18th century, China controlled huge sections of eastern and western Asia. It was the world's largest multi-ethnic state.

Outside its immediate sphere of influence, China banked on the cultural superiority of its civilization. It won over foreign rulers by granting trade privileges: Neighbors from Vietnam to Korea - and even Japan - regularly set off on missions to pay tributes exacted by the sons of heaven.

Even the "outer barbarians," as the Chinese called the long-nosed Europeans, assumed the role of vassals in China's worldview. The emperor Qianlong had the conquests of such peoples as the Xinjiang recorded for posterity on copper engravings - produced in faraway Paris using drawings made by Jesuit missionaries.

The Jesuits' scientific knowledge gained them access to the ranks of the imperial bureaucracy: Adam Schall von Bell (a Cologne native who died in 1666) was head of astronomy in Beijing. More than three centuries later, the Chinese are still using the same flexible approach to hosting Western companies and assimilating their technology whenever it serves their own interests. This pragmatism distinguishes China from its warring neighbors, the Japanese, who executed Christians in the 16th century. To this day, notwith- standing its various promises to the Americans, Tokyo still seeks to shield its domestic market from foreign infiltration.

The strategists in Beijing have closely observed the longstanding trade dispute between the Americans and the Japanese. In the tradition of their great military tactician Sun Tzu, they want to avoid a direct confrontation with a powerful opponent such as the U.S. "Heping Jueqi" - this is the motto that the government uses to describe its plans for a fresh "peaceful resurrection" of its former imperial greatness. The meaning of this nebulous phrase is crystallizing rapidly in U.S. and Western minds. In a few short years, China has emerged as the world's manufacturing hub, and its economy is growing unchecked. U.S. companies like Motorola, the megabrewer Anheuser-Busch and General Motors are among its biggest employers.

But the country is no longer content with its cut-priced status. Armed with Western technology, it intends to conquer the global marketplace. The desk drawers of party strategists are filled with detailed plans promoting national industries from automaking to biotechnology. From cellphones and software to TVs, the country's own industrial standards are designed to shut out foreigners and their influence in the long term.

Under the battle cry of "Zou Chu Qu," which freely translated means "swarm out," Beijing is encouraging its industry to acquire foreign companies: with the twin aims of amassing know-how and acquiring big brands in a single blow. By 2015, the country intends to lift 50 Chinese companies into the ranks of the world's 500 biggest global players, and to foster 500 mid-size and 5,000 small multinational businesses as well. The strategy was conceived by party planners during the 14th party convention back in 1992.

Officials in Beijing are constantly finetuning their plans. A year ago, the ministries of Commerce and Foreign Affairs issued guidelines for Chinese investment abroad, in which the planners meticulously pinpointed nearly 70 nations and regions as targets for potential expansion. Their shopping list extends from the electronics industry to such raw materials as copper, iron ore and oil. Companies whose foreign investments toe this line receive preferential treatment when applying for permits. They can also expect generous financial support from the state-run banks.

When targeting the U.S.A., the guidelines encourage patriotic entrepreneurs to scout out producers of auto parts, home appliances, electrical machinery and textiles. In the service sector, the Chinese are also looking to squeeze a foot inside Uncle Sam's door - by investing in logistics, telecommunications, transport, finance and software development firms.

Unlike the Japanese with their infamous Miti, the Ministry of International Trade and Industry, Beijing is generally content to draw up the big picture for the nation's companies, and leave day-to-day control to their executives. But sometimes these managers miss the collective goal by a mile, infuriating the state's leadership with their capitalistic zeal.

Take Fu Chengyu. He belongs to a new generation of Far Eastern executives: He studied at the University of Southern California and spent 13 years working for Western companies. Today the Communist Party functionary is CEO of the Chinese energy company CNOOC. His bid to take over Californian oil company Unocal shook the United States to its foundations in June. It also confused the well- rehearsed roles assigned to the communists and the free-marketeers.

On the one hand, CNOOC is a state company controlled by the Chinese Communist Party. But the company's chairman built his case on free-market arguments: "I adhere to the belief that the highest price wins," Fu Chengyu recently wrote in a column for the free-market Wall Street Journal - as if that needed explaining in the U.S.

