The US & China Stumble Into Accidental Conflict
How to repair a relationship damaged by false narratives
Economic models are populated with “rational agents” who interact with each other to “maximize utility”. They don’t spend much time working on their relationships. So, it’s a bit unusual, and refreshing, when a well-respected economist devotes an entire book to relationship building.
Stephen Roach’s Accidental Conflict: America, China and the Clash of False Narratives allows us to sit on the couch and listen to the stories each country has told itself as their relationship broke down. Before the session ends, we also get to hear his advice for repairing it.
Roach’s advice is worth heeding. He was Morgan Stanley’s Chief Economist, leading one of the most respected economic teams on Wall Street and was good enough at relationship building to have the ear of policy makers in both Beijing and Washington.
When I spoke to him on this Top Traders Unplugged podcast he had just returned from China, where he spoke both publicly and privately with Chinese officials.
Nature’s Telephone
Everyone likes a bit of gossip. But we really like gossip that’s not true. Roach quotes an MIT study that tracked 126,000 rumors propagated on Twitter which were fact-checked and then classified as true or false. False rumors were re-tweeted six times more frequently. Political false rumors spread fastest of all.
Even trickier, it’s difficult to dislodge belief in falsehoods. Remember reading the report of the commission Trump set up to investigate voting irregularities in 2016?
No? Don’t worry, you're not having a senior moment. The group disbanded after failing to find anything. That didn’t stop Trump or his supporters from propagating the Big Lie that the 2020 election was stolen, an absurdity still believed by 75% of Republicans.
The lesson?
It’s not just Trump’s supporters. ALL of us believe in false political narratives.
What You Think You Know That Ain’t So
Roach identifies two key false narratives—one old, one new—that drive America’s approach to China. The old one is a fixation on the bilateral trade deficit. That deficit exists, but it’s not unique to China. Check out the chart below. In 2022 the US bought almost $1 trillion more in goods and services from other countries than it sold to them.
The US doesn’t save enough to buy all the stuff it wants. This started way before China entered the world economy and America’s deficit will remain until savings goes up. Tariffs might narrow the gap with China, but it will just pop up somewhere else.
The newer false narrative is that a Cold War with China is winnable. We already fought and won one, winning another should be doable right? Uh, no.
The first was against the Soviet Union, a tiny, closed economy. The US was in a much stronger position - it had a rapidly growing economy along with a capital base that was undamaged by war. Today the US has slower growth and infrastructure eroded by low rates of investment, particularly in basic R&D.
Roach’s point—it's arrogant and downright dangerous to think Cold War 2.0 will finish anything like the first one.
What’s China’s Fifty Percent?
The key to any successful therapy session is both parties owning their half of the problem. What false stories is China telling itself?
Chinese consumers have the opposite problem as Americans. They save too much. Consumer thrift is offset by massive investment spending, which has driven the economy’s growth. Unfortunately some of this investment—maybe a lot—has been wasteful.
China knows this but labors under the false narrative that it will rebalance to an economy where consumers play a bigger role and inefficient investment falls. During his recent trip Roach spoke at the China Development Forum on a panel devoted to this goal of rebalancing. He told the audience that this was the eighth time in 20 years he has talked about the same topic, yet nothing has happened. They laughed nervously.
Why is the narrative of an imminent rebalancing false? Because China has been unable or unwilling to provide a comfortable medical and retirement safety net. Until that changes Chinese households will continue to hold very high amounts of precautionary savings and an economy driven by consumer spending will remain just a conference agenda item.
Do The Work
The last part of the book has multiple suggestions for how the countries can repair their relationship. The motivating principle is this—the China/US relationship is the world’s most important, start treating it that way.
The idea that most excites Roach is a permanent “Secretariat”—a standing body based in a neutral country staffed by professionals from both countries. It would have four functions.
Relationship Framing. Carry out joint research on mutual growth opportunities and conflict resolution based on a commonly maintained and agreed upon database. Policy recommendations from this work would go directly to the congress of both countries.
Convening. A clearing house for getting experts in different areas together. Roach calls the current approach of occasional official summits wasteful “event planning exercises”. Instead, the Secretariat would facilitate regular meetings across multiple functions and serve as a go-to in case of emergency.
Compliance. It would be responsible for monitoring all US-China agreements.
Outreach. Sponsor regular public conferences, making its data available. The goal would be to broaden and deepen contact between the two countries.
What response does Roach get to his idea?
In China there is interest. Sure, they would tweak some of the details, but they recognize the risk in the status quo.
In the US - not so much. Roach paints a picture of the US sitting on the couch, arms crossed, basically saying we want the Chinese to hear us and that’s about it.
Disappointing. And ultimately doomed.
China is a superpower of 1.4 billion people. We are going to have a relationship and we need to invest in ways to make it the best one possible without sacrificing national security and without changing our core values, which includes the right of every US citizen to free speech.
Is that possible? I think it is, but we won’t know until we do the work.
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