In early July, senior US and Chinese officials will gather in Beijing for the sixth Strategic and Economic Dialogue. With bilateral frictions mounting on a number of fronts—including cyber security, territorial disputes in the East and South China Seas, and currency policy—the summit offers an opportunity for a serious reconsideration of the relationship between the world’s two most powerful countries.
The United States and China are locked in an uncomfortable embrace—the economic counterpart of what psychologists call “codependency.” The flirtation started in the late 1970s, when China was teetering in the aftermath of the Cultural Revolution and the US was mired in a wrenching stagflation. Desperate for economic growth, two needy countries entered into a marriage of convenience.
China was quick to benefit from an export-led economic model that was critically dependent on America as its largest source of demand. The US gained by turning to China for low-cost goods that helped income-constrained consumers make ends meet; it also imported surplus savings from China to fill the void of an unprecedented shortfall of domestic saving, with the deficit-prone US drawing freely on China’s voracious appetite for Treasury securities.
Over time, this marriage of convenience morphed into a full-blown and inherently unhealthy codependency. Both partners took the relationship for granted and pushed unbalanced growth models too far—the US with its asset and credit bubbles that underpinned a record consumption binge, and China with an export-led resurgence that was ultimately dependent on America’s consumption bubble.
The imbalances only worsened. China’s three decades of 10% annual hyper-growth led to unsustainable strains—outsize resource and energy needs, environmental degradation and pollution, and mounting income inequality. Huge Chinese current-account surpluses resulted from too much saving and too little consumption.
Mounting imbalances in the US were the mirror image of those in China—a massive shortfall of domestic saving, unprecedented current-account deficits, excess debt, and an asset-dependent economy that was ultimately built on speculative quicksand.
Predictably, in keeping with the pathology of codependence, the lines distinguishing the two countries became blurred. Over the past decade, Chinese subsidiaries of Western multinationals accounted for more than 60% of the cumulative rise in China’s exports. In other words, the export miracle was sparked not by state-sponsored Chinese companies but by offshore efficiency solutions crafted in the West. This led to the economic equivalent of a personal identity crisis: Who is China—them or us?
In personal relationships, denial tends to mask imbalances—but only for so long. Ultimately, the denial