On the other side of the bidding war for Unocal stood the landed gentry of old-school industry: the oil giant Chevron, an icon of U.S. capitalism that offered $1.2 billion less than its rivals but - thanks to U.S. government intervention - still won the day.

For months, anti-Chinese sentiment had been simmering in the United States. The situation boiled over when Beijing laid claim to American oil.

"It is not a commercial deal, but rather a government deal financed with cheap government money," one-time Reagan adviser J. Robinson West said at a congressional hearing. Former CIA Director R. James Woolsey saw a threat to his country's security. "China is pursuing a national strategy of domination of the energy markets and strategic dominance of the Western Pacific," Woolsey told members of the U.S. House.

Politicians jumped on the bandwagon, and opposed the planned Chinese takeover by a vote of 398-15. Numerous representatives were even prepared to pass a law blocking the acquisition. They knew they had the people on their side: 73 percent of Americans opposed the deal, surveys showed. And 49 percent generally view the Chinese as an adversary.

Faced with this pressure, CNOOC gave up. The political elite was "hopping mad" about Fu Chengyu's thrust, insiders say. It had wanted to prevent this emotional wave from building in the first place.

In the beginning, Fu Chengyu wrought the ire of his own board. In his delusions of grandeur, he wanted to shell out more than the total market value of CNOOC for a company that makes little economic sense to China. Most of Unocal's resources, including natural gas in Indonesia or Thailand, are intended for local consumption. They could never have quenched China's thirst for energy. At the end of August, CNOOC then sealed the purchase of the Canadian oil firm Petrokazakhstan for $4.2 billion. The company operates in Kazakhstan - right on China's doorstep.

But worried about the implications for China's long-term ambitions, Beijing is now trying to prevent any further solo outings by companies like CNOOC. "In their efforts to expand overseas, Chinese firms should be especially careful," the business magazine Shangwu urges. And the leading economist Cao Yuanzheng warns: With local firms grabbing "everything they can lay their hands on" abroad, they risk reminding the rest of the world of the Japanese.

But the market forces unleashed by the pragmatic Chinese reformer Deng Xiaoping at the end of the 1970s are no longer under the control of the leaders in Beijing, no matter how much the U.S. Congress rants and raves. Regardless of the global-conspiracy theories being spun by U.S. politicians in their home districts, China's expansion overseas is increasingly driven by the heads of local state-run companies. The publicly-owned carmakers Shanghai Automotive and Nanjing Automobile recently acquired the bankrupt British automaker Rover. Nanjing settled for the production facilities, Shanghai the brand name. Yet both companies are owned and operated by their provincial governments.

In addition to the CNOOC offer, Americans can expect further surprises from communist capitalism - and very soon. Wanxiang is one example. China's biggest auto-parts producer is methodically buying up ailing American rivals and tuning them up; its annual U.S. sales now exceed $400 million. Or take CIMC. The Shenzhen- based container producer first cleaned up its domestic market. Then it turned its attention to nearly bankrupt U.S. firms and restructured them.

Among American business consultants, the Chinese managers have earned a reputation as first-class turnaround experts. After all, they have regularly transformed bloated state-run companies into hard-hitting enterprises, frequently with the aid of wholesale redundancies. Disciplined entrepreneurs like these, the Boston Consulting Group writes of the "advantages of the Chinese style of management," would have "much to offer" American industry.

U.S. manufacturers find themselves fighting a constant battle for survival with little hope of winning, particularly in segments like textiles.

George Shuster heads the oldest textile mill in the United States. "We are still doing exactly the same thing we were doing in 1824. So we must be doing something right," he says. But it sounds more like a cry for help.

His business, the Cranston Print Works Company near Providence, Rhode Island, touted itself the biggest textile printing company in the world until the mid-1990s. Since then, Shuster has had to close two of his three factories, and seen sales shrink from about $400 million to $125 million; a workforce of 2,500 has now been pared down to 500. Some jobs were cut as the result of technology and the associated rise in productivity, Shuster says. "But without China, we would have 1,000 employees more," he says.

His office is adorned with photos from the good old days 30 years back. All of the men pictured are Rockefellers, the former plant owners.

