You know, in five years we've gone from trade war to tech war to early stages of a new Cold war. That high octane fuel can be easily ignited by a spark, Taiwan, South China, Sea, China's unlimited partnership with Russia, global recession. Any one of those are sparks that when you are
embracing increasingly intense false narratives, could lead to an accidental clash. Hello, Stephanomics, here the podcast that brings you a new year in the global economy and a new year's aspiration that we end twenty three in better shape than we've begun it. Maybe I'm sitting on the wrong side of the Atlantic looking at the wrong kind of gray sky. Everything's just feeling a bit grim. But we're going to break out of that gloom now to offer you some fresh insight
into the central issue of our time. One. I make no apologies for returning to on a regular basis China's place in the global economy and its relationship with the US. Stephen Roach is a long time contributed to the China debate. He has a new book out, and you just heard a taste of my conversation with him. But before we get to that lofty discussion. Our senior US economic policy editor, Chris Anstey, wants you to look inside the box your
new trainers came in. You've probably never given much thought to desiccants. Not many have, But last year, those little packets you find in a box with a new pair of shoes were at the center of an international trade route. So in descad desiccand is m the little packet that is included in products that are shipped, and it's intended to take moisture out of the air. So, for instance, it prevents small build up or humility getting to a
point where it can cause damage to the product. That was Bruce Main, president of a small safety consulting firm in an Arbor, Michigan. It turns out that China proposed a new production standard for descants last year that critics like Main say would have created a huge burden on manufacturers around the world. Suddenly, anyone making anything with a desiccant inside would be forced to worry about those little
gel packets complying with a new standard. Shoemakers for sure, but also producers of food, electric products, textiles, artware, and leather goods, among others. The battle over this most obscure packaging item illustrates China's growing ambitions not just to dominate manufacturing, but to have a much stronger say in how products
are made and traded around the world. Put in another way, the next round in the great global trade war between China, the US, and Europe may be waged by Wangi, government bureaucrats and design engineers over global standards. Here is Emily Taylor, an intellectual property lawyer who now heads Oxford Information Labs,
a cyber intelligence consultancy. The Chinese approach which seems very daunting, very organized, long term and patient, and in response, you know, it can feel like we need to up our game in the West that China has understood that in many standards organizations it's a numbers game, is about putting people on planes or sticking people in the zoom room and having lots and lots and lots of submissions. And you know, in response to that, the West really seems to be
scrabbling around at times and lacks that coordination. When most people use products and services, they don't give much thought to standards that govern how they're made. You might use the term gold standard or substandard but what are standards? There are scores of different standard setting bodies for everything
from pharmaceuticals to electronics. These global standards organizations were developed over the past century and war by company representatives, technical specialists representing big buyers, and civic groups basically insiders that got together and settle on the most efficient, cost effective way to make things. Of course, the whole process has been dominated by the West, with an outside presence of
American and European representatives. Now enter China, which unsurprisingly wants a say in setting global standards rather than simply accepting what others have decided. Last year, the Chinese his government put out a game plan for strengthening China's hand in standards setting. It's been dubbed China Standards, which gives a clue of the target date that they are aiming at. Bruce Mayne, the Michigan safety consultant, shared concerns about China's
designs on the lowly desiccant. Those of us that were involved said, not certain. It really matters what the desiccant is made of or it just doesn't work. Is it effective in uh doing what it's supposed to do in terms of pulling moisture out of a package or preventing humidity from building up, and the size of the shape. The testing of the desiccating isn't necessarily something that we
need a standard on. We certainly don't want to spend time, our time and energy trying to write those kinds of standards, so that's why we did not support it. That Ever, in the end, US representatives helped to kill off that desiccant proposed l but it illustrates concerns for standards to potentially become used as a tool for influence, and it reflects broader worries in places including the US and Europe about China's intentions. Probably the most contentious area of standard
setting is the field of technology. Taylor, the intellectual property lawyer, has looked closely at China's rising role in standards development organizations. Last year, she set up a group called the DNS Research Federation to shine a light on standard setting as it applies to the Internet. Among the group's concerns is the way China is trying to push a new set of Internet Protocols or new i P that differs significantly from the open approach that underpinned the original structure of
the Web. The fear is it could be a cyber security risk. Although surveillance takes place on the Internet today, absolutely it does. There are many human rights violations, but the Internet was not designed for surveillance. What we see with new i P is a network that is actually designed and optimized for surveillance, whether of a domestic population or through data sharing laws domestically perhaps internationally as well.
