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Rethinking the Sino-American Relationship

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STEPHEN S. ROACH
Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of the new book Unbalanced: The Codependency of America and China.

JUN 26, 2014
Rethinking the Sino-American Relationship
NEW HAVEN – In early July, senior US and Chinese officials will gather in Beijing for the sixth Strategic and Economic Dialogue. With bilateral frictions mounting on a number of fronts – including cyber security, territorial disputes in the East and South China Seas, and currency policy – the summit offers an opportunity for a serious reconsideration of the relationship between the world’s two most powerful countries.

The United States and China are locked in an uncomfortable embrace – the economic counterpart of what psychologists call “codependency.” The flirtation started in the late 1970s, when China was teetering in the aftermath of the Cultural Revolution and the US was mired in a wrenching stagflation. Desperate for economic growth, two needy countries entered into a marriage of convenience.

China was quick to benefit from an export-led economic model that was critically dependent on America as its largest source of demand. The US gained by turning to China for low-cost goods that helped income-constrained consumers make ends meet; it also imported surplus savings from China to fill the void of an unprecedented shortfall of domestic saving, with the deficit-prone US drawing freely on China’s voracious appetite for Treasury securities.

Over time, this marriage of convenience morphed into a full-blown and inherently unhealthy codependency. Both partners took the relationship for granted and pushed unbalanced growth models too far – the US with its asset and credit bubbles that underpinned a record consumption binge, and China with an export-led resurgence that was ultimately dependent on America’s consumption bubble.

The imbalances only worsened. China’s three decades of 10% annual hyper-growth led to unsustainable strains – outsize resource and energy needs, environmental degradation and pollution, and mounting income inequality. Huge Chinese current-account surpluses resulted from too much saving and too little consumption.

Mounting imbalances in the US were the mirror image of those in China – a massive shortfall of domestic saving, unprecedented current-account deficits, excess debt, and an asset-dependent economy that was ultimately built on speculative quicksand.

Predictably, in keeping with the pathology of codependence, the lines distinguishing the two countries became blurred. Over the past decade, Chinese subsidiaries of Western multinationals accounted for more than 60% of the cumulative rise in China’s exports. In other words, the export miracle was sparked not by state-sponsored Chinese companies but by offshore efficiency solutions crafted in the West. This led to the economic equivalent of a personal identity crisis: Who is China – them or us?

In personal relationships, denial tends to mask imbalances – but only for so long. Ultimately, the denial cracks and imbalances give rise to frictions and blame – holding a codependent partner responsible for problems of one’s own making. Such is the case with the US and China.

America blames China for its trade deficits and the pressures they inflict on workers, citing a massive accumulation of foreign-exchange reserves as evidence of an unconscionable currency manipulation. China counters by underscoring America’s saving shortfall – a gap that must be plugged by surplus saving from abroad, a current-account deficit, and a multilateral trade imbalance with more than 100 countries. China blames the US for fixating on a bilateral imbalance as the source of America’s multilateral problem.

The same blame game of codependency is apparent in the cyber-security controversy. The US contends that China steals intellectual property for competitive reasons, inflicting grave damage on companies and workers. China, for its part, claims that the US is guilty of equally egregious violations – widespread cyber spying on international leaders, trade negotiators, and foreign firms.

Equally worrisome are the security disputes that have flared up in the East and South China Seas, which, via treaty obligations, directly involve the US. America’s strategic “pivot” to Asia adds more tension. The longer these frictions fester, the greater the risk of an accident or miscalculation leading to a military response – culminating in the ultimate break-up nightmare.

The US and China could escape the potentially destructive endgame of a codependent relationship by recasting their ties as a more constructive and sustainable interdependency. An interdependent relationship fosters healthy interaction between partners, who satisfy their own needs rather than relying on others to do so, and maintain their own identities while appreciating the relationship’s mutual benefits.

The upcoming Strategic and Economic Dialogue provides the US and China a platform of engagement to seize their collective opportunities. Both countries should press ahead with a bilateral investment treaty, which would enhance rules-based market access and eventually foster greater trade liberalization. That would allow the US, the world’s preeminent services economy, to seize the opportunity that is about to be provided by the emergence in China of a services-led consumer society. And it would enable China to draw on America’s expertise and experience to help master its daunting economic rebalancing act.

At the same time, the upcoming dialogue should aim to restart the military-to-military exchanges on cyber-security issues that were launched a year ago. These efforts were recently suspended in the aftermath of the US Justice Department’s decision to file criminal charges against five members of the People’s Liberation Army. Here as well, the goal should be a rules-based system of engagement – especially vital for all modern economies in an era of IT-enabled globalization.

Progress on these fronts will not be possible if the US and China remain stuck in the quagmire of codependency. Only by embracing the opportunities of interdependency can the hegemon and the rising power reduce tensions and focus on the benefits of mutually sustainable prosperity.

Stephen S. Roach
wants the US and China to move from codependency to interdependence.

- Project Syndicate


© 1995-2014 Project Syndicate


Read more at Stephen S. Roach
wants the US and China to move from codependency to interdependence.

