Accidental Conflict: America, China, and the Clash of False Narratives

In an interview conducted on December 19, 2022, Stephen Roach argues that much of the rhetoric on both sides is dangerously misguided, more a reflection of each nation’s fears and vulnerabilities than a reasonable assessment of the risks they face.

Stephen Roach’s new book, Accidental Conflict: America, China, and the Clash of False Narratives, examines the ominous trajectory of conflict escalation between the United States and China and offers suggestions for resolution.  In just four years, two countries have entered a trade war, a tech war, and perhaps a new Cold War. This conflict between the world’s two most powerful nations would not have happened but for an unnecessary clash of false narratives. The United States falsely blames its trade and technology threats on China yet overlooks its shaky saving foundation. 

China falsely blames its growth challenges on America’s alleged containment of market-based socialism, ignoring its failed economic Stephen Roach’s new book, Accidental Conflict: 

America, China, and the Clash of False Narratives, examines the ominous trajectory of conflict escalation between the United States and China and offers suggestions for resolution.In just four years, two countries have entered a trade war, a tech war, and perhaps a new Cold War. This conflict between the world’s two most powerful nations would not have happened but for an unnecessary clash of false narratives. The United States falsely blames its trade and technology threats on China yet overlooks its shaky saving foundation. China falsely blames its growth challenges on America’s alleged containment of market-based socialism, ignoring its failed economic rebalancing.

https://youtu.be/1rYLrJlzln8Politicians 

like to believe that the Chinese are heavily relianton American markets, on American finance, and without our support and cooperation,we put enormous one way pressure on China. 

And I make the case in the book, I hope convincingly that we are basicallyjust as reliant on China as they are on us.I'm Steve Orlins, president of the National Committee on U.S.-China Relations, and I'm thrilled to be joined today by my old friend Steve Roach.He is the author of a new book called Accidental ConflictAmerica, China, and the Clash of False Narratives. 

It's a book I've been waiting for a long time,and not because Steve told me he was writing it, but because these clashing narratives, the need to change the narrativein order to kind of have policies which make sense forboth countries is absolutely critical. It is a must read for all expertsor all who want to be experts on U.S.-China relations. 

And I hope it is a must read for our friendsin the Biden administration. 

Steve, let me start with the first question is this is obviously you've written several books.The last book was unbalanced. Well, it's called Unbalanced.Is this kind of the intellectual successor to that previous book?Well, there is a flow, a connection, as you correctly point out, Steve. 

And let me just say, it's a pleasure to be with you and discuss this.But unbalanced was a book that really focused on a two way relationship between the United Statesand China that I dubbed and others have as well, a codependent relationship.And I ended the book with a warning. 

I said, Look, there's no guarantee that this codependencyis going to remain intact if one partner, the U.S. or China changes and the other one doesn't.There's a chance this could lead to frictions and conflict. 

And that book basically came outin very late 2014 and within a year. 

That's exactly what happened.So I felt compelled to trace this uncomfortablecodependency into a process that's led to a trade war, a tech war, and a new Cold War in just the last five years.Figure out why this happened and what can be done to arrested that.So there is a true continuum between the two books in that respect.

