Xi Jinping

How bad is the tension between the world's two largest economies, really?

PUBLISHED : Tuesday, 13 October, 2015, 12:52am
UPDATED : Tuesday, 13 October, 2015, 12:52am

Tensions are mounting in a long fractious Sino-American relationship. 

Notwithstanding the pomp and circumstances of Xi Jinping’s recent state visit to Washington, the Obama administration is tightening the noose on an increasingly blatant China containment strategy – threatening naval confrontation in the South China Sea, strongly hinting at cyberhacking sanctions on three large Chinese companies, and pushing ahead on a major multilateral trade deal (the Trans Pacific Partnership) that excludes China. 

China, for its part, has done nothing to relieve any of these tensions and, in fact, has upped the ante on several other confrontational fronts – namely, dragging its feet on market-opening initiatives such as a Bilateral Investment Treaty (BIT), tightening up the operating rules for foreign non-Governmental organizations (NGOs), and turning its propaganda machine loose on what it claims to be the corrosive values of Western education.  Add to all this long simmering bilateral frictions over currency, trade, and saving imbalances – all of which have worsened in the past several months as China has shifted from currency appreciation to depreciation and begun unloading its vast holdings of US Treasuries – and the bad dream of a Sino-American confrontation is starting to seem as if it might come true.

While I warned of such a scenario in my latest book (Unbalanced: The Codependency of America and China, Yale University Press 2014) as the inevitable outgrowth of an increasingly insidious economic codependency, I would be the first to concede that the frictions between the two nations are being exaggerated by the US presidential political cycle. Time and again over the past 20 years, China bashing becomes a bipartisan lightning rod in US presidential campaigns – only to fade after the votes are counted.  The Chinese know this and have learned to decipher the bluster – recognizing that such noise is likely to grow considerably louder over the next twelve months as America chooses its 45th president. 

But the predictable politics of China bashing belie a more sinister development – what historians have long warned of as the inevitable clash between rising and dominant powers.  Mindful of the darker lessons of history, both Washington and Beijing are smug in their disavowal of such a possibility.  Chinese leaders speak openly of a “new great power relationship,” and while US leaders resist this phraseology, they certainly buy into the concept – having elevated the annual Strategic and Economic Dialogue between the two nations to major summit status.

These rhetorical flourishes are, unfortunately, at odds with the signposts of escalating tensions that are very much in keeping with the pathology of codependency.  In human relationships, codependent partners loose their sense of self – drawing sustenance from each rather than from the security that arises from inner strength.  Such a reactive relationship ultimately leads to frictions, imbalances, denial, finger pointing, and ultimately a painful breakup. 

While admittedly it is a stretch to apply this model of destructive human behavior to economies, there is a lot that resonates in the US-China relationship.  During a very difficult period in the late 1970s – a China that was in tatters after the Cultural Revolution and a US that was reeling from a wrenching stagflation – two beleaguered economies came together in a marriage of convenience.  China offered cheap goods to make ends meet for income-constrained American consumers and the US provided the external demand that brought China’s export machine to life.  While the infatuation was innocent at the start, it deepened into a full blown codependency as China lent its surplus saving to saving short America and invested that surplus in US Treasuries at a time when the US was running enormous budget deficits.

Codependent human relationships are destabilized when one partner starts to break away from the other.  That is exactly what is China is now doing.  In an effort to rebalance its economy toward consumer-led growth, China is moving from a model of surplus saving to saving absorption – in effect, putting its saving to work in funding the safety net of its own people rather than subsidizing the safety net of American families.  At the same time, it is focusing its future growth more on the demand of its own consumers rather than on providing cheap goods for American consumers.

In short, China is turning its role as America’s codependent partner inside out.  In a codependent human relationship, the partner that is left behind feel scorned and typically lashes out at the other – leading to a destructive blame game, a tough confrontation, and ultimately a breakup in the relationship. As recent events suggest, that is now the risk for Sino-American codependency.

What can be done to avoid this treacherous endgame? In my view, it starts and ends with healthy economies.  Just as China needs to rebalance its lopsided economy to sustain economic growth and development, America needs to do the same. 

Specifically, that means that the US needs to boost its saving – taking its net national saving rate (combined saving of households, businesses, and the government sector) from an anemic 2.9% in mid-2015 to at least 6% of national income.  It needs long term deficit reduction of the federal government to pull that off but it also requires new incentives for long-depleted personal saving – namely, expanded retirement accounts and a normalization of interest rates that restores financial return back into the investment and saving equation.

For its part, China needs to sharpen its focus on rebalancing and reform – placing more emphasis on strengthening its economy at a critical transitional juncture and less emphasis on geostrategic ascendancy, a muscular nationalism, and the propaganda of information suppression.   

A greater emphasis on rebalancing would enable both China and the United States to operate from positions of economic strength – allowing their relationship to be framed by a constructive interdependency rather than by an increasingly destructive codependency.  Only then would both be in a position to appreciate the benefits of their mutual growth opportunities – growth starved America being able to export goods and services into China’s vast middle class and China drawing on American experience and expertise to frame its push toward what it calls an innovations-driven entrepreneurial-driven well-off society.

History doesn't have to repeat itself. But if recent events are an indication of what lies ahead, a collision between the America, the hegemon, and China, the rising power, seems all but inevitable.  Owning up to the perils of codependency and embracing the opportunities of interdependency is the only way out.


(Stephen Roach, former Chairman of Morgan Stanley Asia, is a member of the faculty at Yale University and a Senior Fellow at Yale’s Jackson Institute for Global Affairs.  He will be speaking in Hong Kong on 22 October at 1800 at the Dynasty Club in Wanchai to offer an assessment of recent economic developments in China and the global economy and joined by senior colleagues from the Jackson Institute to provide information for prospective applicants to the Master’s program in Global Affairs at Yale. RSVP: [email protected])