Some of the tactics deployed by China in standard setting bodies have alarmed many observers, like when Chinese representatives show up in numbers in an effort to boost the chance of Chinese proposals winning adoption. But not everybody is convinced that China is wielding undue influence and standards. After all, Western nations do want China to continue to participate so that global companies don't have to deal with China standards
being different from other markets. Al Kanyevsky is a fellow at Stanford Law School with a forthcoming book on standard setting in information and Communication technology. She argues that Western stakeholders are a little bit premature in their dire assessments of China's recent forays into standard setting, given that Western nations still dominate the process. Standardization system that is open, that is consensus base that doesn't exclude stakeholders is the
system that we need for the technology to work. So I would be very worried if such initiatives to exclude particular stakeholders bait China BA or hawaigh bet particular European or American companies, if such initiatives would actually make it to standard setting bodies and would be adopted by them. But especially when it comes to technology, there's increased danger of two separate economic spheres developing on one side, the West with its own set of standards, on the other,
China and other non democratic regimes. The US and European Union last year set up a new cooperation forum called the treat and Technology Council. One of the items on the agenda, you guessed it coordinating on standards. Nothing dry about this subject, In fact, maybe it needs a des second.
I'm Chris Ansty for Bloomberg News. So having had that brilliant micro level example of the way China's role in the world is changing, We're going to go extremely big picture now with Stephen Roach, who will be a familiar figure to anyone listening. Who's taken an interest in the global economy and especially Asia for the past few decades. An economist, former chairman of Morgan Stanley. He is now a senior fellow at the Paul Si China Center at
Yale Law School. He's written a lot over the years about the future of the US and China, and that's the subject of his new book, Accidental Conflict, America, China and the Clash of False Narratives. Stephen, very nice to have you on the show and to see you again, if only virtually. We are seeing a lot of books about potential conflict between America and China. But what what's
your specific take. In the past five years, Stephanie, We've gone from a trade war to a tech war, to the early stages of a new Cold War, a ominous escalation of conflict that did not have to happen had it not been for the false narratives, and both nations embrace towards the other. So I guess we should digging into that a little bit. How do you see those false narratives developing and and how do they affect their relationship going forward? Do you think Okay, let me let
me just answer that question in two parts. One, why do both UM nations have this UM penchant to embrace false narratives? And what are some of these key false narratives UH? My thesis and answering. The first one is that both nations are surprisingly vulnerable UH in terms of their economic prospects as well as there the stature as leaders in the world and the politics at play in
both nations. And for example, you know, Joe Biden gets elected UM a couple of years ago, razor thin majority in the Congress but a strong bipartisan anti China view that allowed him no wiggle room to disengage from Trump's China policy. So UH, he on his first day in office repudiated a number of Trump's most unpopular policies, like the border wall construction in Mexico the Muslim travel ban, but he did nothing to change in China because if he had done that, he would have been skewered by
his own party, let alone the Republicans. Hi Jinping has a similar political calculus, aspiring for great power status UM. The US is viewed as the greatest impediment to his um UH political objectives of this nationalistic China dream. So both nations have strong motives to blame others for their own vulnerabilities. The second part of the question is what are some of these false narratives. I have eight chapters in the book that detail false narratives, split evenly between
both sides of the conflict. The one I'll focus on from the U S side is um we blame China for our trade deficit. Nations have trade deficits because they don't save uh and the US right now has the lowest domestic savings rate of any leading nation in history. And when you don't save and you want to grow, you import surplus savings from abroad, and you run massive current account or balance of payments deficits that drive multilateral
deficits with many nations. In the last year, we have full data for the US RAN trade deficits with a hundred and six nations. China was the largest, but by no means the only one. But by blaming China for our trade deficit, just as we blamed UM Japan thirty years ago for very similar reasons, I might add, we are ducking the big issue that we need to address to fix our own vulnerable economy, and that is a
shortfall of domestic saving a classic false narrative. The Chinese side is, you know, equally if not even more culpable. The one I'll single out for you is China recognized now nearly twenty years ago that it needed a restructure, rebalance its economy, and shift from an economy that was reliant on exports and investment a one that drew increasingly on consumer demand. They haven't done that. They blame that
