Book Review: Unbalanced: The Codependency of America and China

Beginning in 1978, when Deng Xiaoping began to formally open up China’s economy, through the 1990s, China developed a symbiotic economic relationship with the United States that was of tremendous benefit to both countries. In addition to abating cold-war tensions, the relationship helped Chinese exports to explode, lifting hundreds of millions out of poverty. Meanwhile, in the United States, consumers availed themselves of a cornucopia of inexpensive, well-made consumer goods, much of it produced by US multinationals depending on cheap Chinese labor.

Eventually, however, the relationship reached the point where it was no longer beneficial and actually began to harm both economies, according to Stephen Roach, long the chief economist for Morgan Stanley. Roach, now a senior fellow at Yale University’s Jackson Institute for Global affairs and School of Management, describes the danger of the relationship in his new book, “Unbalanced: The codependency of America and China.

“For a long time, it all appeared to be the ultimate sweet spot for the United States and China,” Roach writes. “Chinese inflows into US capital markets helped American families use the housing market to fund surging consumption. And courtesy of an undervalued currency that persisted in the face of those flows (of capital), the Chinese producers maintained the competitive edge as an increasingly important supplier for the world’s ultimate consumer.”

Unfortunately, today the economic relationship is grotesquely unbalanced. China has piled up somewhere around US$2 trillion of US paper that it can’t get rid of without causing an economic conflagration. Premier Li Keqiang is seeking to redirect the economy away from dependency on exports to build the country’s own consumer society, with a slowing economy getting in the way. The United States consumer remains mired in debt despite five years of deleveraging following the 2009 global financial meltdown. As Roach points out, “as the Great Recession exposed America’s imbalances, it did the same for China’s. “

Both countries face the prospect of major structural change if they are to regain their equilibrium. China, under Li’s direction, appears committed to change, warning the country that its years of headlong growth are over and that it must adapt to a new situation. The United States shows no such commitment. The country must rebuild its infrastructure and revitalize its education system. It must increase its savings rate and stop living on borrowed money and borrowed time. But, as Roach says, the US has little appetite for doing anything beyond blaming the rest of the world, particularly China, for its problems.

“Timing is obviously a key consideration in formulating and rebalancing agendas,” he writes. “The sooner the better, from the standpoint of macroeconomic management. But structural change, almost by definition, entails a major unwinding of deeply embedded habits, incentives and values.”

Unfortunately the United States has a deeply suspicious Congress that defies change. Inward looking, deeply suspicious, its conservative members view government action as encroaching on what they regard as traditional American values – unfortunately largely a myth.

In China, the country’s legacy as a centrally planned economy also creates stiff resistance. Despite almost daily pronouncements of change “big market, small government” as the mantra, there remains strong resistance from the bureaucracy.

As Roach points out, “both nations suffer from classic identity crises that risk turning destructive.” The United States in particular tends to blame China for its problems. Although policymakers pay lip service to globalization, the conservatives believe if China would revalue its currency upward, the problems would be cured. The trade unions believe the country needs more protectionism. If those two maladies were cured, they believe, manufacturing would return to the US and all would be well.

But globalization is here to stay. US competitiveness will continue to be challenged. “Curiously,” Roach writes, “neither nation seems capable of looking into the other’s mirror- to understand how the other sees itself. Caught up in its own pathologies of economic distress, each allows self-interest to trump collective interest.”

It is a bleak picture that Roach paints, and, to one living in Asia, an accurate one. But as he says, the two need to understand each other. “Where would China have been without the open-ended demand of the American consumer? Where would the American consumer have been without the cheap goods and low interest rates made in China? The short answer is that one would have been lost without the other.”

Getting those points across to the two countries will take a major effort. So far there are no answers. Reading Roach’s book would be a good place to at least lean how to pose the questions.