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Stephen Roach shows why both sides stand to lose from their failure to comprehend the stakes of a breakup

Stephen Roach shows why both sides stand to lose from their failure to comprehend the stakes of a breakup

It didn’t have to end this way, but the die is now cast. After 48 years of painstaking progress, a major rupture of the US-China relationship is at hand. This is a tragic outcome for both sides – and for the world. From an unnecessary trade war to an increasingly desperate coronavirus war, two angry countries are trapped in a blame game with no easy way out.

A nationalistic American public is fed up with China. According to a new poll by the Pew Research Center, 66% of US citizens now view China in an unfavorable light – six points worse than last summer and the highest negative reading since Pew introduced this question some 15 years ago. While this shift was more evident for Republicans, those older than 50, and college graduates, unfavorable sentiment among Democrats, younger cohorts, and the less educated also hit record highs.

An equally nationalistic Chinese public is also irate at the United States. That is not just because President Donald Trump insisted on dubbing a global pandemic the “Chinese virus.” It is also because whispers turned into shouts linking the outbreak of COVID-19 to alleged suspicious activities at the Wuhan National Biosafety Laboratory.

Just as most children are taught that two wrongs don’t make a right, tit-for-tat blame does not justify severing the world’s most important bilateral relationship. But the time for dispassionate logic is over. We must, instead, contemplate the harsh consequences of this rupture.

Both economies, entwined in a deeply embedded codependency, will be hurt. China stands to lose its largest source of foreign demand, at a time when exports still account for 20% of its GDP. It will also lose access to US technology components required to advance indigenous innovation. And the loss of a currency anchor to the US dollar could lead to greater financial instability.

But the consequences will similarly be problematic for the US, which will lose a major source of low-cost goods that income-constrained consumers have long counted on to make ends meet. A growth-starved US economy will also lose a major source of external demand, because China has become America’s third-largest and fastest-growing export market. And the US will lose its largest source of foreign demand for Treasury securities, all the more worrisome in light of the looming funding requirements of the biggest government deficits in history.


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This rupture does not come as a great surprise. As is the case in interpersonal relationships, geopolitical codependency can lead to conflict, especially if one partner starts to go its own way. And China’s decade of rebalancing – shifting away from exports and investment to consumer-led growth, from manufacturing to services, from surplus saving to saving absorption, and from imported to indigenous innovation – did indeed put it on a very different path.

This turned out to be an increasingly uncomfortable development for a China-dependent US. Left behind, America felt scorned, and that scorn led first to blame, and now to open conflict.

The consequences of the US-China rupture go far beyond economics. A decisive shift in the balance of global power, ushering in a new cold war, could well be at hand. Under Trump’s “America First” administration, the US has turned inward, heaping scorn on its once-loyal allies, withdrawing support for key multilateral institutions (including the World Trade Organisation and, in the midst of a pandemic, the World Health Organisation), and embracing trade protectionism. Meanwhile, China is filling the void, partly by design (through its Belt and Road Initiative, the Asian Infrastructure Investment Bank, and airlifts of medical supplies to pandemic-ravaged countries in Europe and elsewhere), but also by default, as the US retreats.

Although these tectonic shifts will leave most Americans worse off, the US seems to be shrugging its collective shoulders. America First has resonated with widespread wariness of globalization (now reinforced by concerns over supply-chain vulnerability). Many Americans are angry over allegedly unfair trade deals and practices, indignant at seemingly disproportionate US funding for institutions like the International Monetary Fund and the World Bank, and suspicious that the US security umbrella in Europe, Asia, and elsewhere encourages free riders and others not paying their fair share.

Paradoxically, this inward turn comes at precisely the moment when America’s already depressed domestic saving is likely to come under enormous pressure from an explosion of pandemic-related government deficits. Not only does that imply deepening current-account and trade deficits (the nemesis of the America First agenda), but it also poses a major challenge to longer-term economic growth.

America’s public debt-to-GDP ratio, which reached 79% in 2019, will now almost certainly go well above the 106% record hit at the end of World War II. With interest rates pinned at zero, no one seems to care. But that’s just the problem: interest rates will not stay at zero forever, and economic growth in an overly indebted US will wither under just the slightest rise in borrowing costs.

Can the broken US-China relationship be salvaged? Ironically, COVID-19 offers an outside chance. Both countries’ leaders would need to end the blame game and begin restoring trust. To do so, they would need to come clean on what really happened in the early days of the pandemic – December for China, and January and February for the US.

This is not a time for false pride or nationalistic bluster. True leaders often emerge – or are revealed – at history’s darkest moments. Is it really too late for Trump and Chinese President Xi Jinping to comprehend what’s at stake and seize this opportunity?


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2020, published here with permission.

