In his wide-ranging and immensely readable book, Stephen Roach explores the relationship between China and the US. He skilfully analyses the pattern of post-1945 economic development in the two and teases out the various imbalances, interestingly, based on ex-Premier Wen’s famous critique, the ‘Four Uns’ – Unstable, Unbalanced, Uncoordinated and ultimately Unsustainable.

He describes the evolution of the imbalances as two sides of the same coin: China saves too much, the US too little; China spends too little, the US too much. A well-known story, of course. In discussing the nature of the build-up of China’s trade surplus, he explores the make-up of trade and the proportion attributable to multi-national companies, whose were driven lower as a result, helping to hold down prices and thus inflation. This, along with the inflows of excess capital to US markets from China, helped to hold down US interest rates, facilitating the build-up of the unsustainable property and credit bubbles in the US. He points out that China is the largest supplier of goods to the US, greater even than its fellow NAFTA members, Mexico and Canada, because of the growing supply-chain interlinkages. The end result, in his words, is an unsustainable disequilibrium.

So how has this happened? Roche authoritatively addresses the role of policy makers. He draws parallels between Wen (Jiabao) and Ben (Bernanke) who he calls The Professor. Ben embraced the mantra of free markets, but – in deference to his analysis of the Great Depression – also the need for financial firewalls to protect the domestic economy and the banks. Wen is described as a traditional leader who successfully put a human face on China’s notoriously anonymous leadership. He, courageously, was the first to challenge the status quo with his analysis of China’s problems: the Four Uns.

Roche looks further back at Zhu (Ronghi), another Chinese ex premier, ‘The Boss’ and Alan Greenspan, ‘The Maestro’. Here contrasts emerge. The Boss is a problem solver, having implemented Deng’s initial reforms, with a laissez faire attitude and an analytical approach. He was a practical man (involved in the development of Shanghai’s Pudong district, its modern financial district). The Maestro, however, started off as an industrial economist – micro, not macro – who was also laissez faire, and keen on financial innovation. However, his early experiences as Fed Chairman were in the aftermath of the 1987 equity markets crash, hence the emergence of the famous ‘Greenspan put’, providing a floor for markets. Zhu, by contrast, relied on facts, not ideology.

While China has a strategic and long-term approach to policy, and a good record of implementation, the US eschews any hint of long-term planning, instead relying on the markets to deliver equilibrium. But markets are not always right.

The dilemma of co-dependency is that it has magnified the strains surrounding globalisation. Is the relationship zero-sum? Is one’s gain the other’s loss? Or is it win-win? Whereas the first phase of globalisation (the Industrial Revolution) and its aftermath took 150 years to reach critical mass, the second phase has taken just 20 years.

Such a shift means differences in the scope, means and speed of change, and has left the politics yet to catch up: China being stronger is a source of angst for the US, rather than being seen as a potential opportunity.

Yet the US has a trade deficit with 102 countries. So it is not just China that is the problem, rather the US’s own propensity to consume and import, instead of produce. But the US is in denial that it needs a new growth model, whereas China has already identified some of what it needs to do. This reflects the recognition in Beijing that a consequence of the stimulus measures to avert the worst of the Great Crisis and the Great Recession has been to sow the seeds for new risks.

Now the flaws of the respective models have been exposed, both sides have to make changes in how they manage policy going forward. Clearly, the US has to invest more and export more, while China does the opposite. Roche helpfully points to flaws in the global policy architecture, especially the lack of a collective strategy, instead relying on the sum of each country’s policy. Such complacency cannot continue. Policy mistakes, like the catastrophic Smoot Hawley tariff of the Great Depression, have to be avoided too.

So what to do?

The US needs to improve its competitiveness. On the WEF’s measures, it has fallen to seventh from first in 2005, because of its poor macro policy, its fiscal weakness and the political brinkmanship managing it, its weak institutions, both public and private, and its poor healthcare and primary education facilities. And it has to change its mindset: no more accusations of currency manipulation (just resuming, worryingly), instead rather more structural reform, saving and producing.

China has to boost its consumer spending, Roche suggests by drawing on US expertise and services capacity, as well as the usual mantras of boosting the social welfare safety net, still woefully inadequate. He states that the average pension pot for members of the state retirement plan was $1690 in 2010. If all workers were entitled, each would have a pot of just $565. Scary. No wonder Chinese saving is so high. China also needs more jobs, higher wages, more financial security and more services.

Is the Internet the answer?

For China, social networks are helping coordination and stability, by facilitating communication, albeit within Beijing’s restrictions which allows it to defuse tensions. More services – hotels, distribution, professional services – would help incomes and employment. Urbanisation would give an additional boost. More consumption would improve imbalances, thereby helping sustainability. Bingo! The trouble is that China’s consumers are conservative and cautious, not like the US. And the internet in the US has in fact brought polarisation.

The risk is that China bashing resumes in the US and the opportunity of the win-win resolution is lost – to both. Not such a resolution then.