Yeah, it was it was quite stunning to me. I should have I'm assuming our audience already knows you, but I probably shouldn't make that assumption.And I should say that you are currently a senior fellow at the Paul Tsai China Center at Yale Law School.And of course, as everyone knows, former chairman of Morgan Stanley Asia. Give usthe listeners a flavor of what's in the book. Kind of briefly summarize each country's false narrative about the other.Well, the book starts with with three chapters on the relationshipitself and describes this interdependency, its history and its dynamicin the world today. And I make the case that both nations are vulnerable, susceptibleto embracing false narratives because they're politically expedient.In the U.S., for example, there's unanimous bipartisan sentiment against China.And so we're almost compelled politicallyto be tough on both sides of the aisle with respect to this issue.I focus equally, and I'm trying to be fair here on false narratives from both sides.And that's the bulk of the book. Four Chapters on America's False Narratives of China.Four on China's False Narratives of America. The number one false narrative that the U.S.has, which you and I have spoken about for years, is we blame China for our large trade deficit,when in fact we had trade deficits last year with 106nations altogether, China was the largest, but by no means the only one. And this is a reflection of our savings problem rather than onethat we blame them exclusively on alleged unfair trading practices of China, we failed to address our savings problem.It's politically expedient to blame China for our trade problem.China, on the other hand, my favorite false narrative there has a lot of structural issuesthat are impeding its economy. They have failed to rebalance from exportsand investment, led economic growth to more of a consumer led economy.And yet they blame America's containment for that failed rebalancing of their own.There are plenty of other false narratives I can take you through them, but those are two highlights in each of thetwo big false narrative sections of the book. One of the great I mean, there are a lot of great sections of this book, but one of themis something which you and I have been discussing since 2008, which is the USTR, is what they call301 report. It was, I guess, the polite way to be, to put it would be conclusory.And what the book does is it really goes into the footnotes of the report,really goes into the assertions that it makes and comes to the conclusionthat in a lot of instances, data was was missing. Can you kind of give the audience a taste ofthat part of the book and what conclusions you drew? Well, the section 301 report is onethat I scrutinized in detail for the China classes I've been teaching at Yale, 182 pages, some 1300 footnotes.Allegation after allegation after allegation. Again, take the leading example.The notion of forced technology transfer that we must engage the Chinesein joint ventures with the Chinese partner to operate and set up a subsidiary subsidiary in China.That implies, you know, a an explicit coercion on the part of the Chinesepartner or the Chinese system for sophisticated multinationalsto turn over the Crown jewels of their competitive prowess. Number one, I was involved in a joint venturewhen I was at Morgan Stanley, and nothing could be further from the truth. And I know a number of businessmen, not just in financial services,but in key sensitive manufacturing industries, who would substantiate the same thing, what the Section 3.1 report does, which just staggered me.If you go to page 19, the button near the bottom of the page, I still remember it very vividly.Lighthizer and his team admits there is no evidence on this issue of coercion because according to them,the coercion is verbal and it takes place behind closed doors.So instead they rely on surveys of groupslike the U.S.-China Business Council, whose members indicatethat there has been some discomfort in some of their relationships with their Chinese partners.But that is very different than nailingthe case for forced technology transfer. And there's more I mean, you know.What about the IPR theft portion, which has got all this becomes it becomes law, it becomes the gospel.Well, it does. And the idea that Chinasteals intellectual property from the United States, which now politicians have describedas the greatest theft in recorded human history, the evidence on that is not not even shaky.It's really concocted. It's based on studies that were done by the illustrious IP commission,which they didn't really have the staff to do the study. So they subcontracted it out.And, you know, without taking you through all the minutia of the evidence they assembled,they basically had about $2 billion of piracy data from the Customs and BorderPatrol of goods confiscated at the border that allegedly came from China.And they blew this up to an estimate of between three and $600 billion of theft that occurs each year.And they they built it up based on models that are dubious would be accomplish it.And so this has, in fact, become the law. And it's repeated by Republicans and Democrats alike.Yeah, a famous secretary of state told me recently, former secretary of state, just because there'sa bipartisan consensus doesn't mean it's right, which was a very good point.You write, Blaming China for the U.S. trade deficit is a triumph of political rhetoric over arithmetic.Talk about that in terms of savings rates. I don't think