Should America Fear the Rise of China?

As new coronavirus infections in the U.S. have steadily decreased from a level of 30,000 per day at the beginning of April, and have now plateaued at about 20,000 per day, it becomes more and more important to try to foresee, and plan for, what the world will look like after the pandemic.

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In my last post, I showed that the U.S. has a strong upper hand in relations with China and should be able to maintain both economic and military dominance for many years to come.

It turns out that even more can be said.  Matthew Klein, the chief economist at Barron’s, makes a strong case that Chinese growth relative to the U.S. will level off about 2040 and then begin to decline.  Here is a summary of his argument:

  • Starting in the late 1970s, under Deng Xiaoping, the Chinese economy grew to 66% of America’s size by 2019 (see chart).

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  • From 2002 through 2011, China’s GDP per working-age adult rose 18% per year compared with 3% per year in the U.S. During this time period Chinese GDP grew from 13.5% to 48% of U.S.GDP.
  • After the Great Recession of 2008, the economic collapse of China’s main trading customers caused a huge debt bubble to build in China hitting 250% of GDP by 2019.
  • After addressing the debt problem, Chinese GDP per working adult has grown 6% per year from 2014 – 2019, compared with 4% each year in the U.S.
  • The U.N. predicts that the number of working age Chinese will fall by half between now and 2100 while the number of Americans of working age should rise by 15%.
  • All of this leads to the conclusion that the Chinese economy will peak relative to America’s around 2040 at about 76% of U.S. GDP (see chart). China will then steadily lose ground relative to the U.S., eventually shrinking back to where it was in 2011 when Xi Jinping took office.

Conclusion.  The likelihood is that “the People’s Republic is near the peak of its relative power and will soon enter a long period of relative decline.”  But let’s not become complacent about this!!!

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The Coronavirus Pandemic: How Does it Affect Relations with China?

As new daily coronavirus infections in the U.S. continue to fall and the U.S. economy continues to reopen, it is important to think about the broader implications of the pandemic, among other things with respect to foreign policy.

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Clearly our biggest economic and military competitor, and the biggest threat to worldwide political freedom and democracy, is China.  George Friedman, founder of Geopolitcal Futures, has given an excellent analysis of our relationship with China:

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  • U.S. investment in China has been critical to China’s industrial development, as has been our import of Chinese goods. Thus imposing tariffs on Chinese goods entering the U.S. has been a big blow to the Chinese economy.
  • China is taking a great deal of criticism for letting the coronavirus crisis start in Wuhan and then break out of Wuhan and spread around the world.
  • China’s trillion dollar Belt and Road initiative is now causing huge anxiety around the world as poor countries are struggling to repay their loans from China.

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  • China badly wants a better economic relationship with the U.S. while wanting the U.S. to accept its desire to dominate the South and East China seas.
  • But China also faces hostility from nearby neighbors such as Japan, South Korea, Taiwan, Indonesia and Australia.
  • China benefits if the U.S. gets overly bogged down in other parts of the world but, in fact, the U.S. is trying to cut back involvement in Middle East countries such as Afghanistan, Saudi Arabia and Syria.
  • One possible response to the coronavirus pandemic is for the U.S. and other countries to diversify supply chains which are overly concentrated in China. This will hurt the Chinese economy.
  • All of these factors mean that the U.S. has a lot of leverage with China to be more accepting of U.S. imports as well as ending the theft of U.S. intellectual property.

Conclusion.  In the ongoing competition between the U.S. and China for world military and economic dominance, the U.S. has many strengths and should be able to maintain the upper hand for many years to come.

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The Coronavirus Pandemic: the Remote vs the Exposed

Every week lately I begin a new post with the latest chart showing the number of new daily coronavirus infections in the U.S. There is now a slow but steady decrease in this number.  This is good news, of course, because it means that the curve has been flattened and is turning downwards.  This means that we can cautiously begin to open up the economy.

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It has been reported that 37% of jobs in the U.S. can be performed from home.  These are “remote” disproportionately knowledge workers, mostly well-educated and well-paid.

The other, roughly two-thirds, of the employed are “exposed”.  This includes everyone such as shop owner, waiter, cab driver, sales associate, factory worker, flight attendant, and so on, for whom physical presence is a job requirement.