- Project Syndicate
 
China has been following the rule of GATT or the American "free trade" or "globalization" concept. It's NOT China's fault to have become successful. It'd be ridiculous to blame China not to have given the chances to other new economies.

China-US relationship is hopeless to change as long as Americans believe that they are the chosen world leader for at least one hundred more years and that China should humbly obey the rules made by the US and its allies. Is there any sane person in the forum believing in that the US respects a fair play with China or that US has not resorted to show off their military muscles to China?

US is making China into a hostile rival that the US can't handle without a full out nuclear war.
 
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China has been following the rule of GATT or the American "free trade" or "globalization" concept. It's NOT China's fault to have become successful. It'd be ridiculous to blame China not to have given the chances to other new economies.

China-US relationship is hopeless to change as long as Americans believe that they are the chosen world leader for at least one hundred more years and that China should humbly obey the rules made by the US and its allies. Is there any sane person in the forum believing in that the US respects a fair play with China or that US has not resorted to show off their military muscles to China?

US is making China into a hostile rival that the US can't handle without a full out nuclear war.

I'm not sure what you're responding to, since the counterpoints to your argument were not present in the article.

That said, I am always staggered by the victim-hood mentality that China displays towards the US. Therefore, I cannot resist asking:

In what way have the US rules of free trade and globalization harmed China?
In what way has the US not engaged in fair play with China?
In what way has the US resorted to showing off its military muscle to China?

I see a China that has benefited as much, if not more than the US from the US free trade regime and from US-imposed stability in Asia. But please do show me how I'm wrong.
 
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Put political things aside, China-US economy relation is mutually beneficial, we have too much similarities. EU is fallen, so China is reforming the economic structure towards US. For example, many accounting and auditing standard in China is directly translated from US GAAP and PCAOB, I mean, word by word translation.
 
I'm not sure what you're responding to, since the counterpoints to your argument were not present in the article.

That said, I am always staggered by the victim-hood mentality that China displays towards the US. Therefore, I cannot resist asking:

In what way have the US rules of free trade and globalization harmed China?
In what way has the US not engaged in fair play with China?
In what way has the US resorted to showing off its military muscle to China?

I see a China that has benefited as much, if not more than the US from the US free trade regime and from US-imposed stability in Asia. But please do show me how I'm wrong.
Let me name a few...

In what way have the US rules of free trade and globalization harmed China? Our tech companies cannot operate freely, buy asset, invest in the US without subject to security check. In most cases, they are block from purchasing or partnering with a US firm.

In what way has the US not engaged in fair play with China? The US can print dollar without any consequence and blame China for actively depreciating our currency for unfair trade advantage.

In what way has the US resorted to showing off its military muscle to China? The Missile Defense System that the US deploys across Asia is a testament to show its military muscle to China. You don't actually believe it was intend for North Korea, right?
 
China has been following the rule of GATT or the American "free trade" or "globalization" concept. It's NOT China's fault to have become successful. It'd be ridiculous to blame China not to have given the chances to other new economies.

China-US relationship is hopeless to change as long as Americans believe that they are the chosen world leader for at least one hundred more years and that China should humbly obey the rules made by the US and its allies. Is there any sane person in the forum believing in that the US respects a fair play with China or that US has not resorted to show off their military muscles to China?

US is making China into a hostile rival that the US can't handle without a full out nuclear war.

The only problem is nobody gives two hoots to Chinese to craft rules of the game. I think to claim this right will be tantamount to punching way-way-way above your weight!
 
Let me name a few...

In what way have the US rules of free trade and globalization harmed China? Our tech companies cannot operate freely, buy asset, invest in the US without subject to security check. In most cases, they are block from purchasing or partnering with a US firm.

In what way has the US not engaged in fair play with China? The US can print dollar without any consequence and blame China for actively depreciating our currency for unfair trade advantage.

In what way has the US resorted to showing off its military muscle to China? The Missile Defense System that the US deploys across Asia is a testament to show its military muscle to China. You don't actually believe it was intend for North Korea, right?

Let me counter by saying that if you take such a one-sided view, it's easy to see why you would be hostile to the US. But it's not the reality that we live in. Allow me balance it out for you.

The US is unable to set up 100% owned subsidiaries, let alone buy Chinese companies in a vast spectrum of industries, like finance, where the US has tremendous advantages and could start to change to trade imbalance. Fair play is intact there, so no problem.

The US can print dollars without consequence because China funds this activity in order to keep its currency artificially weak and support exports. Fair play is intact there, so no problem.

The US missile defense system is indeed aimed at North Korea, as China would be able to easily overwhelm it with the quantity and geographic range over which it is capable of launching missiles. The US missile defense system is impotent to stop China (and Russia, for that matter, but that doesn't stop their paranoia). No problems there.

Next?
 
I think any goods are tradable and any business transaction are doable between China and the US. The only thing we would not exchange would probably be our respective political systems or ideologies.

I think China has put a lot of dents on the (meta) narrative of a linear progress of history as articulated by both Marxists and Liberalists.
 
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