most people don't understand that relationship unless if they've got a PhD.Yeah, I know. I've testified in front of that on that point in front of the Congressfor a number of years and their eyes glaze over. I think most of them have not taken economicsand those that did probably didn't do very well. But the macro economics that we practiceis really pretty simple in this respect. If you don't save as a nation and you want to grow,you must import surplus savings from abroad. And when you import surplus savingsfrom abroad to fund your economic growth, you run a massive balance of payments deficit.And that's what gives rise to the multilateral deficit with many nations.You know, I just checked before I plugged in with you today. The domestic savings rate in the United States,which is the important savings rate adjusted for the depreciation of worn outcapacity, is 1.8% of national income. 1.8.No nation, no leading nation in the history of the world has ever been that deficient in savings.The savings rate, by contrast, in China on a comparable apples to applesbasis, is at least ten times that magnitude. So with a very, very low savings rate,we are absolutely destined to have trade deficits with many, many countries.30 years ago, we had the same problem. We blamed Japan and now we blameChina. And it is politically, politically expedient to have a scapegoat, tohold others accountable for deficiencies that are very much of our own making. The biggest source of our shortfall in domesticsaving is, of course, are massive budget deficits. But consumers and businesses certainly don't save enoughto even come close to offsetting that shortfall. But the Chinese have economic policies which create too much savings,and that also has a role in the in the in the multilateral in the debt trade deficit.Well, absolutely. I mean, as a surplus saver, the Chinese have an even largernumber of trade surpluses around the world than we have deficits.And I've been very critical for years of the Chinese for fostering policies that perpetuate too much saving,because in the case of households, for example, that's an outgrowth of a very deficient social safety net.They don't have enough set aside to fund their retirement.And as we're seeing now in this COVID, whether it's zero or non-zerocovid the health care security issues are also very real. And until the Chinese build out that social safety net,their household saving will remain high and that will inhibit the discretionary consumption.They need to rebalance their economy and that's a real problem for them and they have not addressed.Was there some positive news in the work conference of last Friday,the Economic Work Conference of last Friday in this area? Short term, it best.It's clear that Xi Jinping after nearly three years of digging in his heels on zero COVID has done a 180.And you know that's basically to deal with the undercurrent of a veryunsettled population, but also to address the shortfall in economic growth.It's pretty chaotic right now, as you know, in China and going from zero to non-zero COVID,you know, they have lousy vaccines. The elderly are unvaccinated, they have limitedICU capacity, intensive care capacity in their hospitals. And, you know, they're dealing, as we well know, in the U.S.with a highly contagious Omicron strain of this virus.And you know, it to perpetuate that wouldreally leave the major constraints ongoing in economic growth. So it looks like, you know, we'll see a little bit of a reboundin economic growth next year after a terrible outcome this year.The questions I have, though, really pertain to the growth outlook beyond that and which I'mpretty concerned about right now, especially as a congenital China optimist. And I think there's good reason to be worried now about the mediumto longer term growth prospects in China in a way that we haven't been in the past.And I don't think the latest work conference addressed that in any way whatsoever.Seemed to focus a little bit more on the private sector, on on kind of,you know, the pendulum swinging a little bit away from supporting the state sector, supporting the private sector.Wouldn't that be good news? It would be if if they mean it. You know, the real dynamism of the private sectorhas over the past, I don't know, seven or eight yearsbeen concentrated in the very rapidly growing, highly creativeInternet platform companies, and they've been subjected to a lot of criticism for doing that.They're backpedaling the rhetoric, but I think the the prognosis for the sectoris still very problematic. And, you know, that's a big threat, I think, to the entrepreneurial activitythat has been driving dynamic sectors like this that myself and others have been counting onfor Chinese dynamism for a long, long time. And I don't think that they are prepared to reverse that yet.You have a great section on the trade on the what we called the phase one trade deal,which you call an unfortunate combination of political theater and bad economics. Can you tell us a little bit about what's in that section?Well, you know, the theater, of course, came from our 45th president, who proudly declared this deal, like many of the others,that he was able to pull off in his presidency was the greatest deal in the history of trade deals.The unfortunate arithmetic goes back to the point I made earlier, Steve, and that isthe phase one trade deal which ran from January 2020 through the end of2021, was aimed at a bilateral fixto our multilateral problem that centered on