Watts was a voice from the 1960s bringing Eastern spirituality to the West. Here he reads from a Jung essay and puts it in context. Summary, in my words:
Christian morality and, actually, all of Western morality are based on the individual harnessing the good within himself and conquering the evil through an act of will. In the Daoist tradition, on the other hand, good and evil are interdependent and inseparable.
Jung's psychology emphasized acquainting oneself with the dark side of one's own personality. Watts says that Jung had mastered this in his own personality. Jung was able to understand and help people with their own dark impulses because he had made peace with his own.
This doesn't mean that the distinction between good and evil is arbitrary. Watts speaks paradoxically about political struggles in the real world. We can fight passionately with all our being for what we know is right, and still recognize that in doing so we are playing a role in a grand drama, and that the drama as a whole is "good" in a way that transcends the good/evil dichotomy within it.
Acceptance of oneself is the essence of the moral problem, and the acid test of one's whole outlook on life. That I feed the beggar, that I forgive an insult, that I love an enemy in the name of Christ All these are undoubtedly great virtues. What I do to the least of my brethren, that I do unto Christ.
But what if I should discover that the least among them all, the poorest of all beggars, the most impudent among all offenders, yea, the very Fiend himself, that these are within me, and that I myself stand in need of the alms of my own kindness? That I, myself, am the enemy who must be loved. What then?
Then, as a rule, the whole truth of Christianity is reversed. There is then no more talk of love and long suffering. We say to the brother within us: Rocca, and condemn and rage against ourselves. We hide him from the world. We deny ever having met this least among the lowly in ourselves. And had it been God himself who drew near to us in this despicable form, we should have denied him a thousand times before a single co*k had crowed.