The U.S. has recently escalated trade frictions with China by imposing a new tariff hike. In response, China announced on May 13 that it will raise the rate of additional tariffs on some of the imported U.S. products as of June 1. Stephen Roach, a senior fellow at Yale University and former Chairman of Morgan Stanley Asia, shared his views on the underlying causes of the dispute in an interview with Beijing Review. His main points follow:

The events now qualify as a classic trade war—tit for tat tariffs, with China responding proportionately to each and every one of Trump's moves.

To the extent that Trump continues to up the ante, putting tariffs on the remaining $300-325 billion of Chinese shipments to the U.S., I expect China to do the same and put tariffs on the remaining $60 billion of U.S. imports into China.

I think there is a 60-percent chance that U.S. President Donald Trump and Chinese President Xi Jinping resolve the trade conflict before or during the upcoming G20 leaders' Tokyo summit in late June. It is in the self-interest of both leaders to achieve a ceasefire.

Unfortunately, the coming deal—if and when it is struck—is likely to be a superficial deal featuring China's commitment for multi-year purchases of U.S. products. This is a superficial deal because it addresses the least consequential aspect of the economic conflict—the bilateral U.S.-China trade imbalance. The U.S. has a multilateral problem—trade deficits with 102 countries in 2018—because of a major shortfall in domestic saving. Trump will achieve little by attempting to achieve a bilateral solution for a multilateral problem. This is a classic problem in macroeconomics that the U.S. administration either ignores or does not understand.

Apart from the futile attempt to resolve the trade deficit, there is little chance that the coming deal will feature a breakthrough on the tough structural issues raised by the U.S. —intellectual property, forced technology transfer, cybersecurity, and state-sponsored industrial policy. Rhetoric may change but China is unlikely to change its system in response to U.S. pressures. The likelihood is high of lasting conflict on these issues—suggesting the distinct possibility of an economic Cold War between the U.S. and China that leaves me quite concerned about the long-term economic relationship between the two nations.

This conflict is a very real manifestation of a dysfunctional U.S.-China codependency—the subject of my 2014 book (Unbalanced: The Codependency of America and China published by Yale University Press). Both nations harbor deep rooted existential fears—China fears U.S. containment of its growth and development and the U.S. fears that China threatens its future prosperity. The best way to address those fears is by strengthening from within rather that lashing out at the perceived threat. For China, that means continuing to focus on structural rebalancing—from manufacturing to services, from exports to private consumption, from imported to indigenous innovation, and from surplus saving to saving absorption. For the United States, it means focusing on a rebuilding domestic saving by containing longer-term budget deficits—thereby boosting long-term competitiveness by having the domestically generated wherewithal to fund investment in productive capacity, infrastructure and human capital.

Unfortunately, I am more optimistic that China will be better able to achieve these objectives than the United States. That will only deepen America's existential fears of China—prolonging the current conflict for years to come. I fully realize that such a prognosis is at odds with longstanding win-win hopes. In light of current and prospective developments outlined above, more realistic assessment may well be in order.

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