the commitment of the Chineseto purchase $200 billion of American made goods.And, you know, when the dust was settled on on what happened over the two yearduration of the trade deal, we felt we found out that the Chinese fell$200 billion short of hitting the $200 billion target. So there was nothing there. Andand again, it goes back to the point we've been discussinga few minutes ago, and that is the idea that you can sort of solve a trade deficitwith over 100 countries by putting pressure on one.Admittedly, our largest trading partner is not supported by theory and is not supported by reality.The Chinese piece did shrink because of the tariffs, butthat portion of our multilateral trade deficit was diverted to other nations like Mexico,Vietnam, Germany, Singapore, Taiwan and the like.And so our big overall trade deficit, the multilateral one, got bigger rather than smaller.The deal was a total failure. And of course, because they were less efficient than China, because we had the tariffs,it was the equivalent of a tax hike, as you write in the book, a tax hike on companies and consumers.What always bothered me and I'm wondering if you agree, it seems to me to also punish lowerincome Americans more than wealthier Americans. Is that assumption correct?Yeah, I think I think it is to some extent, you know, byalmost by definition of of of lifestyles, looking at low and middle income Americans versus high income Americans who consumea lot of sophisticated services and other forms of non-tradablegoods as well as services, those who are affected the most bydistortions of tradeable goods, which is what the focus ofthe tariffs and the phase one trade deal are. They get off better and that penalizes,especially from a cost point of view, those at the the lower end of the income distribution as well.All sorts of percentage up there that let's say it's $1,000 a family. If you're making 500,000, it's not much of a percentage.If you're making 25,000, it's it's a 4% tax increase.4% tax increase. You know, the book I forget some of these statistics, but the book brings them backthat China's exports to the United States over the last 20 years have grown from 2%.Merchandise exports to 9%, which is an annualized growth the book points out of 12% a year.What I think if you said that, I think as people read your book, they're going to go really?Why is that not generally known and repeated all the time? Why is that not part of the narrative?It's politically expedient. Again, politicians like to believe thatthe Chinese are heavily reliant on American markets, on American finance,and without our support and cooperation, we putenormous one way pressure on China. And I make the case in the book, I hope convincingly thatwe are basically just as reliant on China as they are on us.American consumers need low cost Chinese goods to make ends meet. We need China to loan us their surplus, savingby buying our treasuries to fund our deficit. And to the point you just raised, to the extent we want to grow our economyagain, make America great again, just to coin a trite phrase, by restoring manufacturing vitality,China over, you know, the past almost two decades now, quite honestly,has become our third largest export market behind Mexico and Canada, but by far our most rapidly growing.And so we need Chinese export demand to support the revitalizationof export led growth of American manufacturing. Andto the extent that the Chinese have now retaliated by putting tariffs on American made goods sold in China, you know,that's a real growth impediment for us to have to come to grips with as well.Because a lot of people would ask, is China's reliance more existential that on the United Statesthan America's reliance on China, that we pay higher costs will survive it.But when we restrict exports of chips and of other technology that actually kills an industry, so it's much more existential than the U.S.reliance. Well you know that that's a question that, you know, ultimatelyhistory will render a verdict on. There is no mistake thatand this is you know, I have a chapter in the book called From Trump to Biden. Yeah, the plot thickens.And the point I made there is that the actualpolicies that are being aimed atrestricting China right now in many respects are more severe under the Biden administration than they wereunder the Trump administration in just the last few months. The export sanctions of early October,followed by the expansion in recent days of the The Blacklist,the entity list aimed at leading a Chinese technology companygoing far beyond the original assault on Huawei are truly aimed at China'smost important industries of the future A.I. and quantum computing.And if we are successful in choking offthe chips that go into the growth of those two endeavors, and make no mistake, American officials have said that's exactlywhat we're trying to do, then that that's a seriousthreat to the China of the future. And what surprises me right now is that the Chinesehave not retaliated to those actions. They filed a dispute with the World Trade Organization,but we all know those take years to adjudicate. And the U.S. could just reject any resolution on the grounds of national securityif the dispute resolution process ever gets restarted again. So you've been an enthusiast for investingand doing business with China for many, many decades. You've raised questions in this interview about is this the Chinawhose economic policies we always believed were right? Are do you still believe that