John Rockefeller and two college friends visited the "Oriental class enemy" in the early 1970s to buy fabric. The staterun company Chinatex was reliable, honest and produced quality goods. "At that time, we bought more goods from China than the rest of the United States," Shuster says.

 

At the end of the 1980s, America's most famous capitalistic dynasty sold the company to its employees. The sale was rung up just in the nick of time, before the national textile industry began its long, slow demise and China mutated from supplier to daunting competitor. One by one, Shuster's major customers from the U.S. apparel industry migrated to the People's Republic. The change squeezed the venerable firm into a niche market: printed fabrics for American women who sew their own skirts, blouses and pillow cases. Almost 950,000 workers in the American clothing and garment industry have lost their jobs since 1995. The end of import duties on textiles on January 1 accelerated their plight. "The effect is far bigger than we expected," says Karl Spilhaus, the president of the National Textile Association. In the first seven months, apparel exports from China rose by 66 percent - despite its self-imposed export duty. In some product groups, such as men's trousers and women's jackets, the rise surpassed 110 percent.

As a result, the entire sector - or what remains of it - is now up in arms against the Chinese. George Shuster is part of the protest. "The people who hijacked the U.S. trade policy are retailers and big corporations," the executive complains. Their generous campaign donations have won over the Republicans and the Democrats, he says. In Shuster's world, free trade is a euphemism for the sell-out of domestic industry and unfair competition in the globalized world.

Similar conflicts abound throughout the U.S. economy. Traditional industries have paid a particularly heavy price. Engineering has lost 294,000 jobs and the furniture industry 107,000 since 2001. The numbers from the American high-tech industry tell an even more depressing story. In 1998, both countries had a neutral trade balance in high tech. But in just six years, the United States has piled up a deficit of $36 billion.

Faced with such news, the customarily cocksure United States is tormented by doubt. "Bashing China," the Wall Street Journal rails, "has become a popular political sport among Democratic and Republican officeholders alike." Fear is creeping through the lobbyists' offices and union headquarters and wafting through the halls of Congress on Capitol Hill.

Until 2003, John Engler was the governor of Michigan, the U.S. state that thrived for decades off Ford, General Motors and Chrysler. During his term, "The big three spent most of their time working out how to get smaller." He says he also learned to stop worrying about the economic development incentives offered by such states as Ohio or North Carolina and to focus instead on the competition in China.

Since vacating the governor's mansion, Engler has become the president of the National Association of Manufacturers (NAM). He is one of the most influential business lobbyists in the country. But he sounds more like a shop steward than a captain of industry. "In the past, even without education, you could support your family, you could have a pretty good life in the middle class," he says. "Today, that kind of job is extremely difficult to find."

The AFL-CIO federation of unions is based in Washington. Its headquarters command a view of the White House. Huge frescoes in the lobby trace the proud history of the American labor movement - from the building of the railroad to the West through the rise of the steel and coal industries to the triumph of engineering that sent man to the moon. That is all history now: 37,000 jobs were lost in the auto industry alone between May and August 2005. Such numbers have been the norm for five years now.

"It's killing us," says Robert Baugh of the Chinese competition. For the union boss, the red peril is "like a viral disease affecting all sectors."

Baugh, Engler and their colleagues in Washington are living out a political and economic nightmare. The fluctuations of the dollar and the American trade deficit show just how inextricably interdependent the United States and China have become in just a few years.

The U.S.-Chinese tango began with a few slow steps, scarcely noticed at first. Now, it has gained pace - feverish pace - and captured the world's attention. It has become an issue even for regional newspapers like the Sacramento Bee, which informed readers of the shocking truth: Their cheap toys and toothbrushes were being made in China. "Ever given much thought to where your shopping dollars wound up?" was its pointedly condescending question.

The U.S. trade deficit with China has nearly doubled to $162 billion since 2001, when China joined the World Trade Organization. This year, it is likely to swell to more than $200 billion - the largest ever between two countries in human history.

