Column: The Sino-American trust deficit

Written by Stephen S Roach | Updated: Aug 2 2014, 09:03am hrs
The recently concluded Strategic and Economic Dialogue (S&ED) between the United States and China was a major disappointment. It lacked strategy at a time when both countries face formidable challenges on many fronts. And what passed for dialogue was a series of speeches and tightly scripted talking points. Most significant, it failed to address an increasingly corrosive trust deficit that poses the most serious threat to Sino-American relations in 25 years.

Conditions were tough heading into the talks. The US Treasury was complaining yet again about the Chinese currency, which had depreciated by 2.4% against the dollar in the first half of 2014, after having appreciated by 37% over the previous eight and a half years. The US State Department and Chinas Ministry of Foreign Affairs were engaged in a war of words over mounting territorial and sea-lane disputes in the East and South China Seas.

But the darkest clouds were on the cyber front. Two months before the S&ED, the US Department of Justice indicted five officers of the Peoples Liberation Army (PLA) on 31 counts of charges ranging from computer fraud and hacking to identity theft and economic espionage. In response, China suspended its participation in bilateral military exchanges on cyber threats. Meanwhile, revelations of the pervasive scope of US cyber-espionage activities reverberated from Capitol Hill to Berlin, giving rise to legislation aimed at controlling Americas largely unchecked National Security Agency and casting a pall over the all-important US-German relationship.

Charges and counter-charges on the cyber issue have focused primarily on motives. The US has been quick to distinguish between commercial and military espionage. But for China, this distinction rings hollow.

Chinese officials see little difference between the cyber threat posed by the NSA and that posed by the PLA, especially given that Americas cyber intrusions have also been aimed at foreign companies, trade negotiators, and international leadersall of whom are directly or indirectly engaged in commercial activity. In the end, moral hair-splitting is less important than the blame game itselfa visible manifestation of the deepening bilateral distrust wrought by a destructive phase of Sino-American codependency.

Against this backdrop, it was hardly surprising that the S&ED produced so little. Cyber exchanges between the two militaries were not restarted, and negotiations over a bilateral investment treatya mutually beneficial rules-based framework that would go a long way in opening up both countries markets to increasingly globalised US and Chinese companieswere particularly disappointing. A year ago, there was an encouraging breakthrough on the investment treaty; this year, there was a setback, as the launch of explicit negotiations over which industries would be exemptthe always contentious negative listwas deferred until 2015.

The problem with kicking the can down the road is that the road is leading directly towards the upcoming US presidential election cyclea time when the debate over China always intensifies. Add to that a polarised and dysfunctional Congress, and the time-frame for concluding a US-China investment treaty is beginning to appear eerily reminiscent of the decade-long process that was required for Chinese accession to the World Trade Organisation in 2001. That would be bad for both countries, as each now faces urgent economic challenges.

I was in China during the week following the S&ED, and official circles were abuzz about the new growth opportunities of services-led rebalancing. There was also clear recognition of meaningful progress on this front, with Chinas tertiary sector (services) growing more rapidly than its secondary sector (manufacturing and construction) for the third year in a rowsufficient to make services the Chinese economys largest sector for the first time.

And there is plenty more to come. At around 47% of GDP, Chinas embryonic services sector remains well short of the 60-65% share that a middle-income economy typically possesses.

At the same time, Chinese officials understand that further progress towards a services-led economic rebalancing will stall without the talent, systems, experience, and scale of global multinational services providers. And who better to provide what is needed than the USthe worlds largest and most competitive services economy. Given that the US has experienced yet another year of weak performance, one might have thought that this growth opportunity would have resonated on the American side of the S&ED table.

The failure of both US and Chinese leaders to recognise the mutual benefits of an investment treaty is disturbing. Going slow on such an obvious win-win reform suggests either that each country attaches little importance to its growth imperative or that they are unwilling to address that urgency by coming to grips with the increasingly insidious trust deficit that divides them.

I suspect that it is the latter. Leaders on both sides understand their countries growth challenges. But neither seems willing to address the intensification of distrust that has arisen during the past year from the cyber issue. Here is where the blame game belies the obvious: Both countries hack, and both have lost control over their hackers. Moreover, cyber-hacking itself is growing at an exponential rate in todays interconnected world. In other words, the cyber blame game is pointless.

Acceptance of shared responsibilities in coming to grips with cyber tensions is essential if the US and China are to re-engage on the other geostrategic and economic challenges that they both face. The failure of Julys S&ED was a red flag, yet another indication that the bilateral relationship is headed in the wrong direction. Staying the course is not an option.

Stephen S Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China

Copyright: Project Syndicate, 2014