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| BOOK EXCERPT |

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ACCIDENTAL CONFLICT:

AMERICA, CHINA, AND THE CLASH OF FALSE NARRATIVES

By Stephen Roach

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The Montréal Review, December 2022

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Sequel as Prologue

My previous book, Unbalanced: The Codependency of America and China, ended with a warning that now seems painfully obvious. I feared the codependent economic relationship between America and China might go terribly wrong. Unfortunately, that is what happened. The open conflict now evident between the world’s two most powerful nations is the outgrowth of an inherently precarious codependency.

We should have seen it coming. Relationship conflict arises when there is a profound shift in the terms of engagement between two partners. When Unbalanced was published in 2014, the two nations were at a fork in the road. One path would be delineated by what I called an asymmetrical rebalancing—where one partner changed and the other didn’t. The other, more symmetrical path would be forged by the willingness of both partners to change. The asymmetrical path was a recipe for conflict. Symmetry would avoid conflict and allow each nation to meet its growth and geostrategic challenges in a collaborative spirit that bordered on harmony. The choice was theirs.

There is no dark secret as to what happened: China changed while America remained stuck in its ways. In part, this shift stemmed from China’s inevitable growth challenges. A spectacular takeoff of 10 percent annual economic growth from 1978 to 2007 took its economy to a critical threshold. With per capita income having risen more than tenfold over that period, China was rushing headlong toward the challenging zone of the “middle-income trap,” where setbacks are more the rule than the exception.

For China, this was a clarion signal to change. And that is exactly what it did. With prescient foresight, or serendipitous good fortune, China embarked on the road to rebalancing, shifting its sources of economic growth away from an increasingly unstable external sector toward internal private consumption and indigenous innovation. But the changes in China have gone far beyond economic rebalancing—there has also been an equally dramatic and worrisome tilt in its political economy of power and ideology. With the United States clinging to a timeworn growth model and increasingly consumed by social and political polarization, the die was cast: a destabilizing dynamic between the two nations has led to a full-blown trade and technology war.

This tilt in the relationship dynamic underscored the paradox of the Next China—that China’s emergence as a major engine of global economic growth turned into an uncomfortable ascendancy for established world powers. But it did more than that. It also unmasked the great American paradox of a savings-short global power that had long prospered well beyond its means. Conflict took on a life of its own, bringing an increasingly treacherous endgame into focus. Notwithstanding the darker warnings of history, the rising power was indeed clashing with the incumbent hegemon.

It didn’t have to go this way, and there is still a chance to avoid the worst-case outcome. The big question is whether both powerful nations have the vision and, ultimately, the political will to resolve this conflict before it is too late. As Henry Kissinger has put it, the United States and China are now in the “foothills” of a new cold war. Predictably, codependency has entered the danger zone of conflict escalation. For America and China, a new framework of engagement and coexistence is an increasingly urgent priority. And so we begin where Unbalanced left off.

Introduction

Expedience

History is littered with false narratives. From the flat earth theory and the Ptolemaic system of cosmology to tales of UFO sightings and the “Big Lie” of election fraud promulgated by former president Donald Trump and his supporters, twisting facts to tell a convincing story has long been central to the human condition. So it is with the false narratives about each other that China and America have embraced.

The distinction between a true and a false narrative is often tricky to make. Veracity is ultimately determined by time. Just as new discoveries correct bad science, “fake news” can be fact-checked and political detours can avoid dead ends. Yet dislodging a false narrative can be exceedingly difficult. Fact-based counterarguments, as reaction to America’s post-Trump political adventures attest, may not be enough. Repetition of a lie often breeds conviction. And technology-enabled repetition takes on new meaning in an era dominated by online social networks. If left unchallenged, the false narrative can become self-fulfilling—at least until experience makes it untenable. Until that moment of reckoning, however, the false narrative can take on a life of its own, shaping the very history from which it has emerged.

For most in the United States there is nothing false about the profusion of negative stories on China. They resonate with a broad cross-section of the American public. In mid-2021, fully 76 percent of Americans had an unfavorable view of China, according to the Pew Research Center. This is a stunning increase of 29 percentage points since the United States launched a trade war with China in 2018, and it represents the most negative US public opinion toward China since the inception of this survey in 2005.

China suffers from a similar malady. While it has long sought to replicate the strength of the US economy and to rival America’s hegemonic global role, China sees the United States through its own biases. It fears that America wants to contain its growth and development. It extrapolates the trade war of 2018–21 into the future, convinced that it will remain in the crosshairs of a protectionist and increasingly nationalistic United States.

At the same time, many in China have embraced the narrative of America in decline—especially after nearly two decades of crises and instability. China’s ultimate false narrative on America—the ideological triumph of socialism over capitalism—underscores a very different aspect of conflict between the two nations. It pits one system against the other, leaving little room for compromise on deeply entrenched values. As long as the Communist Party controls China, it can’t afford to let go of this ideologically expedient narrative.

