Every adult American knows the American and Chinese economies have been increasingly intertwined since the 1980s. China transformed an impoverished agrarian economy into the world’s low-cost workshop for consumer goods. Big U.S. businesses like GM, Caterpillar and pharma companies built operations in China to tap its domestic market growth potential. The same companies simultaneously divested from the American industrial economy, stressing our domestic economy and politics.

What began as a symbiotic relationship has grown fractious, leading to adjustments now in process. “Re-shoring,” “near-shoring,” production moving from China to other low wage nations including Vietnam and Mexico, and rebuilding of American capacity to make strategically important goods like pharmaceuticals and advanced computer chips all reflect this adjustment. Recent increases in the rate of economic inflation in the U.S. are, at least in part, a byproduct of the fraying of the China trade.

Curious about the correlation between these changes and domestic inflation, I read economist Stephen Roach’s just released Accidental Conflict: America, China and the Clash of False Narratives.[1] Roach spent his career at investment bank Morgan Stanley rather than in academia. He writes for the lay person, providing useful economic data and analysis. His assessment is well-informed, balanced and timely.

The root problem, he says, is America’s savings rate is too low and China’s is too high. “In many respects, the U.S. and Chinese economies are mirror images of each other. The United States consumes to excess while China’s consumption share is the lowest of any major economy in the world. Conversely, China produces to excess . . . . Trade between the two nations brings their duality to life--China as the ultimate low-cost producer supports America as the ultimate high-spending consumer. Yet without U.S. demand the Chinese producer would have floundered.”[2]

China’s domestic consumption lags because Chinese remember when their government in the late 1990s pulled out from under them the social safety net of government benefits, the so-called “iron rice bowl.” Too, the repressive nature of the Chinese regime extracts a price in the form of behavioral conformity and risk avoidance. So, Chinese save rather than spend as a matter of self-protection and survival.

China’s leaders have been stymied in their efforts to change that behavior. They believe China’s economic miracle entitles it to stature on the world stage equivalent to the United States. In this, Roach says, they are fixated on the fact that China and the U.S. today have nearly equal GDP even though per capital GDP in the U.S. remains far greater than in China. In his 2021 speech commemorating the centenary of the Chinese Communist Party, Xi Jimping spoke of the great power that comes with economic scale as “a great wall of steel forged by 1.4 billion Chinese people.”[3]

Americans’ pride in our economy’s innovative dynamism blinds us to our dependence on foreign capital, Roach says, a weakness that is growing. Military containment of China, desired by us and resented by them, is not feasible on the model of the Cold War. Even if we were committed to it politically, we do not now have the economic strength to carry it off, he asserts. Our co-dependent relationship with China is starkly different from our mid-century relationship with the Soviet Union, whose economy and ours were never interdependent. The income-based savings rate in the U.S. declined from its 1971 peak of 13.5% to a 2005 low of 3.1%.[4] All those factors make it naïve and dangerous for Americans to believe we can win a second cold war.

Not surprisingly, Roach’s prescription for conflict de-escalation is conversation, collaboration and interdependence. He repeatedly quotes Henry Kissinger’s 2019 remark that the two nations are now “in the foothills of a cold war.”[5]

As a frame for understanding how ongoing changes in the Sino-American story will affect us, Roach’s analysis tells me the low rate of economic inflation of the last decades is history, although he does not say so explicitly. Plentiful and cheap consumer goods offset the impact of declining real wages. Americans at the top of our economic pyramid experienced above-historical-average gains in wealth. For all the reasons Roach identifies, that equilibrium has been upset.

Roach leaves no doubt rebalancing the two nations’ economies and geopolitical positions will be hard work. It is tempting and certainly easier to succumb to jingoism and trading retaliatory blows. Roach’s title expresses his fear—that false beliefs about one another will lead the U.S. and China to escalate conflicts that could be managed if common sense and mutual respect prevailed. His book is an invitation and roadmap to avoiding that outcome.

[1] Published by Yale University Press, 2022.

[2] Roach at pp. 328-29.

[3] Roach at p. 290.

[4] Roach at p. 209.

[5] Another analysis of the implications of conflict over Taiwan asserts the U.S.’s great weakness is its inability to replenish military materiel given our reduced industrial base while China’s great weakness is the mass starvation its people would suffer if U.S. food imports were cut off. https://www.newyorker.com/magazine/2022/11/21/a-dangerous-game-over-taiwan