Author: Stephen S. Roach, Yale University
Increasingly reliant on each other for sustainable economic growth, the United States and China have fallen into a classic co-dependency trap, bristling at changes in the rules of engagement. The symptoms of this insidious pathology were on clear display during Chinese President Xi Jinping’s recent visit to America. Little was accomplished, and the path ahead remains treacherous.
Co-dependency between the two was born in the late 1970s, when America was gripped by wrenching stagflation and the Chinese economy was in shambles following the Cultural Revolution. Both needed new recipes for revival and growth. They turned to each other in a marriage of convenience. China provided cheap goods, and America provided the external demand that underpinned Deng Xiaoping’s export-led growth strategy.
Over the years, this morphed into a deeper relationship. Lacking in saving and wanting to grow, America relied increasingly on China’s vast reservoir of surplus saving to make ends meet. Anchoring its currency to the dollar, the Chinese built up a huge stake in US Treasury bonds, helping America fund record budget deficits.
But economic co-dependency is as unstable as human co-dependency. One partner eventually changes, while the other is left hanging, feeling scorned.
China is now changing, and America doesn’t like it. Not only is China shifting its economic model from exports to consumption, it is also redefining its national character. It has adopted a more muscular foreign policy in the South China Sea, embraced the nationalistic longing of rejuvenation, framed by what Xi calls the ‘China Dream’. And it has started to reshape the international financial architecture with new institutions such as the Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund.
The US response — so-called ‘strategic rebalancing’ — has put China on edge, with its subtext of containment. The United States recognises the need to increase China’s role in the International Monetary Fund and the World Bank; but when it fails to deliver, it chafes at Chinese institution building. While Washington has long urged China to tilt its growth model toward private consumption, it is uncomfortable with many of the implications of this shift.
In large part, America’s unease reflects a failure to address its core economic problems — mainly a lack of domestic saving. The net national saving rate stood at just 2.9 per cent of national income in mid-2015, less than half the 6.3 per cent average during 1970–2000. As China shifts from surplus saving to saving absorption — using its surpluses to build a safety net for Chinese citizens rather than subsidise American savings — America will find it tough to fill the void.
America’s monetary policy reveals another layer of co-dependency. By citing international concerns — especially China’s slowing growth — as a major reason for deferring its long-awaited interest-rate hike in September, the Federal Reserve has highlighted the key role that China plays in sustaining a still-fragile US recovery.
And with good reason: US exports — which accounted for a record 13.7 per cent of GDP in the fourth quarter of 2013, up from 10.6 per cent in the first quarter of 2009 — slipped back to 12.7 per cent of GDP in mid-2015. With domestic demand still weak (real consumption has grown at an anaemic 1.4 per cent since 2008) the United States needs export growth more than ever. So the outlook for China, America’s third-largest and fastest growing export market, is crucial for a Fed that has failed to gain much traction from unconventional post-crisis monetary policies.
This aspect of co-dependency is global in scope. Since 2005, China has accounted for an average of 1.6 percentage points of world GDP growth per year — more than double the combined 0.7-percentage-point contribution of the so-called advanced economies. Even if its GDP growth slows to 6.8 per cent this year, China would account for slightly more growth than is likely from the advanced world. Little wonder its growth prospects are such a big deal for policymakers worldwide.
Speaking in Seattle on 22 September, Xi stressed the need for both America and China to deepen their ‘mutual understanding of strategic intentions’ as a key objective for the bilateral relationship. And yet his deliberations with US President Barack Obama lacked precisely that. The agenda was shaped more by disconnected issues — cyber security, climate change and market access — than an appreciation of the strategic challenges that both countries face alone and together.
There was little sign of meaningful progress even on the issues that were discussed. Both sides hailed a newfound commitment to high-level exchanges on cyber crime; but Washington is about to impose sanctions on Chinese companies that have benefited from egregious hacking. Likewise, they stressed yet again the need for a ‘high standard’ bilateral investment treaty; but there was little indication of serious movement on shielded industries (the ‘negative list’).
To its credit, China did announce an important shift in environmental policy — a nationwide cap-and-trade system for greenhouse-gas emissions, to go into effect in 2017. But, without similar actions by the United States, China’s move hardly tempers the perils of global climate change.
Trapped in a web of co-dependency, the Sino–American relationship has become fraught with friction and finger pointing. In human behaviour, the endgame of this pathology is usually a painful breakup. The just-concluded summit did little to dispel this possibility.
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.
An earlier version of this article appeared here on Project Syndicate.