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For the remote, social distancing and shutdowns are at most a mild irritant.  A few more weeks or even months of this response to the pandemic is easily bearable. For many of the exposed the economic shutdown has instead been a catastrophe. Their livelihoods and social sanity are at stake.

The Governor of Pennsylvania, Tom Wolf, says that those pushing against the shutdown are “cowards”.  The Governor of Michigan, Gretchen Whitmer, has called the shutdown protesters “racist and misogynistic.”

Michigan and Pennsylvania are so-called “purple” states where the governor is from one political party (in these cases, Democratic) while both legislative chambers are from the other party.  These two states, along with Wisconsin, all went for Donald Trump in 2016 which swung the electoral vote in his favor.

The people making key decisions on how and when the shutdowns will end are not themselves members of the exposed class.  “Those who think the world can be run by remote control may well have their folly exposed as failure by those who know it can’t.”

Summary.  Prolonging economic shutdown any longer than absolutely necessary, in order to be extra safe against coronavirus infection, is a risky economic and political strategy.

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The Coronavirus: Trying to Foresee what’s Coming Next

The number of new infections in the U.S. has leveled off at about 30,000 per day in the last five weeks and appears to be showing a slight drop off.  This is very positive since more and more people are being tested all the time.

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So much about the coronavirus is as yet poorly understood that it is hard to even know the best way to implement the social distancing strategy which most of the world (except for Sweden!) is taking very seriously.

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As I discussed last week, many states, including Nebraska where I live, are beginning to reopen their economies.  Considering the uncertain timeline for the further spread of the coronavirus, it is critical to do this, even if the effort starts out slowly and hesitantly.

Many people, including myself, have speculated on how the pandemic is going to significantly change the way we conduct our personal lives, both at work and at home, such as, for example, by speeding up even more quickly the adoption of technology.

Another big change is going to occur in how we relate to the rest of the world in the future, especially China. Not only was the pandemic caused by poor public health measures in Wuhan, China, but it has now become obvious that the developed world has become too dependent on industrial supply chains centered in China.  This has enabled China to dictate the terms of access to its market in circumvention of established international trade rules.  The U.S. and its allies can’t protect their interests without confronting China.

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Conclusion.  The coronavirus pandemic has presented a huge shock to the entire world.  Trying to limit the number of infections and deaths is an enormous public health issue.  But is will also have a big effect on everyday life in the future.  And world affairs will be greatly impacted.  It is worthwhile to try to anticipate what is coming down the pike and prepare for it, even if imperfectly!

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Middle America Is Opening Back Up!

As the number of new cases of coronavirus infections in the U.S. continues to level off at about 30,000 per day, and should soon start beginning to drop, America is thinking more and more about how to return to normal.

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For example, restaurants in many different states are reopening with seating restrictions.

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It turns out that Middle America is leading the way in loosening restrictions so that the economy can begin to reopen. It is urgent to begin doing this.  We simply cannot stay locked down until an effective vaccine appears on the scene which may be many months, or even a year or more, from happening.

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An at least temporary retreat of the regulatory state is helping this to happen.  For example, medical personnel have been freed to practice across state lines.  Obstacles to telemedicine are being dismantled by Medicare and Medicaid.  Private firms are being liberated to develop Covid-19 and antibody tests.  The FDA has authorized emergency use of the Gilead drug Remdesivir for Covid-19 patients.

Long term, the pandemic has exposed several weaknesses of overly strict central planning.  For example:

  • Net neutrality price controls on internet service providers, now overturned, never anticipated that the entire country would be simultaneously stuck at home, requiring much more flexibility for internet traffic.
  • The 2010 Dodd-Frank law piled a multitude of unnecessary restrictions on small banks which prevent them from serving desperate small-business applicants at the present time.
  • Obamacare outlawed short-term health insurance plans lasting more than three months (now loosened), not anticipating that millions of people could be thrown out of work, with no guarantee of being back in less than three months.
  • Our decentralized federal system of government is now showing its great strength in the coronavirus pandemic.

