Cold War, Inflammatory Rhetoric: The U.S. - China Relationship

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• The relationship between the United States and China is among the most complex international relationships in the world right now.
• Stephen Roach, former Chief Economist at Morgan Stanley and Senior Fellow at Yale’s Paul Tsai China Center, says the two nations are in the midst of a new cold war, exacerbated by “false narratives” on both sides.
• Stephen joins Kevin Coldiron to discuss several of these false narratives, and a few solutions that might help the two superpowers work better together in the future.

The United States and China have one of the most complex international relationships in the world today. As the two largest economies and military powers, their actions and policies have far-reaching consequences for the global community. But trade disputes, human rights concerns and soaring geopolitical tensions have weakened U.S.-China relations to a dangerous point.

Henry Kissinger, the U.S. Secretary of State who initiated the modern relationship between China and the U.S. in the early 1970s, said in 2019 that the two countries are “at the foothills of a new Cold War.” 

Stephen Roach, former Chief Economist at Morgan Stanley and Senior Fellow at Yale’s Paul Tsai China Center, says that Kissinger would be the first to admit we’ve climbed well above the foothills. 

“In fact, this is a legitimate cold war. It’s a different cold war. No two are alike. We’ve only had two of them so it’s difficult to make the same precise comparisons,” says Stephen, who is also the author of the 2022 “Accidental Conflict: America, China and the Clash of False Narratives.”

Stephen’s commentary and analysis have helped shape policy debates in both Beijing and Washington for many years. He spent 30 years at Morgan Stanley, serving as its chief economist and as the Chairman of Morgan Stanley Asia before pivoting to academia.

In the book, Stephen explores the deteriorating U.S.-China relationship by unraveling the stories that each country tells — and proposing solutions for putting an end to this 21st-century cold war. 

He describes himself as a “recovering Wall Street forecaster,” even though it’s been a decade since he left Morgan Stanley.

“The Wall Street experience was challenging and enriching,” says Stephen. “It gave me the opportunity to travel, to see many important countries and to [meet] their policymakers, to get familiar with their institutions. I wouldn’t give that up for anything. But I’m glad to be out of that and now taking a more academic perspective on many of the issues that whetted my curiosity — but I could only touch briefly — when I was in the Wall Street world.”

On an Ideas Lab installment of Top Traders Unplugged, Stephen joins Kevin Coldiron for a discussion about some of those perspectives, including the following two “false narratives.”

From a ‘hunch’ to trust — and access

Stephen first traveled to China in the early 1990s and continued to make “infrequent and brief, sporadic trips” for a few years — until he took on a leadership role in Morgan Stanley’s highly regarded global economics team during the depths of the Asian financial crisis. 

“I had a hunch, only a hunch, that China would hold the key to the end game of what many were calling the first crisis of modern globalization,” he says. “I started going there in late ’97, quite frequently, in fact — every other month — and it just took off. It quickly became evident to me that China was not going to go the way of Thailand, Indonesia, South Korea and others that were falling like dominoes; that had had the wherewithal, the strategy, and most of all, the determination to avoid currency devaluations and resist the capital flight that was taking down other countries.”

Senior Chinese policymakers took notice of Stephen’s research and invited him to several important international conferences in China. He began to build relationships with influential people — and credibility on both sides of the U.S.-China relationship.

“I became a trusted confidant of the Chinese leadership for reasons that still escape me,” he says. 

“But in any case, I really had tremendous access and I still do. I was just in China last week for the first time since COVID [we conducted this interview on April 19], and while China is very different than it was 25 years ago in the depths of the Asian crisis, it’s still a fascinating place to go.” 

Scapegoating superpowers

Stephen’s thesis in "Accidental Conflict” is that right now, the U.S. and China are trapped in dueling false narratives about each other. It’s a dynamic that isn’t unique to these superpowers. 

“These false narratives don’t just arise in a vacuum of nations and their leaders trying to fabricate stories about adversaries, but they really stem from a deep-seated vulnerability that each nation is unwilling to accept,” he explains. 

“In the case of the U.S., we’re certainly a superpower global hegemon, but our economic foundations are not as strong as we’d like to believe. … Our political stability is being drawn into question daily, especially today — on the day of the indictment of a former president — and our social stability reflects a worrisome and potentially dangerous polarization. We’re vulnerable and we don’t want to face up to it.”

In the American political system, we tend to blame our vulnerabilities on other countries. China is our favorite scapegoat, says Stephen, because it’s our biggest trading partner and our biggest adversary. He notes that China “holds the biggest questions with respect to our own economic prosperity … [and] has clearly flirted with some transgressions in the areas of technology, trade secrets and human rights that make us very uncomfortable.”

This “blame game” is not dissimilar to the one America played 30 years ago, finding fault with Japan for our economic problems at the time.

But now, the consequences of scapegoating an economic rival have geopolitical implications for the global market.

Blame is a two-way street

“The Chinese suffer from a similar affliction,” says Stephen. 

China is vulnerable in its own ways. The nation has aspirations to become a “great modern socialist nation” by 2049, the centennial of the founding of the People’s Republic of China. Xi Jinping’s promises to the Chinese people and to the Communist party “hinge on being able to deliver a growth and development trajectory that justifies those claims of rejuvenation and great power status,” Stephen explains.

