What's at stake for U.S. economy in competition with China

Yale University Senior Fellow Stephen Roach joins Yahoo Finance Live to discuss potential economic solutions discussed at the G7 conference in Hiroshima, Japan, concerning the relationship between the U.S. and China., globalization, and the production of semiconductors in the U.S.

Video transcript

JULIE HYMAN: World leaders gathered for the G7 summit in Hiroshima over the weekend to discuss potential solutions to some of the biggest global economic challenges. One of those issues remains managing America's relationship with Beijing. President Biden left the trip on something of a positive note, saying he expects relations to improve shortly.

JOE BIDEN: Now we're also united in our approach to the People's Republic of China. And the joint statement released yesterday outlines the shared principles we've all agreed at the G7, and beyond, dealing with China. We're not looking to decouple from China. We're looking to de-risk and diversify our relationship with China.

JULIE HYMAN: But soon afterwards Beijing announced an effective ban on us memory chip giant, Micron, as tensions rise between the two nations. Our next guest says the escalating conflict comes with significant economic costs for all concerned. Let's bring in Stephen Roach, Yale University Senior Fellow. He was formerly Chairman of Morgan Stanley, Asia. Stephen, it's good to see you. And a really good time to talk to you, as we see the G7 winding up, but now this Micron news hitting. How should US investors, in particular, be thinking about the relationship between the two countries, and the repercussions of this current tension?

STEPHEN ROACH: Well notwithstanding the President's positive spin that he put on the joint statement of the G7, and directed at China. I think the conflict remains ongoing. The Micron action by China is basically a retaliation for earlier sanctions that the US put on Chinese access to advanced semiconductors and semiconductor production equipment, coming out of the US, Japan, and the Netherlands. The statement of the G7 was a lot of spin. This distinction that the President noted that you highlighted between decoupling and de-risking, that's really playing a cute with rhetoric.

When you transform a supply chain dependence through the principles of diversification away from China, at a minimum that's a partial decoupling. And splitting hairs as diplomats always want to do in these difficult conflicts and other situations doesn't really get away from the bottom line that we are leading a Western push away from China. And this idea that is de-risking, as opposed to decoupling, I think, splits hairs.

BRAD SMITH: We had Interactive Brokers, Steve Sosnick on earlier, Stephen, to tell us that globalization is clearly in reverse as we were discussing the news coming out of China, impacting Micron, but has some broader implications as well. With that thought in mind, if globalization is in reverse to the extent that it's beginning to overflow and impact the US economy, or even specific companies here, where can the Biden administration perhaps net some type of movement forward to reverse the reverse, if you will.

STEPHEN ROACH: Well, first of all, Steve Sosnick is my next door neighbor in Connecticut. So I agree with everything he says. But the point on globalization in reverse, it's an important point. And globalization is being blamed for a lot of problems in terms of inequality and pressures on workers, and those concerns are certainly understandable.

But the flipside of globalization was the efficiency solutions that offshoring has offered for multinational producers, and for the consumers that they serve. And so when you move away from these efficiency solutions, and just say you want to bring things back home, or push production to other producers, there's a cost associated with it. And it's borne by profit margins of our multinationals and, ultimately, American consumers. So again, you can't have it both ways here, you need to think about the consequences of this political initiative.

JULIE HYMAN: And so just again, to put a fine point on what you're saying, because this is something you've written about for Project Syndicate, that basically, while we're getting all of this political posturing, the costs are not being made clear, perhaps, to the American people. So not that that's unusual, that politicians would not make those costs clear, but what do Americans, both consumers and investors need to understand about this tension, and how bad it could be for the American economy?

STEPHEN ROACH: Well the point I tried to make last month is that conflict does not come without costs. And there's some very creative research that has just been published by the IMF, and by the staff of the European Central Bank that really identifies those costs as being twofold. One, the supply chain disruptions, which lead to a reduction of global output in the long run of about one percentage point, which is a big deal.

And secondly, the higher cost pressures that we were just talking to, that boost global inflation also by about one percentage point over the long term. So this conflict, to boil down to a simple word, very stagflationery, lower output, higher inflation. And we can't pretend that we can engage in conflict with a nation that has been for a long time our primary offshore supplier, and not face up to the consequences of what that conflict entails.

BRAD SMITH: As we think about international partners of the US historically, Japan has been one area that's also gotten a lot of focus recently, and perhaps for our own conversations, because Warren Buffett, the Oracle of Omaha, has invested so much, or placed more interest in Japan in this near term period of time. Do you imagine that there are other entities, other countries, where the US can, in the absence of China, drum up more of a partnership that is beneficial to both economies?

STEPHEN ROACH: Well I think the US certainly has long had a constructive economic relationship with many countries in East Asia, especially Japan and South Korea. But keep in mind, in the 1980s, Japan was in the position that China finds itself today. Our trade deficit was then incorrectly thought to be Japan's fault.

And we put enormous pressure on Japan. And Japan made some big mistakes in responding to our pressure that have played an important role in creating virtually three lost decades of near stagnation. But all is forgiven in the blunders of economic policy and conflict, and we're certainly embracing Japan right now as a security partner to address China, and indirectly to address Russia, and the same is true of South Korea.

Whether or not Japan can step up and provide the same type of efficiency solution for our multinationals that I just alluded to is highly debatable, and Japan is a much higher cost nation. And so if we shift some of our production from China to Japan, it doesn't come without considerable costs to our companies and our consumers.

BRAD SMITH: Really great insight. Our thanks to Stephen Roach. Stephen, thanks for taking the time this morning. Appreciate it.