on America's stated policy to contain China's peaceful rise. Uh. The US does have a containment policy UM that has aimed directly at China, and that's a UM, you know, a key theme in many aspects of my book. But America's efforts to contain China have literally nothing to do with China's own inability to rebalance its economy to be driven more by internal private consumption. China's dropped the ball on this for a number of reasons that I detail
on the book. But by fixating on US containment, they're guilty of an egregious false and narrative with respect to the US. I think as an economist, you've you do
more in this book. I think that most people to to show the interconnections between that great power rivalry and the macro economic imbalances that opened up between US and China once China's growth took off, and as you've just explained, you end up with this sort of what you call a codependency, with the insufficient savings by the US being being matched by this massive trade deficit and if you like,
excess exporting U by by China. And you've just highlighted there in a sense that was what each side has done wrong in failing to kind of get to grips
with that. But I'm interested going forward. I mean, there is obviously an element of this which is just about China getting stronger but continuing to be very different from the US in terms of its values and the kind of global order that it wants to participate in, and the US increasingly thinking it should try and thwart that development, having kind of given up on the China becoming a
more like the US. So I just wondered, how does that that sort of classic view which says, you know, the US tried was hoping that the China was going to become, you know, like Europe, and it's not like Europe. So now it has to just stop it being a prevent providing a rival economic system for the world. Not so sure that the US wanted to China to be like Europe. I think the US wanted China to be
like America. UH. And this is a I think a hopelessly naive expectation that was framed around the time of China's push for w t O membership UM that took over a decade to negotiate. Finally UH culminated UM under President Clinton in late two thousand one h and his argument that he made to the Congress is, UM, you know, if we don't allow China to to join our system, than others are going to benefit from China's extraordinary rise.
And by finding China to an American centric trading system under the w t O, UH, it's compliance with those rules would pretty much turn it into a system that mirrored hours that was that was just hopelessly naive. And this is a Washington failure as well as a European failure, and probably a Chinese failure as well. Lies at the
heart of this conflict. The notion of coexistence, which is something that UH Henry Kissinger still as he's nearing a hundred years old right now, continues to stress as the ultimate um UH resolution for the U. S. China conflict um needs to be much more open than it has been under this sort of false premise of mirroring one
systems values with the other. I was baking at the U. S. Treasury just as that deal was being finalized at the end of end of the nineties, and I guess the debate was had about whether it was realistic um to expect the China to be on anything like that trajectory. I guess the question arises of what's the alternative if you're Donald Trump or indeed some in the Biden administration that was the sort of original mistake was to let China into the World Trade Organization. But I'm not I'm
not sure that you're saying that was a mistake. You just think we should have told ourselves a different story about it. I don't think it was a mistake at all, because you know, by engaging China and bringing China into the w t O, that was a powerful driver of of Chinese economic growth at that time and really powered its export led momentum. And from those exports, you know, income constrained American consumers are able to expand their purchasing
power over low cost and increasingly high quality Chinese goods. UM. China became the largest purchaser for a long time of the U S treasuries to enable US to fund our budget deficits, and the Chinese market as our America's third largest and most rapidly growing export market over the last twelve or fifteen years. So there were huge benefits that occurred. And I think the mistake we made is that we
wanted more. We expected China to transform uh it's system in a way that uh matched not just our economic needs, but are political and social value system. And you know, there there was reason to hope that that was occurring, UM under the sort of dunk shopping model of a market based socialism, where China was certainly taking on an opening up to a lot of Western values. But then along came Shi jin Ping ten years ago who reverse course on virtually all of that counter and we've taken
enormous exception to that. Listening to you the way you describe China's motivations and it's different outlook on the world and indeed talk about coexistence, UM. You know, many would say that the title le Ville book sounded a bit odd because it doesn't sound like the conflict is accidental at all. I mean, you have a new rival power in the world which has very different views of kind of basic notions of whether it's press freedom or human rights, democracy,
any of these things. I mean, it's sort of inevitable that they will come into conflict with the West broadly speaking, who believe that these values are important? Isn't it? Well, certainly to very powerful nations, you know, one the ruling hedgemon if you want to call it, for lack of a better term, and the other arising superpower, there was
always the possibility of of conflict UH and friction. The concept of accidental conflict says that that by embracing false impressions, false narratives of the other, we build on these mistaken views that we harbor their politically expedient for our own purposes, and the false narratives UH collide, they duel with one another, and they have the potential to become the high octane