But to quote the country’s former premier Wen Jiabao, the Chinese economy is “unbalanced, unstable, uncoordinated and unsustainable,” Stephen adds. He thinks Jiabao’s calculus is correct, and that China has yet to fully address those concerns. It blames its chief adversary instead. 

In an address to the National People’s Congress a few months ago, Xi Jinping said the United States “is intent on suppression, containment and all-around encirclement of China’s system.”

Stephen thinks the false narratives China and the U.S. peddle are in most cases “fact-based,” but draw the wrong conclusions on both sides. 

‘Bilateral bluster’ can’t keep the Titanic from sinking

Stephen’s favorite false narrative from the U.S. is what he calls “bilateral bluster”: America’s large trade deficit inflicts hardship and pain on its workers, companies and communities, and it’s China’s fault. 

The truth? The deficit is an outgrowth of a shortfall in domestic saving.

“When countries have low saving rates and they want to grow, they have to import surplus savings from abroad and run massive balances of payment deficits with the world, and those balances give rise to multilateral trade deficits with many countries,” he explains. “In 2022, for example, the United States had trade deficits with 106 countries. Yes, China is the largest piece of our 106-country multilateral trade deficit, but that still leaves 105 others by hardly unsophisticated math.”

Putting tariffs on China, as the Trump administration did and as the Biden administration still does, is like “rearranging the deck chairs on the Titanic,” Stephen argues. 

“You shrink the Chinese piece of our multilateral trade deficit, but that gets diverted because our savings are still under pressure to other countries. That’s exactly what’s happened over the last several years. The Chinese piece has come down, but our trade deficits with countries like Vietnam, Malaysia, Taiwan, Japan, Germany, Mexico and Canada, have all increased — and our overall trade deficit has gotten larger. In fact, it hit a new high record last year.”

Every cold war is different

Another U.S. narrative that’s actually a fallacy, says Stephen, is that we’re in a cold war with China, but we can win it. The argument is basically that over the long term, our economic strength and our open democracy will win out.  

The first Cold War (with the former Soviet Union) occurred in a period of great economic prosperity for the United States. 

“We were in the sweet spot of our post-World War II revival,” Stephen argues. “... This time our economy is a good deal weaker, if you look at the numbers on GDP growth, productivity growth and domestic saving. … We’re basically running at a sharply reduced pace in terms of productivity and GDP compared to that earlier period, and our imbalances in terms of savings and trade are far more severe.”

But this time, our adversary, China, is incomparable. The Soviet Union was “a peer in terms of weapons technology, but it was a very small economy compared to the behemoth that we now encounter in China,” Stephen notes. 

At the end of the first Cold War, the Soviet Union was in the midst of collapse. Many Cold War scholars conclude (“correctly, in my view,” he adds) that the decisive battle was an economic one: the strength of the U.S. economy over the Soviet system. China is a much larger economy — and by some measures, bigger than ours. 

“The conventional wisdom is that they’re on a path of convergence that will equal the U.S. in dollar terms at some point in the next decade,” says Stephen.

Plus, in terms of military might, China is a “far more formidable adversary” against the United States.

“I think it’s a little bit worrisome, smug and potentially arrogant that we presume just because we won the first Cold War, the verdict will be the same this time around,” Stephen argues.

Relationship rehab

Kevin notes that people like Stephen, Susan Shirk and presumably others who have contacts and trust with Chinese officials have created an informal channel of dialogue, “which is better than nothing.”

But Stephen wants to go further. In the book, he proposes setting up an organization at a neutral site — Switzerland, perhaps, or somewhere else both parties agree on — which would be staffed by career diplomats, economists and other experts. He envisions an institution recognized by both countries as a place to resolve conflict as well as a place that produces joint research on how to improve the U.S.-China relationship over time.

He asks Stephen: “When you talk about this idea with people in the U.S. and with people in China, how is it received?”

“Well, it’s mixed, to be honest with you,” Stephen replies. “I did talk about it in considerable detail with a number of Chinese officials and academics on my recent trip to China. There was some interest. They would tweak this or that and make a few suggestions. But in large part, they recognize the lack of engagement, and the framework that underpins that engagement [between the two countries], is a hugely disconcerting and potentially risky phenomenon.”

When he attempts to present the idea in the States, especially to the U.S. government, “basically, there’s no interest,” he adds. “The response is something like, You’ve got to be kidding. We are not interested in bureaucracy. We know what the problem is, and we want the Chinese to be more responsive to our perspective. So I’m really committed to raising this issue in the U.S. much more than has been the case thus far.”

Stephen is confident that America plays “just as an important role in China in leading to this dysfunctional relationship, and it’s our obligation to really commit to a different approach. … If you don’t like the secretariat, give me a better idea. I’m happy to listen to it.”

Kevin agrees and adds that the U.S. and China have “the most important bilateral relationship in the world, so it deserves an organization commensurate with that.”

“Let’s elevate the relationship to the status it deserves,” Kevin says.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.