Editor’s Note: Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of the 2014 book “Unbalanced: The Codependency of America and China.” The views expressed in this commentary are his own. Read more opinion at CNN.
The Gang of Four has now spoken. Over the past month or so, in a virulent polemic against communism reminiscent of the Red-baiting of the 1950s, four top officials of the Trump administration have delivered a series of well-orchestrated tirades against China.
National security adviser Robert O’Brien initially focused on China as an ideological threat. FBI Director Christopher Wray next addressed espionage. Attorney General William Barr did the economics piece. And then Secretary of State Mike Pompeo batted cleanup and pulled it all together in a full frontal attack delivered on July 23 at the Nixon Library in California – providing an uncomfortable bookend to the opening up of US-China relations that President Richard Nixon initiated with his historic visit to China in 1972.
In a climate where US public opinion of China is at a record low, a confident Gang of Four swung for the fences. Unfortunately, their arguments as a whole are largely specious – laced with conspiracy theories and devoid of fact-based analytics. This came through in three key areas: economics, the Covid-19 blame game, and the character of the US-China relationship.
As an economist, I have long stressed the role that foreign trade plays in shaping the US economy. These four officials, all schooled and trained as lawyers, have neither the necessary background nor the experience to speak from this perspective. But, heck, this is politics, where anything goes. Even so, the disconnect in this case is staggering.
The US suffers from a serious deficiency of nationwide saving. In the first quarter of 2020, the net domestic saving rate – the combined saving of individuals, businesses, and the government sector (all adjusted for the depreciation of worn-out capital) – stood at just 2.9% of national income. This was less than half the longer-term historical average of 7% recorded over the 45-year period from 1960 to 2005. And that was before the pandemic hit the US.
In the Covid-19 era, exploding federal budget deficits are overwhelming a temporary surge in household saving driven by one-off relief checks and expanded unemployment insurance. As a result, saving is headed into record negative territory. That implies a partial liquidation of the seed of future economic growth that saving provides. Lacking in saving and wanting to grow, the US imports surplus saving from abroad – bringing overseas investment to its shores – and as a result runs massive trade deficits to attract foreign capital.
Not only is Barr clueless about how trade deficits fit into the US economy’s saving puzzle, he misses the most important point of all when it comes to China: America’s $346 billion bilateral merchandise trade deficit with China in 2019, while the largest portion of our overall $853 billion deficit in the trade of goods, is but one piece of a multilateral US trade imbalance with 102 countries.
Consequently, limiting trade with China without addressing a domestic saving problem that is now going from bad to worse is like rearranging the deckchairs on the Titanic. America’s other trading partners will simply provide higher-cost imports, thereby effectively taxing American consumers. The Gang of Four may know something about the law, but they would get a failing grade in most introductory economics courses.
Secondly, conspiracy theories have long been the calling card of the Trump administration, and Pompeo has led the charge in deploying these tactics when it comes to China. Earlier this year, Pompeo had been front and center in the Trump administration’s effort to cast blame on China for Covid-19, touting the theory that it had spilled from a lab and accusing the Chinese government of a cover-up (allegations Beijing described as a “smear”). Similarly, in the early days of the pandemic, Pompeo was unflinching in the racist depiction of Covid-19 as the “Wuhan” or “Chinese virus.”
Pompeo seems to grasp the value of truth-tellers: one needs only look at his public embrace of Li Wenliang, the Wuhan ophthalmologist who voiced concern about the virus before the Chinese government was willing to let the public hear that truth. It is an act of extraordinary hypocrisy, then, that Pompeo attempted to undermine the US whistleblowers who spoke out against his boss.
Finally, the Gang of Four paints a picture of a one-sided relationship, maintaining that China needs the United States far more than we need them. From an economic point of view, nothing could be farther from the truth. Income-constrained American consumers certainly need low-cost goods from China to make ends meet; the US Treasury will continue to need China as the largest foreign buyer of our exploding federal debt; and US companies, facing growth problems at home, need China as America’s third-largest export market. In short, it is a two-way relationship of codependency, whose demise could have a very destabilizing impact on the US economy.
In their rush to demonize China, the Gang of Four has pursued a line of argument that is more about crass domestic politics than the articulation of a coherent grand strategy on a geopolitical chessboard. A similar approach was recommended in a document that, according to Politico, was distributed to Republican Senate candidates in April, called the “Corona Big Book.”
The basic premise was simple: As the ravages of Covid-19 were mounting in the United States, the memo counseled, “don’t defend Trump … attack China.” As Covid-19-stricken America has neared the abyss, and as that defense of Trump has crumbled, the Gang of Four has taken the lead in executing a similar strategy.
History offers an ironic precedent. After the death of Mao Zedong in 1976, China’s notorious Gang of Four – radical leaders of the Cultural Revolution – perpetuated a tumultuous period of chaos and political instability. Fixated on China, the American gang may do the same thing, if these four officials divert attention from Trump’s failures to pin the blame for America’s chaos on China.
In the end, China’s Gang of Four was arrested and put on public trial. In the United States, we have a different approach – elections.