fuel of conflict escalation. And again back to the to the first sentence I I uttered to you today, and that is, you know, in five years, we've gone from trade war to tech war to early stages of a new Cold war, that high octane fuel can be easily ignited by a spark. Taiwan, South China, see China's unlimited partnership with Russia, who is now waging an unconscionable war, America's own vulnerabilities, global recession, which is a distinct possibility
this year. Any one of those are sparks that when when you are embracing increasingly intense false narratives, could lead to an accidental clash. I mean, just a few days ago, um I saw a report I'm sure as you did, of a fighter jet over the Chinese fighter jet over the South China. See that came uh extraordinarily close to an American aircraft. Uh. Accidents can happen, and big wars, world wars have been started by accidents in the past, and so I shows that title to express that potential
in the context of this conflict. But those are genuine reasons why we might conflict with China, they're not They're not false reasons. China wants to take back Taiwan, which as far as we could see, does not want to be back in as part of China. Um it wants to have an unrivaled supremacy in East Asia, where we have and the US has powerful allies and security relationships. So is that a false narrative to be that China does want to take over these things and we don't
want to let them. That seems to be the sort of uncomfortable truth. Those are Those are legitimate areas of dispute one s I believe strongly in and as does the other. I'm not arguing that those are false. But what I'm saying is that the confluent of these false narratives makes dispute resolution over legitimate issues all but impossible. I do end the book, you know, with a prescriptive approach to resolve disputes UH in the context of a
conflicted relationship. The current architecture of engagement between these two UH leading superpowers is completely dysfunctional. The nations don't talk to one another. When they do talk, it's you know, it's zoom calls or There was a three hour plus meeting in Bali ahead of a G twenty meeting in
November that accomplished nothing. And I make a fairly detailed proposal for a new organization that I call a U S China Secretariat, a permanent organization located in a neutral venue that is empowered to address all aspects of the relationship, from trade and economics to technology, cybersecurity, human rights, health fully staffed by equal complements of Chinese and American professionals working full time seven on all these and other aspects
of the relationship. Two frame problems AH provide mutually authored UH policy white paper, sometimes with dissenting views from one from from one side or the other, but stressing a collaborative approach toward dispute resolution rather than the current contentious approach that we have right now. This relationship needs a far more role bust platform for engagement. And this may not be the perfect suggestion, but it sure as heckt
beat what we've gotten now. Well, it's interesting that I, you know, we've talked to quite a lot of people about this issue over the months, and they all whatever whatever direction they come from, they all end up with a version of what you're talking about. There's a way of starting to rebuild trust, because that's one of the things that we worry has really gone by the wayside. I had we're going to run out of time, but I had two more questions for you and one of them.
And it will sound a bit self interested since I'm sitting in the UK asking this, but I wonder whether you did think there was a role for Europe in UM helping to reduce the false narratives and potentially rebuild trust.
And the reason I say that is although obviously the European Union has been, if you like, on the U S side of many of these disputes, it's also been much more reluctant than the US to see this as a zero sum conflict, and somewhere like Germany is obviously very torn about and very concerned about the possibility of a decoupling of the global economy. How do you see Europe's role? Is it completely just a bystander in this and how this relationship evolves, or could there be something
more constructive that Europe could contribute. Europe is certainly not a bystander. It's a uh, you know, an important actor in the global economy, in the geopolitical arena, and does have i'd say more mixed feelings about its relationship with China right now than as evident certainly the United States UM. The US administration, however, has been putting a lot of pressure on its European allies to take sides in this dispute,
and that's an uncomfortable place for Europe to be. But I think UH Europe has ample leeway to chart its own course with respect to China and to point out that some of the UH the issues that the US takes UM is such a close to an existential threat in the technology arena, for example, are things that Europe is handling very differently. And I would cite UH the the Huawei centric US fixation on the Chinese technology threat. Huawei has UH still has a significant presence in many
European UH telecommunications sectors. Huawei has been investigated assiduously by the UK, by Italy and by other European economies, and the egregious threats of espionage that the US just takes for ranted through Huawei's UM the state of the art five G telecommunications infrastructure have never been validated. There was one instance of a backdoor leak UH in Italy a number of years ago that Huawei was quick to resolve.