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38 Comments

This crisis has highlighted the risks inherent in the world concentrating it's manufacturing in one place. It has also highlighted the ineptitude, if not outright corruption, of international bodies like the WHO, WTO etc. Combine this with the rise of populism globally, I think we're going to see a shift towards protectionism and away from globalism. Critical manufacturing and food production will be pulled in country, with further subsidies and tariffs introduced to support. Non-critical manufacturing will be diversified into south east asian nations, pending trade deals to come.

The Chinese are notorious for saving face, and Trump is....Trump.
It's a little hard to be optimistic.
But there is a slender thread of hope. As the author says, the health of each country's economy is dependent on the health of the other's. This may bring both sides to the table. But quite hard to see at this stage.

From my perspective, the Chinese need to 'give' more than the Americans. Give on their humanitarian atrocities, give on their tragic mishandling of coronavirus, and give on their abuse of IP and more. A lot to give on. But are they really ready to see their economy decline significantly, and social unrest rise, if they don't give? Maybe they are. They will head for quite a different trajectory, then. Poorer, more authoritarian and quite probably weaker.

I'd bet on the USA coming out stronger.

21
up

I will be the one to disagree with the notion that a reset would be a good thing.

I'm actually quite happy that the idea of China as the world's factory is coming to an end.

Human rights abuses, illegal sovereignty claims over the South China Sea, cheque book diplomacy the world over, fake goods, massive theft of intellectual property, meddling the world over in domestic politics and lest we forget the pumping of money all over the world into residential property as ordinary Chinese squirel funds away from the local authorities.

It's all been enabled by the West by empowering the CCP through their accumulation of wealth. And it's got to stop.

100% agree.
A shock is coming to the Chinese. Their boom is over.

Ya think so?!
You’ll have to convince the western masses to wean themselves off the drug of prolific cheap goods first!

Totally agree Glitzy the sooner the better hopefully without military conflict . Hard to imagine there won't be some tense moments, think Cuban crisis.

""by empowering the CCP through their accumulation of wealth"" true but worth mentioning China's wealth (per capita half of Taiwan's) is not just very impressive but also the result of very hard work by the population of China. If the west had worked as hard we would be wealthier too.

World as it is today, it's not by Chinese know how, technology etc. - You have to differentiate.. the hard work vs. Labour exploitation (greed)..The west worked damn hard, but also damn hard/expensive on spending... taa daa...Came Chinese with this idea.. 1) you can save more by moving all your production here 2)You can get rich more by tapping to our buyers, if you allow to remove trade barriers... until their own exotic dietary requirements causing this...issue the world is facing...watch what 2021 stores for the world. Reckoning time...

14
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What a load of tosh, greedy corporates aided by glad handling politicians have simply scoffed at the trough by having china's oppressed serfs cut the american workers grass while selling the intellectual property like a cherry on top for a mere 30 years. China has not done anything in good faith and unlikely will, good riddance to the untrustworthy self obsessed thugs.

15
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We should have never got into bed with the CCP - it has cost us our souls. Now is the time to rebalance and move away from the evil empire. Their open hostility to human rights and the rule of law is staggering. Maybe we shouldn't have looked the other way when their were brutalizing their own citizens. However, no matter where I look now all I see is their lies killing and inflicting suffering. As for me, I will personally de-couple from China as much as I can even if it costs me a few extra dollars - my integrity is worth more than that.

China has had plenty of time to adjust its behaviours as a citizen of the world. It hasn't stepped up.

No one expected them to become a western-style democracy. But many expected them to transition away from their numerous dodgy behaviours.

The current regime has taken them in the wrong direction. They were starting to go the right way 6-7 years ago.

the labour party got us in bed with china but the national party pulled the sheets right up over our eyes and ears

"...unnecessary trade war..."
OMG what planet are you on! Of course it is necessary.
Its a shame that all western countries haven't joined in.

16
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I would make the comment that we do not need the low cost goods. My experience by and large is that cheap stuff from the big retail barns doesn’t last. It is inferior, shoddy materials, poor workmanship. One thing L4 has taught me is how little I really need. Buy once, buy right. Buy quality, not cheap crap. I fish a lot. I now realise that my 10-year old rod catches as many fish as my new one. My 5-year-old DSLR will take great pix until it dies, and my golf handicap hasn’t been improved by the bloody expensive clubs I bought last year. I’m going to drive my Ute until it dies, and wear out clothes before I buy new ones. Fare thee well, consumer society.

I hear you Pietro.

"One thing L4 has taught me is how little I really need". Absolutely, do we really need to change our iPhones every year or two?

A new iPhone? yes, when apple deliberately hobble your existing one with software updates.

https://www.reuters.com/article/us-apple-iphones-settlement/apple-to-pay...

A new phone? I'm hoping my Samsung I replaced my iPhone with doesn't have an 'inside man' sabotaging it.

