No matter who wins the U.S. election, the United States is sure to continue in its efforts to “decouple” from China. Yet despite all the rhetoric and bravado, it is going to be extremely difficult for any U.S. president, or any country for that matter, to try to decouple from China’s economic prowess. That horse left the barn a long time ago.
The American strategy for keeping China’s economic strength restrained would look markedly different under each party, and it isn’t even clear that either Democrats or Republicans could be successful. While Republicans would be inclined to continue President Donald Trump’s aggressive tariff approach, the Democrats would likely put pressure on China through a coalition of allies, while maintaining some of the current trade restrictions. Joe Biden has made much of his “Buy America” position, and much of that reinvestment back home would likely come at the expense of Chinese production. But there is a price to be paid, if this relocation ever does happen, through a higher cost of production in the United States.
We also must bear in mind that China is coming out of this pandemic stronger than the U.S. or Europe, and any attempt to isolate it by the West could well backfire. China’s resilience is already showing up in the data. The International Monetary Fund’s latest outlook is titled A Long and Difficult Ascent, but in the case of China the ascent has been anything but. The country was the first to begin lockdowns, with most restrictions relaxed by April just as the rest of the world was battening down the hatches. Since then, it’s managed to avoid a second wave while elsewhere daily case counts continue an inexorable rise. The world’s second-largest economy is now expected to grow by 1.9 per cent this year, picking up to 8.2 per cent in 2021. By the end of next year, while America’s economy will be smaller than it was in 2019 (by about 1.3 per cent), China’s will have grown by 10.2 per cent, narrowing the gap between the two superpowers considerably.
Keep in mind, too, that this has been achieved without the country embarking on radical monetary or fiscal stimulus, in contrast to most other countries on the planet. Come to think of it, the rest of the world is probably going to become even more reliant on China’s economic growth than it did before the pandemic.
China is also one of the few regions with years of rising capital intensity and infrastructure investments that will boost its future productivity and growth. In 2020, the IMF estimates the country’s total investments as a share of GDP will hit 43.9 per cent. In the U.S., where we’ve seen limited capital investments (20.3 per cent of GDP this year) and a shrinking labour pool, the economic growth potential is weakening.
So, with these figures in mind, here are some of the key questions:
- To what extent is the next U.S. administration prepared for a Cold War-type scenario of mutual suspicion and continued trade conflicts, given China’s ascendency as a global economic powerhouse?
- Could there be a “hot" war over China’s assertions in the South China Sea, or over its increasing reach into Hong Kong or Taiwan?
- On the technology front, how far is the United States prepared to go to limit Chinese dominance in areas like 5G, artificial intelligence, quantum computing, fintech, etc.? How successful will any tactics be if China continues to build and strengthen a regional technology manufacturing network, cutting out U.S. firms?
The two countries are highly integrated, so any decoupling will likely be gradual and incomplete. But as we saw in the early parts of the pandemic when China was shut off from the world, there is a global reliance on China to manufacture a wide range of products, including autos and auto parts; semiconductors, electronic components, circuit boards, optical fibres and the like; and pharmaceuticals as well as medical supplies and equipment. This tells us that any shock to supply chains through repatriation of manufacturing to the U.S. or through heightened trade tensions would disproportionately affect telecoms, auto manufacturers, pharmaceutical and health care companies. Bipartisan legislation mandating U.S. production (or where government procurement requires U.S.-made content, which is the most likely mechanism here) could emerge for these sectors as well as for defence equipment, a sector that benefits from escalating tensions, either hot or cold.
Bottom line: Significant uncertainty remains around China’s relationship with the U.S. and its allies. It is doubtful that any actions by the current or future administrations will help to curb Chinese ambitions – despite all the promises, there has been no narrowing in the bilateral trade balance in the past four years. Protectionism could backfire and increase China’s resolve to forge ahead with regional partnerships that lock the U.S. out. Under various scenarios where tensions remain elevated, the sectors identified above have the most to lose (except for defence) as the cost of doing business in China increases and they are forced to take expensive steps to reroute supply chains.
Add to that China’s relative progress in the telecom and cyber race, and relentless emphasis on infrastructure, where the productivity benefits are more than offsetting the effects of an aging population profile. The rest of the world will have to think very carefully about how far it will want to isolate an economy that is very likely going to be an even more dominant driving force than it has been since it gained entry to the World Trade Organization two decades ago.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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