Book Review: Unbalanced: The Codependency of America and China
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The codependency between China and the US has been obvious for a long time. China's exports to the US help maintain employment, a key component to economic and social stability. This stability is seen as essential to the continued power of the Communist party. The US has become dependent on flow of capital from China's high savings rate, and on imports of cheap consumer goods. The thesis of Stephen Roach's Unbalanced: The Codependency of America and China is that this dependency is "unbalanced," and is starting to change dramatically. We are facing a "realignment of the world's two largest economies." Both countries are viewed as "on the cusp of important transformations."
China has already announced a move to increase its consumer sector—to rebalance the dependence on exports, fixed investment, and infrastructure spending. This will absorb some of the high savings rate, leaving less Chinese money to finance the US budget deficit, business, and consumer borrowing. This comes at a dangerous time for the US, which recorded negative savings in 2008 and 2009. The US has an "unprecedented shortfall of national savings...and must import surplus savings from abroad." This has been the fuel for "bubble and debt dependent growth." A decline in imported savings could result in "sharply higher US interest rates and a significant weakening of the dollar."
As the author stresses, both countries are facing a "wake-up call..." on "old-growth models" not built to last. Sadly, the US appears to lack the political will to face up to the problem and take action. Here, there is a "consensus still focused on re-creating yet another round of consumer-led growth," which the author views as a continuation of a commitment to maintaining a "false prosperity." This is reflected in the Fed's quantitative easing policy "which artificially depresses yields on savings accounts," and could be the "breeding ground for the next bubble."
China does face some big challenges when reducing its savings culture to more consumer spending. These include building a national safety net especially for medical care and retirement. In meeting this challenge, China has the advantage of an ability to create a national strategy and implement it. In contrast, "strategy has never been the United States' strength." This is aggravated by what looks to be political paralysis and inertia in Washington. A very disturbing conclusion from Roach is, "China seems to get it. The US doesn't seem to get it."
In the midst of all the disturbing negative facts and conclusions, there is some positive sunlight for the US. First is all the experience and skills in creating a robust consumer sector. This includes the distribution structure and brand promotion. Second is the potential services market in China. As its manufacturing becomes more automated, there is a need to create more jobs. This could be done in labor intensive services. Currently China has the most underdeveloped service sector of any major economy in the world today." It is 43 percent of GNP versus 75 percent in the US. With its strengths in healthcare, leisure, hospitality, financial services, and supply logistics, the US could become a major exporter of services to China.
We are all aware of the enormous importance of the financial and economic relationships with China. In many ways it is the core of our prosperity and well being. Stephen Roach's new book is indeed a wake-up call. As such, it is essential reading for every NYSSA member.