A Blog by Jonathan Low


Feb 19, 2014

American and Chinese Codependence: Can This Marriage Be Saved?

The US and China have become like the proverbial married couple who can not resist squabbling but
can not live without each other.

The two countries are increasingly dependent on each other, providing the financial, industrial and market-based underpinnings for each others indulgences.

Having optimized its industrial strength - environmental issues notwithstanding - China now needs to emphasize consumer spending if it is to forestall the sort of disquiet that has plagued other nations whose people now recognize, via the internet, how well others may live. The US needs to find a more substantive and sustainable outlet for its innovation and ambition since austerity policies and the law of big numbers have stymied growth in its domestic market.

The US can assist China with its transition just as China can assist the US with its. As the following article explains, exports of services and the knowledge on which they are based - and of the kind China needs - is an American strength. If they can see their way to cooperating, the codependency they acknowledge but resent could be enhanced. The alternative alas, is a future filled with discord to neither side's economic or social benefit.

Both cultures are proud, stubborn and sometimes prone to letting emotion work to their own detriment. But they are also immensely pragmatic and it is that instinct, hopefully, that will prevail. JL

Fred Andrews comments on Stephen Roach's new book in the New York Times:

If China is to build a consumer society, it must create a robust services sector. The trick for the United States is to build its exports by helping China meet that need, exploiting American expertise in everything from running retail chains to overnight delivery to professional services.
Stephen Roach proposes to remake the two largest economies on the globe, ours and China’s. For decades, he writes, the United States and China relied too much on a “marriage of convenience” that guaranteed China a huge market for its exports. In exchange, China gave American consumers a cornucopia of inexpensive products, while creating a willing buyer of the United States government’s swollen debt. But that marriage has played out, Mr. Roach says; it has warped the two economies, leaving them ill-equipped for further growth.
In “Unbalanced: The Codependency of America and China,” Mr. Roach asserts that it’s time for the two nations to switch identities: that the United States should change its emphasis from consuming to producing, and that China should do the opposite.
Mr. Roach suggests that the way for the two nations to prosper is jointly. If China is to build a consumer society and find jobs for millions of peasants flooding into cities looking for work, it must create a robust services sector. The trick for the United States is to build its exports by helping China meet that need, exploiting American expertise in everything from running retail chains to overnight delivery to professional services.
China is already the third-largest importer of American products. It has gobbled up American producer goods, so prospects for broader American exports are good. Mr. Roach calculates that a $4 trillion market is opening up for foreign providers.
None of that will come easily, Mr. Roach concedes. He says China can probably pull it off — its consumerist goals are already built into its Five-Year Plan. But he wonders, without offering much of a blueprint, whether the American people and their elected leaders can stomach the sacrifices of saving rather than consuming.
The alternative, he worries, might be more fist-shaking toward China and, conceivably, a devastating trade war that nobody wants. Strident anti-Chinese voices in Congress aren’t entirely bad, Mr. Roach says — a Senate bill proposing trade sanctions spooked China into lifting the value of its currency, thus raising the price of Chinese products. But if the United States economy doesn’t revive and Washington actually enacts trade sanctions, a tit-for-tat exchange of curbs could carom out of hand as Beijing replies in kind.
Mr. Roach offers an evenhanded, thorough response to the anti-China potshots from Democrats and Republicans alike. It is surprising, though, how matter-of-factly he seems to accept that America is on a downhill slope. In the fresh relationship that he sketches for the two world powers, China is the mature senior partner and America its problematic, less-reliable junior.
Mr. Roach is a global affairs senior fellow at Yale who once led Morgan Stanley Asia. A top Wall Street global economist, he was struck by how adroitly China dodged being drawn into the Asian financial crisis in the 1990s (by pushing cheap exports to finance huge dollar reserves). “It didn’t take long for me to get hooked on the Chinese development miracle,” he writes.

And hooked he remains. Much of his book is devoted to defusing hostility toward China. He notes, for instance, that though Chinese exports ravaged American manufacturing, their low prices reduced consumer inflation in the United States. (Some 70 percent of what Walmart sells comes from China.) And though China gets a black eye for excessive exports to the United States, Mr. Roach sees it as wrongly blamed. China is often just the final link in a long supply chain, assembling parts made elsewhere. Yet under accounting rules, the entire value of such products is recorded as Chinese exports, though much of their value was produced in other countries. China’s enormous holdings of United States Treasury debt are a grave worry, he acknowledges. If China were abruptly to stop buying Treasury debt, Uncle Sam  would be hard-put to find buyers for so much volume and almost certainly would have to pay higher interest.
The root problem, Mr. Roach says repeatedly, is America’s inability to save enough at home to finance its growth — a situation that is hardly China’s fault. And a day of reckoning is coming. If China devotes more of its surplus savings to funding a decent pension plan or health care for its citizens, it will spend that much less at Treasury auctions.
Mr. Roach walks a line between explaining China and excusing it. He stresses that its modern economy, barely three decades old, is still learning the game. He notes that though China has a terrible record on intellectual-property rights, the West has dealt with intellectual-property issues since the 1400s; China’s patent law dates only to 1985.
And, yes, the Internet is censored, often heavy-handedly, but it does exist and even thrive in China; it has by far the world’s largest Internet community, which plays a vital role in creating the new consumer economy.
Mr. Roach understands that China, in many ways still a poor country, differs vastly from the United States. He acknowledges the Chinese Communist Party’s many flaws. He knows that it cracks down proactively on any dissent that threatens its rule. He is aware that dealings between Washington and Beijing can sour for innumerable reasons. And he is terribly pessimistic about political myopia and paralysis in Washington.
But “the endgame provides enormous opportunity for each,” he writes. “The challenge is for both to see it.”


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