Dueling false narratives spell nothing but trouble for this deeply conflicted relationship. America’s fixation on the China threat is on a collision course with China’s focus on the American threat. In both cases, the fears underlying these false narratives may feel perfectly legitimate, providing justification for strong actions. The dueling false narratives of the United States and China have, indeed, led to very real conflict.

How did it get to this point? The simple answer is misplaced fear—the most corrosive ingredient in any relationship, human or economic. In the United States, those fears are rooted in the economic angst of American workers and families over the chronic job and wage pressures that have sapped vitality from a once proud US manufacturing sector. These fears coincide with an outsize foreign trade deficit, which for many symbolizes a leakage of jobs to overseas producers that can undermine any nation’s sense of self. That China’s dramatic rise as an economic power accounts for the largest portion of the US trade deficit is especially grating given that many low-cost Chinese-made products appear to replace the very goods that American workers once produced at home.

This narrative has the added allure of its own strain of political expedience. US politicians—Republicans and Democrats alike—have been quick to connect the dots and add an important twist: America’s economic carnage, they claim, is not only traceable to Chinese trade, it also reflects unfair, abusive, and often illegal economic aggression by the Chinese state. This amounts to an existential threat to the cherished American Dream and US global leadership.

This dark narrative works especially well for US politicians looking to duck responsibility for the plight of American workers. It lets them off the hook for the very real pain felt in countless communities across the nation. It deflects attention from decades of government budget deficits that have sapped domestic US saving, giving rise to the dreaded trade deficits that politicians are quick to pin on China. The combination of self-inflated economic angst and political expediency makes for a compelling story. It fulfills the classic conditions of a powerful false narrative. And it has taken on a life of its own.

The same thing is happening in China. The trade war with the United States has played to the dark side of a long-insecure Chinese leadership. China’s so-called century of humiliation, which began with the Opium Wars in the mid-nineteenth century, left deep scars of wounded pride and national pain that have conditioned the Chinese public and leaders of the Chinese Communist Party to fear that the West might well attack again. In the grip of such wrenching insecurity, these expectations leave the country ripe for its own politically expedient false narratives.

All this paints a picture of accidental conflict, the collision that didn’t have to happen were it not for the mutual expedience of a confluence of false narratives. This has taken the conflict between the United States and China decisively into the danger zone. As president, Donald Trump provided catalytic support to conflict escalation, but his was by no means the sole voice linking long-simmering economic pressures with the toxic politics of nationalism. In the world according to Trump, the China threat is the single greatest obstacle to making America great again. The tariff war, an outgrowth of this line of reasoning, has taken the world’s two most powerful nations to the brink of a full-blown economic rupture.

Surprisingly, Trump’s successor, Joe Biden, has done little to dispel this narrative. Again, the reason is political expediency. While the two presidents have very little in common, they are both captives and protagonists of America’s false narratives on China that have so inflamed public opinion.

This troubled relationship has roots in some of the most contentious issues shaping the global economy. The rise of China is itself a double-edged sword. On the one hand, the Chinese economy of the not-so-distant future—call it the Next China—is likely to be increasingly consumer-led, services-based, and innovation-driven. It has the potential to provide the largest source of growth in global aggregate demand in the first half of the twenty-first century. The positive take on this development is that rapid expansion in the markets of the Next China would offer great opportunity for other nations to share in the benefits of China’s burgeoning middle class. And who is better positioned than the United States and its vast collection of world-class companies to reap those benefits?

But the other edge of the sword is equally sharp. There is widespread concern, especially today in the United States, that the benefits of a rising China may come at great expense to American citizens as well as to those in the world’s other major economies. Fears of lost jobs and repressed wages, the ultimate economic sacrifice for any nation, are central to those concerns.

Adding to fears of economic insecurity is the extraordinary confluence of two black swan events—low-probability shocks that actually came to pass in a shortly-compressed period of time.  First came the Covid-19 pandemic in 2020. While most major economies, especially the United States and Europe, appear to be on the road to post-Covid recovery, China continues to struggle with new variants of the virus. In all instances, the impacts of the shock are likely to cast a long shadow over behavioral patterns of individuals, companies, and public finance. The pandemic-battered post-Covid world will need to learn to live with the virus and its aftershocks, as well as the fear that gripped us in 2020 and 2021. A shot in the arm won’t erase that.

The second shock, the Russo-Ukrainian War, came a mere two years later in early 2022. On the surface, this seemed like a classic great power clash between the United States and the Russian Federation.  But China, which had just signed a new “unlimited” partnership agreement with Russia, was quickly caught in the crossfire.  If it held to that agreement by maintaining, or even increasing, support to Russia, China risked being judged guilty by association in the eyes of the West.  Such a verdict would not be without sanctions-like penalties that would only intensify conflict between the United States and China.

If one nation struggles more than the other in the aftermath of these twin shocks, it will only further inflame the blame game that is already well under way. US politicians, for example, can’t seem to let go of the narrative of Covid-19’s Chinese origins. If the disease started in Wuhan, goes the argument, China must deserve blame for its effects, both those already suffered and those that might yet occur. Never mind the politicized denial that inhibited America’s own Covid response throughout 2020. It was more expedient to pin the problem on someone else. And that someone, of course, is China. Similarly, while China played no role in starting the war in Ukraine, it risks blame if it condones, let alone assists, the dangerous military aggression of its newfound Russian partner.