Because Americans barely save a dime and consume much more than they produce, they constantly need new loans. And, of late, Beijing has been their source. The party strategists in the People's Republic use their export revenues to purchase U.S. bonds - more than $670 billion in total. The interest they receive is minimal, but they do buy the knowledge that their most important customer, the American consumer, is satisfied and continuing to purchase their wares.

And because the value of the yuan was kept artificially low - it was pegged to the dollar for 10 years - Chinese exports became cheaper and American imports more expensive. And this situation still persists, despite a marginal revaluation of the yuan.

With their massive dollar reserves, the Chinese keep the American currency stable. This allowed Fed Chairman Alan Greenspan to cut interest rates to record lows after 9/11 and preempt a recession. At the same time, America's non-stop shopping spree keeps China's economy expanding and its people working. And that, in turn, keeps the Communist government in power. Thomas Friedman refers to this as the "Tiananmen-Texas bargain."

But as American deficits grow, joblessness climbs and outsourcing continues, George W. Bush will be hard put to honor this secret pact. "If you are no longer producing any goods, you can't trade with them either," union boss Baugh warns, "and if you don't have anything to trade with, you can't get a handle on the deficit." In the face of these problems, anti- Chinese sentiment has been festering in Congress.

In one of their few joint legislative initiatives, Republicans and Democrats devised a draconian plan to impose punitive tariffs on Chinese imports: import duties of 27.5 percent that would offset the estimated undervaluation of the yuan.

But the pending trade war was averted. Treasury Secretary John Snow and Greenspan persuaded the senators to postpone their move. At the end of July, Beijing's central bank demonstrated a modicum of good will for the first time - by raising the value of the yuan 2.1 percent. Since then, it has been allowed to fluctuate within a range of 0.3 percent against a basket of currencies. Beijing's move, however, prompted further demands from its critics in the U.S. Most national experts think a 40 percent revaluation is needed for America to bring its trade deficit under control.

By strengthening the yuan, China did indeed take a true step toward reform, says Kenneth Courtis, Vice Chairman of Goldman Sachs Asia. But, according to Courtis, it would be difficult for China to reconcile its long-range strategy with the short-term political pressure from the United States. The months ahead could prove particularly "critical" for Sino- American relations. In the absence of further reforms, the U.S. Treasury Department will have to classify Beijing a "currency manipulator" in its upcoming report, says the U.S. banker, who also sits on the CNOOC Supervisory Board.

The initial optimism in the United States has been yielding to the suspicion that China is once again pegging its currency to the dollar - at a low level. New York Times columnist Paul Krugman, one of America's best known economists, suggests that the small step taken by the Chinese may be "a piece of theater designed to buy a few months' respite from protectionist pressures in the U.S. Congress."

For decades, Americans believed that free trade and open markets would bring them only benefits. But no longer.

According to economic theory, the Americans - confronted with the loss of industry abroad - need only climb a few rungs up the technological ladder to create new, better-paying jobs and more prosperity. But the reality is far harsher. Lester Thurow, an economist at the Massachusetts Institute of Technology, has determined that workers who lose their jobs to China will earn some 25 percent less from their new employers.

A downward spiral has been set in motion, with hopes of finding a solution plummeting in tandem. The reason: The foundations underpinning America's good life were on loan - built on debt.

Even such level-headed observers as Paul Volcker, Alan Greenspan's predecessor at the Federal Reserve, see a 75 percent chance of the dollar crashing in the next five years. And currency speculator George Soros, whose funds brought down the British pound at the beginning of the 1990s, believes that another Great Depression could rock the world if the dollar is not propped up.

Has the United States already succumbed to the challenge from the Far East? Does the land of unlimited opportunity have no other options for the future? Is a major crisis inevitable in the long run?

The Chinese are watching the new uncertainty of the Americans with a mixture of hidden pride and mounting perplexity. "The U.S. Congress discusses China every day," the Huanqiu Shibao noted with amazement. The newspaper also reported that, on some days, as many as four congressional committees simultaneously have China on their agenda.

Chinese analysts are troubled by the protectionist calls. Pan Rui, a professor at the Center for American Studies at Shanghai's Fudan University, feels sympathy for the United States: The elegant, red-brick building where he teaches was built with U.S. funds. Nevertheless, he is critical of American hype about cheap Chinese exports and his country's thirst for energy. "International investors have made us into the world's factory," he says. "In most cases, we merely produce the export goods which benefit others."

