Rethinking Sino-US ties

Updated: 2014-07-08 07:27

By Stephen S. Roach (China Daily USA)

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Senior US and Chinese officials will gather in Beijing for the sixth Strategic and Economics Dialogue (S& ED). With bilateral frictions mounting on a number of fronts - including cyber security, territorial disputes in the East China Sea and South China Sea and currency policy - the summit offers an opportunity for a serious reconsideration of the relationship between the world's two most powerful economies.

The United States and China are locked in an uncomfortable embrace - the economic counterpart of what psychologists call "codependency". The association started in the late 1970s, when China was recovering from the "cultural revolution" (1966-76) and the US was mired in a wrenching stagflation. Desperate for economic growth, two needy countries entered into a partnership on the economic front.

China benefited from an export-led economic model that was critically dependent on the US 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 savings, with the deficit prone US drawing freely on China's voracious appetite for Treasury securities.

Over time, this association 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 percent annual 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 savings and too little consumption.

Mounting imbalances in the US were the mirror image of those in China - a massive shortfall in domestic savings, 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 decades, Chinese subsidiaries of Western multinationals accounted for more than 60 percent of the cumulative rise in China's exports. In other words, the export miracle was sparked not by State-owned 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 the huge accumulation of foreign exchange reserves as evidence of an unconscionable currency manipulation. China counters by highlighting the US' savings shortfall - a gap that must be plugged by surplus savings from abroad, a current account deficit, and a multilateral trade imbalance with more than 100 countries. China says being fixated on a bilateral imbalance is the source of the US' 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 companies.

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 S& ED 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 the US' 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 started 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.

The author is a faculty member at Yale University and former chairman of Morgan Stanley Asia, and has the book, Unbalanced: The Codependency of America and China, to his credit.

Project Syndicate

(China Daily USA 07/08/2014 page13)