Change of Guard- II

Does the COVID-19 pandemic provide opportunity for China to don the mantle of world leadership? Article by Maj Gen Moni Chandi(Retd).

In the 1st Part of this series, the author had examined the effects of diplomatic leadership and military muscle, as elements of world power. In this part, he further analyses the facets of economic power likely to emerge in the post COVID-19 world.

The World’s Largest Debtor Nation

"The dollar is our currency but it is your problem.”  John Connally, US Treasury Secretary addressing Finance Ministers of G-10 countries, at Rome, in 1971

As in April, 2020, US national debt is estimated at approximately US$ 24 trillion. Further due to the coronavirus pandemic, the US budget deficit is estimated to reach a record US$ 3.8 trillion (18.7% of GDP), this year.

Analysis:  Debt rises when one spends more than one earns. Firstly, the US public health system is inefficient and this was demonstrated during the pandemic. More importantly, with remarkable increases in life expectancy, there are growing numbers of US senior citizens, who aspire to benefit from the decrepit system. Secondly, shortfalls in budget have been made up by increasing federal debt, which costs interest. While the Federal Government may have some control over domestic interest rates, the US has committed interest payments, on international debit. Currently, both PRC and Japan each hold more than a trillion dollars in US debit. Thirdly, the Federal government does not have income to meet its expenditure. Cheap imports from the high-value dollar has made domestic production uncompetitive and populist tax measures have curbed government revenues. 

Assessment: None of the three phenomena described above (cost of public health, increasing federal debit and shortfall in national income) are recent but have progressively aggravated, over decades. Political pragmatism in the US has preferred to stay away from these contentious subjects that offer only immediate pain for long-term prudence. The bottom line is that US national debt is increasing with every successive year and at some point, in the future, bills will be called for payment.

Bed-fellows in the US – China Trade War

Since 2012, the US trade deficit with China has consistently exceeded US$ 300B, annually. In 2019, computers, mobile phones and manufactured products were the major US imports from China, totaling US$ 452B. On the other hand, aircraft, soybeans and semiconductors were the major US exports to China, totaling a mere US$106B. The PRC’s consistent trade surpluses over decades has helped China to accumulate the largest foreign exchange reserves in the world; estimated at US$ 3.9T, in March, 2020.

Analysis: President Trump has understandably been concerned with the US trade deficit with China. On one hand, he could try and force China to appreciate the Yuan against the US dollar; however, that could make the same imported Chinese product, more expensive to US customers. Alternatively, he could impose additional tariffs on Chinese products (which he has done) but that would also make the products more expensive to US customers. Perhaps the President’s intention is to make Chinese imports more expensive, encouraging US customers to buy more expensive but US-manufactured products.

Assessment: While the US has legitimate concerns about addressing the trade deficit, any policy that makes US customers pay more, merely to eliminate foreign competition, violates the open-market system of trade that has been corner-stone of US foreign policy, for over seven decades. In terms of free trade, the US needs to increase exports to China to match their demand for imports. With the current arrangement, the US benefits from cheap imports in the short-term, while China benefits from accumulated reserves for the longer-term. After 21/2 years of tit-for-tat tariffs, the 15 January 2020, US-China trade agreement, offers little clarity except making for truce during the US Presidential campaign. US and China are indeed bed-fellows in the current trade war.

Chinese Perspective: The Mandate of Heaven

The PRC would like its currency the Yuan, replacing the US dollar as the world’s popular global currency. In order to achieve this, it has a monetary plan and an infrastructure plan. The monetary plan encourages both, the use of the Chinese Yuan in international contracts and the holding of part reserves in the Yuan by international banks. Both these measures are expected to make the Chinese less dependent on the US dollar.

In 2013, the PRC launched the Belt & Road Initiative (BRI); an ambitious plan to connect Asia, Africa and Europe with a network of land and maritime corridors. The plan promises to improve regional integration, increase trade and stimulate economic growth. The program involves trillions of dollars of investment for ports, roads, railways, airports, power plants and tele-communication networks. Created in 2016, the Asian Infrastructure Investment Bank (AIIB), is a multilateral development bank structured to finance the BRI. Headquartered in Beijing, it has 102 approved members, including India. While Ms. Nirmala Sitharaman, Finance Minister is a governor of the bank, Mr. Atanu Chakraborty, Secretary EA is an alternate governor.

Assessment: The BRI is key to PRC’s emergence on the world stage. Firstly, it provides an investment opportunity for China’s foreign exchange reserves, most of which are tied up in low-return US treasury bonds. Secondly, it provides new markets for China’s high-speed railway industry, construction firms as well as for cement, steel and metal exports. Thirdly, it provides China with the power and prestige, it has sought since the humiliation of the Opium Wars (1839 to 1860).

Overall Assessment: As on 03 May, 2020, death rates in China, on account of COVID-19 appear to have stabilized and lock-down restrictions have been lifted from Wuhan, the source of the pandemic. With less than 4700 deaths, the PRC appears to have handled the coronavirus pandemic, better than most countries. On the other hand, the US with more than 68,000 deaths, appears to be on a long road to recovery. No matter who wins the US Presidential election in November 2020, the incumbent will have to exercise fiscal prudence, while dealing with federal debit, balance of trade and federal monetary policy. China on the other hand, with its ample foreign exchange reserves and export-focused economy, will be in a better position to assist recovery of the global economy. In the aftermath of the pandemic, with most of the globe in economic recession, the BRI and the AIIB is unlikely to face competition for infrastructure projects. The PRC is also likely to use the opportunity to transfer funds from low-yield US treasury bonds to more remunerative infrastructure projects. The current skepticism for BRI, is likely to give way to more pragmatic embracement, in Asia, Europe and Africa. World power should also definitely gravitate Eastwards, including Europe and China. Bretton Woods institutions (IMF and World Bank) as well as the UN and WTO, should become more representative of Asia (China and India), in the emerging world order. 

 Author -- Maj Gen Moni Chandi (Retd), Synergia