Stephen Roach notes that while China is changing, or at least attempting to do so, America remains stuck as a deficit saver with the need to draw on global surplus saving to support economic growth

By Stephen Roach*

Codependency never ends well in personal relationships.

Judging by the ever-escalating trade war between the United States and China, the same is true of economic relationships.

While I published a book in 2014 on the codependent economic relationship between the US and China, I would be the first to concede that it is a stretch to generalise insights from human psychology to assess the behavior of national economies. But the similarities are striking, and the prognosis all the more compelling, as the world’s two largest economies sink into a dangerous quagmire.

In its most basic terms, codependency occurs at one of the extremes of relationship dynamics – when two partners draw more from each other than from their own inner strength. This is not a stable condition. Codependency deepens as partner feedback tends to grow in importance and self-confidence steadily diminishes as a result. The relationship becomes highly reactive and fraught, with mounting tensions. Invariably, one partner hits a limit and seeks a new source of sustenance. This leaves the other feeling scorned, steeped in denial and blame, and ultimately with a vindictive urge to lash out in response.

The case for US-China economic codependency has been compelling for many years. On the brink of collapse in the late 1970s, following the cumulative convulsions of Mao’s Great Leap Forward and Cultural Revolution, 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 grips 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.

Alas, it was not a loving relationship. Deep-seated biases and resentments – China’s so-called century of humiliation following the Opium Wars of the nineteenth century and America’s inability to get out of its own skin when assessing the ideological threat posed by a socialist state like China – sustained a long-simmering distrust that set the stage for the current conflict. As the human pathology of codependency would predict, a parting of the ways eventually occurred.

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 progress has been mixed, but the endgame is no longer in doubt, underscored by a shift from surplus saving to saving absorption. After peaking at 52.3% 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” and to achieve great-power status by 2050, as per President Xi Jinping’s “new era” centenary aspirations.

Consistent with the human pathology of codependency, China’s shifts have become a source of growing discomfort for the US, which 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 the 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 America is not. The US remains 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 human behavior may hold the answer. Rather than react out of blame, scorn, and distrust, both countries need to focus on rebuilding their own economic strength from within. That will require compromises on 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 it 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, seen as a classic symptom of codependency, those fears are overblown.

Innovation is indeed the lifeblood of any country’s sustained prosperity. But it need 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 personal 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.


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, 2018, published here with permission.

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7 Comments

There are some interesting points here, but i can't help feeling that deep inside Trump's position is a kernel of truth.

From NZs perspective for example, Fisher and Paykel were well known as an innovator in their whiteware division, but the free market and globalisation allowed the company to be sold to the Chinese, closing the factory, and of course resulting in, the most popular, and likely best, whiteware sold in the country supporting kiwi jobs, being moved to an import cost providing profits to foreign companies and workers. F&P are now a health products factory, exhibiting the same innovative attitude, but getting some stiff resistance in the US. Other companies in NZ face the same fate. So while the author of this article advocates having a hug and making up, he provides no answers as to how countries like NZ are to provide jobs for their citizens that will not be stolen overseas?

Politicians and economists (and most people in general) are always black or white re: globalism etc. They don't see the grey. My opinion is first world countries should only have free trade with other first world countries or you will lose your industrial base.

Trump sees the rise of China as a military power as a major issue for the US over the next 20-100 years. He does not want China to industrialise off the back of the US consumer, effectively paying China to forge the knife that he is concerned will end up embedded in the US at a future date.

I note the US Gallup poll over the weekend, has the Republicans ahead of the Democrats for the first time since Jan 2011. This gels with many US people I meet who say, the portrayal of Trump and his perception within the US is distorted by US liberal and overseas media, and in general he is quite popular, though polarising.

I keep hearing this statement that it is bad for a good local company to be sold to foreign owners because the profit then all goes to foreigners rather than kiwis. Well what about the money the foreign investors pay to buy the company? This sum of money equals the present value of ALL OF the expected future profits of the company and it is paid to kiwi shareholders. So by selling the company the kiwi shareholders already received the equivalent of all the profits the company is ever going to generate in its lifetime. In fact the proceeds are often higher than the sum of the expected future profits because a takeover bid often offers a price materially higher than the market price of the stock. How could one still expect the ongoing profits to come into your pocket when you already got paid once? Greed? or ignorance? It’s beyond me.

Hope Peters and relevant persons from MFAT give a good read on this: http://language.chinadaily.com.cn/a/201809/25/WS5ba99f4aa310c4cc775e7ea5...

A note for the unwary: "China Daily" is state run propaganda controlled by the Communist party. Why any westerner - let alone a high level politician - would get their information from a red chinese rag is beyond me.

Well, you obviously do not have any idea of the weight of this document, and any implications it could have on the trade and investment between NZ and China.

The Facts and China’s Position on China-US Trade Friction
Information Office of the State Council
The People’s Republic of China
September 2018

I really hope that ppl like you would NOT serve NZ and advise NZ policies and strategies in any significant way.