Foreign companies are indeed making the major contribution to China's export growth by producing their goods in the low-wage country. Pan Rui therefore thinks that China has every right, as the world's factory, to secure a higher share of global energy resources.

China has no choice but to seek an alternative to the U.S. growth model. Every year, the country uses 1.5 barrels of oil per capita, Pan Rui says, while the United States consumes 17 times as much. "We cannot afford an American dream." The People's Republic needs a model that wastes less energy than the U.S. version. And solves the country's overwhelming social problems.

While American politicians talk up the foreign threat, other, more pessimistic scenarios are making the rounds in Beijing. The excessive expansion of production capacity will make the country even more dependent on exports in the future because domestic demand is so weak. This will translate into higher trade surpluses, greater foreign-currency reserves and added strain with its biggest customer, the United States.

Outside glittering commercial centers like Shanghai, the budding economic titan is a developing country. Large segments of the population live in abject poverty. Working conditions are often catastrophic. Coal mines, for instance, are the frequent scene of horrific accidents. In the first half of 2005, China's cumbersome, unprofitable companies slipped still deeper into the red - with losses up 60 percent compared to last year.

The cellphone maker Ningbo Bird is also bleeding money. Not so long ago, it was being lauded as a shining example of China's unstoppable rise. Growing numbers of China's 120 automakers are reporting losses as well; tough competition is preventing companies from passing on higher energy prices to consumers.

In the end, party strategists may have to cut back on production. Corporate earnings will drop, investments will decline, loans will go unpaid, and the regime will falter.

Trade wars, depressions, government collapse - the economic scenarios for U.S.- Chinese relations are bleak enough. But military and foreign-policy problems are already lurking off America's West Coast. The Pacific could be the arena for a showdown of the giants. The United States, the current reigning hegemonic power in the area, is nervously watching China regain its historic influence.

American expansion in the Pacific began in the mid-19th century, when China's empire in eastern Asia was collapsing. Under the doctrine of Manifest Destiny, covered wagons headed toward the Wild West. After California was won in the war with Mexico (1848), there remained just one more territorial goal for the great United States: the Pacific. The Americans opened Japan to trade, colonized the Philippines and annexed Hawaii.

They arrived in China too late. But that did not stop them from rushing headlong into the fray with their "open door" policies and legions of Christian missionaries. As a result, they were not left out when imperial European powers and Japan divided up China. There was nothing arbitrary about China's first modern-style boycott being directed against the United States in 1905. In Shanghai and Canton, nationalistic students went on a rampage against the influx of American products.

Following the victory over Imperial Japan in 1945 and the downfall of the British Empire, the United States turned much of eastern Asia into a Cold War buffer against communism. The Americans clashed head-on with the Chinese for the first time at the end of 1950 during the Korean War, and suffered their first serious humiliation. When U.S. General Douglas MacArthur ordered his troops to the Yalu River along the border, Mao Zedong, the Great Helmsman, struck. Under cover of darkness, he slipped 180,000 soldiers from the People's Liberation Army across the river. Panic-stricken, the Americans fled as far south as the 38th parallel.

The forced retreat triggered by the only rudimentarily equipped but thoroughly disciplined Chinese - Mao had established the People's Republic just a year earlier - shocked the superpower. In Washington, President Truman threatened China with nuclear war. MacArthur drew up a list of 26 possible targets in China and North Korea. But things never escalated to that point. Instead, the two opposing forces reached a truce on the 38th parallel.

But now the Chinese are reasserting themselves in Asia. Turning on their diplomatic charm, they have used the allure of China's huge market to entice Asia's tiger states. By 2010, China intends to set up a free-trade zone of about two billion people with the ASEAN countries - making it the world's largest economic bloc. As part of its kid-glove diplomacy, Beijing is also winning over its neighbors one by one with bilateral agreements. At the end of April, for instance, President Hu Jintao sealed a strategic partnership with Indonesia aimed, among other things, at joint exploitation of the country's oil and gas reserves.