China's GDPwill exceed America's in the near future? Well, you know, I look at thoseestimates that I've made, and I'm not the only one that's made them. And I look at some of the assumptions embedded in them.It's quite possible now that I may be overly may have been overly optimistic in the book.I still think we're headed there. But, you know, then in the book that, you know, we could hit thatparity on a a dollar based GDP basis by 2030.And maybe it comes a few years later. If China, of course, stumbles and has a majoraccident, then that it would be later than that. But I don't I don't think that's going to happen.But, you know, to the broader point, the medium to longer termgrowth outlook for China now is one that I am raising some very serious concerns of my own.The working age population is now shrinking because of the demography of the one child family policy.And so when that happens to offset it and stay on a course of rapid growth,you need an acceleration of productivity growth. Productivity growth has been declining in Chinafor the past several years and the outlook in light of some of the earlier points we made on private sector,especially Internet platform companies, isproblematic. And I think Chinaneeds to to to really focus much more on the productivity side of its equation than it appears to be doing right now.And one of the unfortunate conclusions coming out of the 20th Party Congressis that Xi Jinping is fixated on security rather than economic growth.And that is a potential headwind to productivitythat may come back to haunt him. And that would affect these growth conversion scenarios that are,you know, that we talk about in the book and that others feature as well. What about AI as a real source of productivity growth?Very important and. Combined with robotics.You know, to me, the most interesting work on AI has come from the venture capitalist,Dr. Kai-Fu Lee, who's looked at the the AI competitive dynamic in U.S.and China in great detail. And he concludes, and I have no reason to doubt himthat the real opportunities in AI are shifting away from the theory and the algorithmsthat arise out of that theory and more toward applications.And the applications are driven by the aggregation of these massive big datasets where China has an enormous amount of data not alwayscompiled in the, you know, in the in the spirit of of privacy,that we put such great premium on in the West. But they've got the data.And so I think they can still stay the course of some of their trajectory to AI leadership.But the the restraints that we're putting on advanced semiconductor chipscertainly do raise questions about ever increasing processing power that is going to be requiredfor increasingly sophisticated AI applications. And it's a very important point worth thinking about for the future.Because it's Steve Roach, because he's not satisfied with just talking about the problem at the end of the book, proposessome interesting kind of ways to start down a path of resolving some of these problems, to rebuilding trust.Could you just give the listeners a flavor of what you propose so they'll go out and buy the book?Yeah, well, thank you for raising that, Steve. I mean, I quickly learned on Wall Street that, you know, investors get tired of youif all you do is talk about problems without providing solutions. So this book ends with three chapters on solutionsand it starts with, you know, the important point that this is a relationship problem and America doesn't have a China problem.China doesn't have a U.S. problem. The two of us together have a relationship problemthat requires a relationship solution. So we needthree things to resolve this conflict. One, and I know you've actually written about thisrebuilding trust, and there's a lot of low hanging fruit that can be picked, such assome of the points that you've mentioned, reopening consulates, restarting foreign exchange program programs,relaxing visa requirements, restrictions on NGO activity in both nations.And then I focus a lot on some of the higher hanging fruit, the big global issues such as climate change, health,especially in this COVID era and cyber, the second leg of the stoolis one that abandons this zero sum bilateral trade deficit framework that we've talked about a lot todayand moves back to a positive, some pro-growthmarket opening initiative framed around a bilateral investment treaty.And the third leg of the stool is the one that I think is possibly the most unique recognizethat the current architecture of engagement that we have right now, which used to be framed around the strategic and economic dialogs,now, you know, bilateral meetings such as the November 14th, three hourin-person discussion between Presidents Xi and Biden. It hasn't worked and it will not work.And I'm proposing the establishment of a permanent organization that I call a U.S.-China secretariat that works full time on all aspects of the relationship,from trade and economics to human rights, technology transfer or innovation.So subsidies to state sponsored activities. And I think those three legs of the stool togetherprovide a much better chance for a relationship solutionto a relationship problem. Steve, thank you so much for joining us today.Thank you so much for writing this terrific book, Accidental Conflict America, China and the Clash of False Narratives.It needed writing you did a fabulous job writing it, and I recommend it to everyone who's listening to us today.Thanks very much, Steve. Thank you very much.