How this will all play out is anyone’s guess. There is no lack of alternative narratives, especially with the economy. Frothy stock markets seem to promise the instant gratification of vigorous economic recovery. Rising inflation and interest rates threaten that optimistic outcome, as do the mounting perils of war and great power conflicts.

Whatever the eventual outcome, escalating tensions between the world’s two leading powers are likely to have enduring impacts. The contrast between differing economic models of the two nations is not just about ideology but also about very different time horizons. The economic translation of “American exceptionalism” is spend now, save later. Largely because of that, the United States has long lacked a solid foundation of domestic saving—the seed corn of economic growth for any nation.

China, taking a longer-term perspective, has drawn heavily on its surplus saving to support the massive investments its spectacular development has required—new capacity, infrastructure, a deepening of human capital, and now a quest for home-grown, or indigenous, innovation. The big question for China is whether it can pivot toward more of a US-style consumer model. An equally large question for the United States is whether it can become more like China in restoring its saving capacity to fund the investments it needs for future growth.

Meanwhile, the results speak for themselves. America, fixated on short-term results, has let its saving and international imbalances intensify. Lacking domestic saving yet wanting to invest and grow, the United States has borrowed heavily from the rest of the world to fund that growth. Yet to attract foreign capital, the US has run chronically large deficits in its balance-of-payments and foreign trade positions. This contrasts sharply with China’s emphasis on saving as the foundation of future growth. But China’s excess saving brings its own set of problems: it has given rise to vast trade surpluses that spawn allegations of unbridled Chinese mercantilism and unfair trading practices.

The lens of codependency brings this contrast between the two nations’ economic value propositions into sharper focus. In the 1980s and 1990s, the needs of the Chinese and US economies dovetailed perfectly. Coming off two decades of instability, the battered Chinese economy desperately needed a new source of growth. America was struggling in the aftermath of a wrenching stagflation—the confluence of sluggish economic growth and rising inflation. Shifting its manufacturing to China allowed US companies to cut costs and boost profitability while keeping prices in check and thereby allowing American consumers to enjoy rising living standards. For a fleeting moment in the late 1990s and early 2000s, this marriage of convenience was a blissful outcome for both nations. Chinese economic growth surged as the United States offered a major source of demand for Chinese exporters. And American consumers enjoyed a great expansion of purchasing power that low-cost imports from China provided.

But that was then. Now we are seeing a classic clash of codependency. China has moved up the value chain, making more advanced products and developing new industries that the United States wants to claim as its own. The US public, gripped by economic angst and with its leaders unable or unwilling to promote change, clings to the politically expedient characterization of China as an existential threat to America’s future prosperity.

In the end, the world’s response to the transitional imperatives of the Next China may be decisive in resolving the battle of competing narratives. Getting its economy right is essential for China to hit its own development targets as well as to resolve its relationship conflicts with others. Its focus on artificial intelligence as the linchpin of indigenous innovation is key to its audacious goal of achieving great power status by 2049. This poses a special challenge: is China strong enough to pull off such a transformation without reforming its debt-intensive state-owned enterprises or developing a modern, open financial system, including a fully convertible currency?

Similar questions can be asked of the United States. Can it continue to grow without addressing its saving challenge? Lacking in saving and the investment and research that saving supports, can the United States maintain its edge on the frontier of innovation? America needs to strengthen its economy, not just recapture a modern version of an earlier magic. It has to anticipate a very different future, one that undoubtedly includes an important role for a rising China. The resolution of the US-China conflict will depend critically on how both nations address daunting growth challenges, separately and together.

Conflict resolution is all the more urgent in today’s anxious and uncertain climate. The concurrent challenges of post-pandemic global healing and renewed military conflict in Europe are complicated by the confluence of breakthrough technological change, political upheaval, periodic bouts of financial instability, and newfound fears over health and climate security. A profusion of false narratives can deflect attention away from tackling these tough problems.

But for both the United States and China, the greatest danger of false narratives lies in the dark recesses of political expedience. What plays well politically may be more of a raw power play than an ideal economic or geostrategic strategy. As the false narratives spawned by the seduction of political power become ever more deeply entrenched, the vicious cycle of accidental conflict becomes exceedingly difficult to break. The real risk is that the temptations of the false narrative may not be dislodged by any experience-based correction that follows. Conflict resolution is vital to preventing permanent damage from the clash of false narratives between America and China. A new approach is desperately needed.

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Stephen Roach is a senior fellow at the Paul Tsai China Center of Yale Law School and the former chairman of Morgan Stanley Asia. He is also the author of Unbalanced: The Codependency of America and China. He lives in New Canaan, CT.

Excerpted from Accidental Conflict: America, China, and the Clash of False Narratives by Stephen Roach (Yale University Press, 2022)

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