Few would dispute that the U.S.-China relationship is the world’s most important bilateral economic relationship. Few would also dispute that this relationship is now deeply troubled. Notwithstanding hope of an imminent trade deal between the two nations, a tariff war remains in danger of morphing into something far worse. How did we get to the flash point, and what can be done to avoid a more serious and protracted clash?

To answer these critical questions, it is essential to delve into the character of the relationship. At its core, is a deeply entrenched codependency, with each nation depending heavily on the other. Yes, China has long relied on the U.S. as its most important source of external demand — key to its export-led economic miracle. At the same time, a saving-short U.S. has depended on China as an important source of surplus saving, its largest foreign owner of U.S. Treasuries, and its third largest and most rapidly growing major export market.

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