Watching Chinese officials turn the tables on the U.S., I can't help but wonder if they've been reading Stephen Roach's new book.
Roach is an economist who made his name at Morgan Stanley. But in "Unbalanced: The Codependency of America and China," he dons a psychologist's hat to warn about how the "marriage of convenience" between the two biggest economies is going awry in ways that could send bad vibes from Jakarta to Johannesburg. The impending breakup will not be pretty -- especially for the U.S.
"This relationship obviously brings important benefits, but there are serious risks," Roach argues.
"Psychologists warn that codependency ultimately leads to identity crisis, denial of responsibility, and the tendency to blame others for problems. China and the United States manifest most aspects of that mutual pathology."
That was the clearly subtext at last month's Group of 20 meeting, where Jacob Lew did what Treasury secretaries do best: call on an Asian economy to ease the U.S. 's pain. Japan used to be the target of this age-old blame game; now it's China. When asked whether China was doing enough to rebalance its economy away from excessive investment and cheap exports, Lew said: “I have yet to see the signs that they are moving with the speed that we would want.” Washington, he added, will continue to press China's leadership “to move faster, with more clarity and more immediacy.”
That drew an unexpected response from Lew's Chinese counterpart, Lou Jiwei: "They have always been saying that China should boost its consumption ratio and the U.S. should boost its investment ratio, but that structural change is not happening in the United States," Lou told Bloomberg News in a Feb. 22 interview. The U.S. recovery, he said, "is being helped by monetary policy and not much by structural adjustment."
It's a valid point. My March 17 column looked at how China's stimulus binge may be setting up the country for a bad-loan crisis in the years ahead. But just as China should be reducing savings and boosting domestic demand, it's equally important for the U.S. to be retooling its unbalanced economy. Why? "Long dependent on 10 percent Chinese growth, the U.S. in particular, and the world in general, is not prepared for the slower growth that will emerge with an increasingly consumer and services-led China," Roach argues.
The big worry is denial in Washington. There's plenty of criticism to heap on China, especially the ways in which Beijing has bent the World Trade Organization to its will since joining in 2001: hidden tariffs; excessive subsidies for state champions; laughable worker protections; poor environmental standards; a cynical disregard for intellectual property rights.
U.S. lawmakers long looked the other way, beholden to Wal-Mart's campaign contributions and voters who love their $69 DVD players, $49 dresses and $10 toys. They also forget that the current marriage between the U.S. and Chinese economies -- America is addicted to China's cash, China can't live without U.S. consumers -- was largely a Washington creation. Roach's book intricately explores the fallout that would follow any move by Congress to retaliate against China. That temptation, after all, is perhaps the only thing on which Democrats and Republicans agree.
"How did we get to this point?" Roach asks. "How could the United States have squandered its once unchallenged global economic leadership? Why is it so easy for the United States to lash out at China as a scapegoat? Is it Washington's last gasp of hegemonic desperation?" If's there's a simple answer for all these questions it's complacency. If the U.S. wants to grow faster, the answer is better education, improved infrastructure and WiFi speeds that match Asia's. That all requires hard work and lots of investment, something the U.S. seems averse to these days.
China needs to do lots of heavy lifting, too. But in Roach's view, it will act much more aggressively than the U.S. Although I have some doubts about its long-term commitment, China is accommodating the urbanization that drives growth, tweaking its one-child policy, shifting to more market-based interest rate and currency systems, reining in the state-owned enterprises that kill innovation and at least making noise about curbing pollution.
Last week, China turned the tables on Washington again. On March 15, Lew told Chinese Vice Premier Wang Yang over the phone that the second-largest economy needs to move toward a market-determined exchange rate. A day later, China called Lew's bluff and broadened the yuan's trading band as if to say "your move, sir."
But the U.S. is walking in place, nostalgic for a time when things were easier for America and blaming China for everything. "The days of codependency are nearing an end," Roach warns. "China is striking out on its own. We can only hope Washington seizes this moment and converts Chinese rebalancing into a new source of growth and prosperity."
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