The Italian telecommunications providers have actually increased their reliance on Huawei since then. So I think that technology which is such a a major aspect of the growing conflict between the US and China is one that the Europeans could play a very constructive role in mediating and pointing out.
I would hope a more constructive outcome. That's fascinating because of course there'll be lots of people very focused on this issue, clamoring as they listen to this to say that that's a that the European position that presents a naive view of of Huawei and the is always that point that's made that even if it's not happened yet, you know, there is a legal requirement for any Chinese company if if asked to provide information to the government,
especially under sieg ng Ping. That's been quite clear. Yeah. I think the idea of trying to wall off one nation, one systems platform for from another because of the difference in systems that we've addressed earlier is the taking decoupling to its most destructive endpoint, and I think we need to avoid that. My final question is a bit more personal, Stephen.
I mean, as long as I've been thinking about the global economy and sometimes and writing or reporting about it, um you have been an observer and an analyzer of of the global economy, but also US and China particularly, and having spent a lot of time in Asia, obviously, I just wondered whether they were looking back. I mean, what have you changed your mind on? I mean, when you see how the world has evolved relative to what we might have thought, say in the early nineties, Um,
how have you been surprised? Have you changed? I mean, you obviously have changed your view in some important ways, both with regard to US and China in light of events. Yeah. Yeah, it's been a journey for me. Um. You know, I would say, um, you know, the perch I had at Morgan Stanley for thirty years was really, um, you know,
a great um sort of learning experience from me. For the first half of that I was US based, focused on the US economy, which is something I did at the Federal Reserve prior to coming to Wall Street, and I was heading up the global economics team. And then along came the Asian financial crisis the late nineties. Uh. And you know, I'd been to Asia a lot, and I've been to China a few times, but I had
no idea really what was going on inside. I had a hunch that China would really shape the endgame of what was then the worst and first crisis of globalization. Little did we know, but that's the way we thought of it then, and UM it quickly became evident to me that China was cut from a different cloth and would come out of the crisis um uh much better than the rest of Asia, especially Japan, which had been
the leader. And so I switched my my role. Then I became a global economists fixated on Asia, especially on rising China, and eventually moved to Hong Kong and headed up Morgan Stanley's Asian businesses. And you know, I was really convinced that China's transformation along the lines of the dunk shopping model was really going to UH lead to a powerful unstopp of bowl engine, of a new engine of of global growth that UH could could benefit the
West as well as itself. And then, as I indicated earlier, long term chijin Pain who has reversed much of that with this fixation on ideology and control that has had limited UM has limited the consumer and rebalancing at a time when China needs it the most. China has an aging population UH and the working age population is already contracting, and so when you have a contracting working age population, to stay the course of growth and prosperity, you need
an acceleration of productivity growth. That's the economist in me. And under Shijing pain, productivity growth is going the other way, and so China is in trouble. Uh. And that has really been a tough pill for someone like myself who has been a die hard China optimist, A swollen Stephen Roach. That's a hell of a note on which to end, but I think we will try to do that. Thank you very much for your time and thanks for your book. Thank you, Stephanie. Great talking to you. As always. That's
it for Stephanomics. We'll be back next week. In the meantime, please rate us wherever you get this podcast, and check out the Bloomberg News website for more economic news and views on the global economy. You should also follow at economics on Twitter. This episode was produced by Yang Yang, Summer Saddi, and Magnus Henrickson, with special thanks to Stephen Roach and Chris Hadsty. Mike Sasso is the executive producer of Stephanos