Interview with Stephen Roach: Trade relationship may be "off-track"

Jul 18 , 2019

Stephen Roach is the former Chief Economist at Morgan Stanley and a current Senior Fellow at Yale University's Jackson Institute for Global Affairs. He says the U.S. depends on China as a low-cost source of foreign goods, funding of chronic budget deficits, and opportunities for American exporters. In this interview with James Chau, he also talks about his work in teaching the 'Next China' course at Yale University for almost a decade - a way of informing America's educational elite on the future ahead.

This interview was recorded at the US-China Trade and Economic Relations Forum in Hong Kong on 9-10 July, 2019. 

JC: Stephen Roach, thank you very much for your time. As we sat down, you noticed this headline over here, "Back on Track." So the President says after he met with Xi Jinping on the sidelines in Osaka, you said, "off-track, maybe." What does that mean?

SR: Well, what is the track? If we're going back to the prior framework before the negotiations broke down in early May, that's a track to nowhere. It features a focus on a reduction of the bilateral trade deficit between the US and China, which any economist, except those who work for the Trump administration, will tell you gets the United States nowhere. And then it has a framework to talk about structural issues that involve major one-sided capitulations from the standpoint of China, but very little in the way of compromise offerings from the US. So, if that's the track, it's a track to nowhere.

JC: There is this thinking amongst some people in China who subscribed to this theory that all was good pre-Trump, and now it's all changed. But in fact, there were clear signs before that, that it wasn't all brilliant. It wasn't all rosy, so to speak. So, how would you describe that track and what is the track that you would want to see established?

SR: There's been a growing, ominous shift in the US-China relationship I'd say over the last 10 years, which predates Donald Trump by a long shot. The view is that American manufacturing, both companies and workers, had been put under enormous pressure since China's accession to the WTO, and that is a key reason that many politicians and their advisors, Republican and Democrat alike, feel that China needs to be held accountable for the pressures bearing down on American middle class workers and families. And then a whole, what I call a false narrative, has been constructed to rationalize that. From focusing on the trade deficit, to intellectual property theft, to forced technology transfer. To cyber hacking, to state sponsored, industrial policy. All of these, arguments had been blown way out of proportion, relative to the actual facts, that have laid the responsibility for these pressures on the American middle class on China. And it sells well in political circles, and it's going to be very difficult for the next president, whether it's second term Donald Trump, or a Democrat who defeats him, to reverse that course in a short period of time.

JC: As you said, it sells well in political circles to those who vote for you, obviously. But as an economist, we know that economic stability leads to social progress, which leads to peace as well. What's the opportunity cost here, right or wrong, if they don't get this fixed?

SR: Look, there's no doubt in my mind that the rise of China has played an enormously beneficial role in influencing the global economy in general and the US economy in particular. In the United States, for example, we depend on China to provide American consumers with low cost source of foreign goods that helps income constrained American consumers make ends meet. We depend on China to help us fund chronic budget deficits. China owns the largest share of foreign holdings of Treasury securities. We depend on China to provide opportunities for American exporters. China is our third largest and most rapidly growing export market. So to say that, you know, we don't need China, is sort of missing the opportunities that have fallen our way in a significant fashion over the the last 10 to 20 years.

JC: You are not just one of the most influential economists of our times, but you extend that to the youngest generation of brilliant minds. You teach over at Yale, you're part of that process of this generation. What are you teaching them and what are they informing you in return in your classrooms?

SR: I teach a course and I've taught it now for nine years. Next year, it'll be the 10th year, called "The Next China." And it's a course about basically the modern Chinese economy, starting off with the origins of the Reform and Opening Up of Deng Xiaoping post-Mao in the late 1970s. And then I talk about the pivotal realization that occurred right around 2007 when a former premier, Wen Jiabao, spoke of a Chinese economy that was unstable, unbalanced, uncoordinated, and ultimately unsustainable. And how that ushered in a debate for the structural rebalancing of China, from exports and investment, to internal private consumption. From manufacturing the services from surplus saving to saving absorption, and finally from imported to indigenous innovation. So I teach the students about these transitional imperatives of China and where they're going to take China over the next 20 to 30 years. And then how that fits into the challenges that China faces in the broader global economy in general, and with respect to the US right now, in particular. So it's a course in the transition of China and it's the most popular economics class at Yale on China, and the students are fully engaged. I teach all between 150 to 200 students a year are in that class, a large number of them, maybe a quarter of them are Chinese students who want to learn about China from the Western perspective. I put a lot of time and effort into changing the course every year. I'm in the middle of doing that right now this summer.

JC: You've had this incredible career. We haven't even touched on the banking and financial sectors as well. I would like to ask you in closing: if you could bring the knowledge that you share with your students at Yale and transport it to a mass number of students in China today, what are the two things that you would tell them in how they can secure global future, and that process is inclusive of Americans and other people.

SR: Well, there's no real silver bullet. The realization by the Chinese leadership that the model that worked for 30 years is not a sustainable model for the next 30 years is a powerful realization. And so, if I were teaching my class in China, I would make the same point that I make at Yale, that the pivotal change that began in 2007 that is very much in evidence today is a strategic adjustment that needs to be sustained at all costs. And that the focus on that change should not be reduced because of trade tensions on the United States, or others. I would stress that point emphatically. And the second point I would stress is that the same pivotal change that really underscores my view of "The Next China" is in China's best interest. It's in China's best interest to have a broader economic model that moves out from manufacturing as the factory of the world, to providing services and goods for its own people, for a system that put too much emphasis on rapid growth and not enough emphasis on the quality of growth to deal with environmental [issues] and income inequality. These changes are all in China's best interest and a stronger China that stays the course of this transformation is in a much better position to deal with pressures that are being brought to bear on it by the rest of the world. If you're stronger from within, you're much better equipped to deal with pressures from the outside. If you're weak inside, then the outside pressures strike you when you are most vulnerable.

JC: That's a very, very powerful thought to finish up on— with the strength from within and this ability to negotiate the pressures from the outside. Stephen Roach, thank you very much.

SR: Thank you. Good to talk to you.