U.S. allies Japan and South Korea are becoming more and more economically dependent on their neighbor. China has already replaced the United States as the leading supplier to both countries. And even Taiwan, branded by the communists in Beijing as a renegade province, is forging stronger economic ties with the mainland. Well over 500,000 Taiwanese businesspeople work in China, where they run huge factories that churn out notebooks, monitors and cellphones.

 

Yet politically and militarily, both nations are eyeing one another warily. Beijing's threat to forcibly retake Taiwan - should the island declare independence - represents the biggest potential conflict with the United States. If that happens, Washington is required by law to consider Taiwan an issue "of serious concern." Major General Zhu Chenghu, a professor at the National Defense University in Beijing, has even threatened to use nuclear force against the Americans should the United States intervene in any conflict.

The volatility of the situation in eastern Asia became obvious last November when a nuclear-powered Chinese submarine slipped into Japan's territorial waters near Taiwan. In the aftermath of the incident, the United States and its loyal ally Japan jointly announced for the first time their strategic interest in the security of Taiwan. Resource-poor Japan gets 90 percent of its oil imports through the shipping lanes near the island.

In their own search for raw materials, the Chinese have even cut deals with regimes in Iran and Sudan, which Big Oil has tended to shun for political reasons. In Iran, the Chinese oil company Sinopec has sealed the country's largest energy agreement - worth $70 billion, locking up 250 million tons of liquefied natural gas for 30 years. In addition, Sinopec will be playing a major role in Iranian crude production.

China's close partnership with Sudan has also prompted concern. As a result of the atrocities in Darfur, the West has ostracized the country's leaders. But not the Chinese. Their CNPC oil company has assumed a leading role in production near the capital of Khartoum. Through a subsidiary, the company is building a refinery with a capacity of 2.5 million tons and a pipeline that will stretch 1000 miles to the Red Sea. The African country now supplies an estimated 8 percent of China's oil imports. The deal with Beijing is also paying political dividends for Khartoum. With China holding a veto on the U.N. Security Council, Sudan has little reason to fear international sanctions for human rights violations.

The Sino-American race for resources and global influence has subverted concepts of friend and foe in Asia. Both rivals are currently involved in a bizarre sort of bidding game for the favor of India, itself an emerging superpower. Within three weeks last spring, U.S. Secretary of State Condoleezza Rice and Chinese Prime Minister Wen Jiabao visited the subcontinent. To defend its rear, Beijing is doing its best to resolve old border disputes with New Delhi. In June, it signed an agreement with Russia that is designed to end a 40-year-old conflict over their common 4,300-kilometer border.

China is increasingly emerging as the leading regional power in Asia. Prior to the latest G8 summit, to underscore its newfound status, China organized a meeting of the Shanghai Cooperation Organization (SCO), a newly formed association of countries under its leadership. Beijing hopes that the organization, whose members include Russia, Kazakhstan and several central Asian states, will help bring stability to its restive western provinces.

At the same time, the group is designed to secure Chinese access to central Asia's resources. At this year's meeting in Kazakhstan, President Hu Jintao held negotiations on both the construction of a pipeline and the exploration of oil and gas fields in the host country. At the end of the summit, the participants revealed part of their packed agenda: Together, they called on the U.S. to withdraw the troops it has stationed in central Asia since its war against the Taliban.

Regardless of which countries George W. Bush and Hu Jintao visit, the man from Beijing is faring better with his ideologyfree stance. In Australia's parliament, Bush was met coolly during his last state visit; just a short time later, the Chinese president received something of a hero's welcome. "Had you not known otherwise, you would have concluded that Hu's country was the longtime ally and Bush's the threat," Prestowitz observed. The pattern was echoed in Malaysia: On his first trip abroad, new Prime Minister Abdullah Badawi did not head to Washington. Instead he went to Beijing - accompanied by a delegation of 800 businesspeople.

Around the world, governments are busy adapting to the new world order. U.S. companies in particular want to keep in the new superpower's good books. For instance, in accordance with Chinese law, the software giant Microsoft prevented users of the country's official website to search for terms considered objectionable by its communist rulers.

Among the offending words: "democracy" and "human rights."