Chinese President Xi Jinping and U.S. President Donald Trump in Beijing, China.
Artyom Ivanov | TASS | Getty Images
Place your bets for the coming race to growth.
It will be an epic contest among the world’s most significant economies, with generational and geopolitical consequences. For context, think back to what the United States accomplished after World War II, when it rose as an economic power to shape a better world.
The post-COVID19 race could determine whether the U.S. rebounds in a manner that allows it to retain the mantle of global leadership. More likely for the moment, Beijing could leverage its first-mover advantage – alongside a faster economic recovery across Asian markets – accelerating the trend toward a Chinese-centric globalization.
Elsewhere, as President Macron argued this week to the Financial Times, the coming months could determine whether the European Union collapses as a political and economic project. The days ahead also could trigger a dangerous widening of the economic gap between emerging markets and the developed world – with escalating conflict and surging migration.
It may seem premature to reflect on which of the globe’s economies is likely to have the most robust and lasting economic comeback – and with what geopolitical impact. After all, this was a week in which the International Monetary Fund projected a 3% contraction in global GDP for 2020, the most dramatic drop since the Great Depression.
Yet it is the details behind that dismal forecast that should raise concerns within the U.S. and Europe. Their steeper economic decline and slower recovery could lay the seeds for a long-lasting shift of global tectonic plates to China’s advantage.
The IMF projected a U.S. economic decline of about 6% in 2020 and a contraction of the eurozone of 7.5%. That compares to projected Chinese economic growth for 2020 of 1.2% after a first quarter real decline of 6.7% – far less than the 10%-plus dip many experts had expected. The only group of countries in the world projected to be in positive territory are East Asian, at roughly 1%.
Even if one accepts that Chinese coronavirus fatalities likely are greater than their public figures and that the growth decline is likely larger, that doesn’t change the potential for a scenario that Deloitte and Salesforce this week referred to as “Sunrise in the East.”
Describing this scenario, as one of four possibilities they list, they write, “The global center of power shifts decisively east as China and other East Asian nations take the reigns as primary powers on the world stage and lead global coordination of the health system and other multilateral institutions.”
That comes with the broader acceptance of greater surveillance mechanisms as part of the public good, a faster recovery of East Asian countries with less economic impact from COVID19, and a significant ramping up of Chinese foreign direct investment to burnish its global reputation.
Still, the U.S. has a host of incumbent advantages that could serve it well if it uses its economic recovery to also strengthen its infrastructure, if it reverses runaway unemployment quickly, if it can tame political polarization and, most significantly, if it rediscovers its taste for collaborative global leadership.
In the economic race, no advantage is greater than the dollar.
China may be the world’s second largest economy, but the Chinese yuan makes up only 2% of global payments and reserves while the dollar accounts for roughly two thirds of foreign exchange reserves. The dollar underpins four-fifths of global supply chains.
The Economist reckons China could chip away at U.S. economic advantages through three underestimated strengths of its own: as a trusted debtor, an attractive creditor, and increasingly as a tech partner.
As a debtor, China’s $13 trillion bond market is the world’s second largest and has weathered the crisis well. Chinese debt returned 1.3% in the first quarter, vastly better than the 15.5% decline for other emerging market bonds. Over the same period, the Chinese market added $8.5 billion (60 billion yuan) in net inflows.
As a creditor, China has remained willing and generous, an approach that served the U.S. well after World War II. For example, it declared its willingness to back a G20 deal to suspend bilateral loan repayments by poorer countries, a sizable benefit also at its own cost.
On the tech front, few countries were as ready as China for money and people to go entirely online. Tencent and Ant Financial have more than a billion users each for their digital wallets, and they are expanding rapidly throughout Asia. OneConnect, an offshoot of China’s largest insurer, provides financial institutions in sixteen Asian countries with cloud-based services.
So, what other advantages can the United States leverage in this race?
Never underestimate the brittleness of an authoritarian country under stress. Its broad censorship, it’s opaque legal system, and the nature of its surveillance state are hardly models to emulate.
Beyond that, Japanese Prime Minister Shinzo Abe is not alone in proposing that his country relocate high-value supply chains from China. If many countries do the same, the manufacturing foundation of China’s economy could erode.
The Financial Times’ Gideon Rachman adds that the global trust in the dollar is just one of two built-in U.S. advantages that are difficult to dislodge.
“Where, outside your home country, would you most like your children to go to university or to work?” he writes.
Most significant in this race would be if the United States regained its appetite for political and economic leadership as the world’s premier “convening power.”
That need not be done at the cost of China – or anyone else.
The race still can be won if U.S. leaders see it as a marathon and recall that much of the world long embraced their global leadership because partners learned they were more likely to win as American partners.
This economic rebound from COVID19 will be patchy and uneven. Being first out the gate will be significant, and that is likely to be China. Yet history has taught the United States that it’s victory will be longest lasting if it can achieved alongside partners and allies.
Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States’ most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper’s European edition. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth” – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week’s top stories and trends.
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