End China-US economic ‘war’ before it gets worse

By Stephen Roach Source:Global Times Published: 2018/10/22 20:38:39

Illustration: Luo Xuan/GT

I published a book in 2014 on the codependent economic relationship between the US and China. This argument has been compelling for many years. With its economy in a weakened state in the late 1970s, China was quick to turn to the US for external support for Deng Xiaoping's strategy of "reform and opening up."

Meanwhile, the US, in the grip of stagflation in the late 1970s, was eager to seek new growth solutions; low-cost Chinese imports were the antidote for income-constrained American consumers. The US also began to borrow freely from China's vast reservoir of surplus saving - a convenient solution for the world's largest deficit saver. Born out of innocence, this two-way dependency blossomed into a seemingly blissful marriage of convenience.

China was the first to embrace change - committing to an economic rebalancing by shifting its growth model from external to internal demand, from exports and investment to private consumption. China's endgame is no longer in doubt, underscored by a shift from surplus saving to saving absorption. After peaking at 52.3 percent in 2008, its gross domestic saving rate has fallen approximately seven percentage points and should continue to decline in the years ahead as China strengthens its long-porous social safety net, encouraging Chinese families to reduce fear-driven precautionary saving.

At the same time, an explosion of e-commerce in an increasingly digitized (that is, cashless) economy is providing a powerful platform for China's emerging middle-class consumers. And a transformation from imported to indigenous innovation is central to China's long-term strategy, both to avoid the "middle-income trap" as well as to achieve great power status by 2050, as per the country's "new era" centenary aspirations.

China's shifts have become sources of growing discomfort for the US.  Washington can hardly be thrilled with China's saving pivot. With America's saving shortfall now worsening in the aftermath of last year's poorly timed tax cuts, the US will only become more reliant on surplus savers like China to fill the void. Yet China's move to saving absorption narrows that option.

Moreover, while China's nascent consumer-led growth dynamic is impressive by most standards, limited market access has constrained US companies from capturing what they judge to be a fair market share of this potential bonanza.  And, of course, there is enormous controversy over the innovation shift, which may well lie at the heart of the current tariff war.

Whatever the source, the conflict phase of codependency is now at hand. China is changing, or at least attempting to do so, while US is not - stuck in the time-worn mindset of a deficit saver with massive multilateral trade deficits and the need to draw freely on global surplus saving to support economic growth. From the perspective of codependency, the US now feels scorned by its once compliant partner and, predictably, is lashing out in response.

Which brings us to the burning question: Will the US-China trade conflict end with a peaceful resolution or an acrimonious divorce? The lessons from the human pathology of codependency may hold the answer. Rather than react out of blame, scorn and distrust, each nation needs to focus on rebuilding its own economic strength from within. That will require compromises from both sides - not just on the trade front but also on the core economic strategies that both nations embrace. 

The innovation dilemma is the most contentious issue, by far. The conflict phase of codependency frames this as a zero-sum battle: US allegations of Chinese intellectual property theft are portrayed by the Trump administration as nothing less than an existential threat to America's economic future. Yet, those fears are overblown.

Innovation is, indeed, the lifeblood of sustained prosperity for any nation. But it needs not be depicted as a zero-sum battle. China needs to shift from imported to indigenous innovation to avoid the middle-income trap - a key stumbling block for most developing economies. The US needs to refocus on innovation to overcome yet another worrisome productivity slowdown that could lead to a corrosive stagnation.

That may well be the bottom line on the trade conflicts of codependency. The US and China both need innovation-led economies for their own purposes - in codependency terms, for their own growth. Transforming a zero-sum conflict of codependency into a positive-sum relationship of mutually beneficial interdependence is the only way to end this economic war before it turns into something far worse.

The author is a faculty member at Yale University and former chairman of Morgan Stanley Asia. bizopinion@globaltimes.com.cn


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