Let's face it. Corporate America needed (and still needs) someone who could manufacture fast and cheap. Authoritarian China was (and still is) the best candidate for that, especially after Authoritarism lost its grip in South Korea and Taiwan. America could have stopped working with China when the shots were fired in Tiananmen Square, but America didn't; America could have stopped working with China when CCP started the bloody purge against Falun Gong, but America didn't. The list goes on. Capitalism prosperity we have witnessed in the last 20 years is built on greed and over-consumption. Nothing will change unless they change.

Surely they can pull back from China to home and SE Asia. Sure it will come at a cost but...

100%
I for one want NZ to repurpose our economy towards resilience and sustainability at its core.

Thing is, are we as a nation, willing to make the sacrifice, for what could be many years, for the long term good?

Mexico and India will the world's next mega factories.

Mexico makes great sense for America, being immediate neighbours.

ahh but trump wants to build a wall and he changed the nafta deal to try to bring jobs home
https://www.vox.com/2018/10/3/17930092/usmca-mexico-nafta-trump-trade-de...

Add Vietnam to that list. But yes huge potential for Mexico and eventually other Latin American countries.

I believe the shift away from China has been happening for a while now. The annual average income of Chinese has risen quite a lot in the last 10 years and they are no longer the lowest cost manufacturer.

I am laughing at the most of comments below -- blind and biased.

Sadly, New Zealand does not even have an independent journalists force based in China to find and report new truthfully. Nearly all commentators below are pretty much circulating news from western media that are traditionally biased against China, and with the strategic intentions to do so.

A wholeheartedly recommendation for NZ to peddle forward between the ongoing complicated China-US relationship is to have an NZ journalists force based in China and find out the truth by yourselves.

11
up

ha ha
face the reality, your beloved homeland's boom times are over. And still only a low-medium income country.

The West is sick of your country's human rights abuses and IP theft and trade abuse.
Your country's response to this pandemic was also awful. Far too late. Your government shut down the people who were calling out a crisis in Wuhan in mid-late December
And if your country had actually done something about those awful wet markets, we would be far less likely to be in this mess.

Your country's economy is on the rails and your people won't be happy about being poorer and having even less freedom.

can you tell us what independent Chinese news sources we should read if there are any
its hard to believe some of the stuff they come up with as it has to go through state control
case and point how the chinese authorities acted in NZ against the pro hong kong protesters
we have freedom of speech here you dont have to agree but they can have there say
https://www.channelnewsasia.com/news/asia/new-zealand-rebukes-china-over...

..Xinhua?

So, how long do you think an independent journalist would last in China?

One party has a wee bit of a credibility problem. Politicians think of the next election. While statesmen think of the next generation. So I am staying positive that wise minds will ultimately prevail.

https://www.bbc.com/news/world-asia-china-52420536

This CCP member needs to be removed from Parliament https://www.newsroom.co.nz/2020/03/05/1066244/controversial-mp-jian-yang...

Good article & very topical with very strong anti-CCP posts above. I'm proud of you all. As for (our) Xi, well he's biased, but remember, he's still allowed his say in NZ at this point. Xi, we are not not anti-Chinese, we are anti-CCP. There is a difference. They are communists & you may not realise it, but we've been here before. It didn't work last time & will not this time either. Why? Because the people of China will not put up with it. Sooner or later, the people will stand up to the CCP bullies & we in the west will be right behind you. In fact, we might well be in front of you, if things carry on the way they are.

For now it is all a facade, they need each other more than they would like to admit. The only way I see this changing short term is if Trump says something stupid that directly offends the CPC leaders. This is the world where we live now.

VDH
Thinking back to when Wuhan was locked down chinawise to china Jan 23rd, yet Wuhan folk able to travel internationally. It's the teachable moment.

https://youtu.be/v7kkxnpMWGo
China in particular 16.20 min mark.

Chinese is for China & China is for Chinese, the 'magic weapon'/sleeper agent won't be able to do the activity without the 'land/base' to launch it's activity of 'united front works' - That's why China won't spend all those hard earned $ into WHO etc, China will only spend where ever it is just to the 'few ruling elites' where they can/allow to move the capital out into, this normally to land/property first, before people movement.
(Hence we can see comrade Xing.. here in NZ, OZ, US, UK, Canada - you won't be able to spot them in Liberia, PNG, Malawi, Sudan etc.)
https://tinyzonetv.to/watch-movie/watch-the-china-hustle-2018-free-59408...

you guys have lost the plot . Is this not what the west has done to the rest of the world . Regarding chinese expansion.

KO something for you.

https://youtu.be/_b4qKv1Ctv8

Doing too much, too little or the wrong thing!

It's not just America that is going to be getting rid of China after all this. The whole world has woken up to the kind of country they are.

Not a moment too soon. Good riddance.

Days to the General Election: 24
See Party Policies here. Party Lists here.