Conclusion.  Led by Middle America, the U.S. is now just starting to recover from the economic disruption caused by the coronavirus pandemic.  This forward movement has been greatly aided by a loosening of various regulatory restrictions.  Our decentralized federalist system is demonstrating its great strength and resilience.

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We Can (Safely) Begin to Reopen the Economy!

 

New coronavirus infections in the U.S. have levelled off to the rate of about 30,000 per day and several states are experimenting with loosening restrictions on “nonessential” economic activity.

                     There are reputable reports that the death rate from COVID-19 may be as low as .025% to .635% of the number of infected individuals, even lower than the mortality rate for seasonal flu.

Experts have already proposed some general guidelines for reopening the economy in a safe but also sensible manner.

Now a top expert in medical economics, Avik Roy, at the Foundation for Research on Equal Opportunity, has given more explicit reopening guidelines even assuming a more pessimistic scenario, in which accurate, near-ubiquitous testing is difficult to achieve; infected individual’s antibodies do not lead to immunity; anti-viral treatments take longer to develop; and vaccines never arrive.

The FREOPP strategy takes into account the heavy skew of poor health outcomes and deaths from COVID-19 towards the elderly and those with chronic disease, as well as new tools for contact tracing being developed by Apple and Google.

Here is are some of their major ideas:

  • Reopen pre-K and K-12 schools right away.
  • Lift stay-at-home orders for most non-elderly individuals.
  • Reopen safe but “nonessential” businesses.
  • Incentivize employers to deploy testing at work.
  • Incentivize consumers to use contact tracing apps.
  • Continue to prohibit large group gatherings.

Conclusion.  Even if, and perhaps especially if, the U.S., and the rest of the whole world, are in for a long slog to recover from the coronavirus pandemic, there are a number of fairly simple measures as above which can be taken to lessen the current economic pain.  Since we don’t know how long it will take to completely eliminate the pandemic, we need to figure out a way to return to a more normal and sustainable way of life in the meantime.

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The Coronavirus and World Leadership II. Is the U.S. in Decline?

New coronavirus infections in the U.S. have leveled off at about 30,000 per day and we are beginning to turn our focus to the reopening the American economy.

As China increasingly becomes the main challenger to U.S. world leadership, how has the coronavirus pandemic affected the relative standing of these two largest world powers?  (see here, here, and here)

Pertinent to this question, Ruchir Sharma, the Chief Global Strategist at Moran Stanley Investment, has a very informative article in the latest edition of Foreign Affairs, “The Comeback Nation.”

Mr. Sharma points out that:

  • The U.S. share of world-wide nominal GDP was 25% in 1980 and remained at 25% in 2020. During the same time period, China’s share grew from 2% to 16% and the EU’s share dropped from 35% to 21%.
  • 90% of global financial transactions use the dollar. The share of countries which use the dollar as their anchor currency (including China) has risen from 30% in 1950 to 60% today.  Because the U.S. Federal Reserve controls the supply of dollars, it is now, more than ever, the world’s central bank.  Whether or not global elites trust the current U.S. president, they do trust U.S. institutions, which is why the U.S. is now a financial empire without rivals.

  • Signs are that the coronavirus pandemic will even further entrench the dollar at the center of the global financial system.
  • Ever since Gallup started asking Americans, in 1979, whether they were satisfied with how their lives were going, the vast majority have said yes. In January 2020, that share hit a record 90%.
  • The median household income in 2018, adjusted for inflation, was $63,000, an increase of $15,000 from the early 1970s, and of $7000 since 2013.
  • For all the talk of decline and despair, the bigger risk for the future is complacency in the face of growing threats from debt, deficits and demographics.
  • U.S. productivity has gotten a boost from investment in technology in recent years, but the most important U.S. advantage has been a relatively high population growth rate, babies and immigrants, not Stanford and Google.
  • Unfortunately, major voices in both parties are now making the case that deficits no longer pose a threat to growth – Republicans to defend low taxes and Democrats to defend higher public spending.
  • If, into the future, China and the U.S. each maintained their officially reported nominal GDP growth rates, 6% for China and 4% for the U.S., China would not catch up with the U.S. until 2050. If its growth rate slows by one percentage point, China will not catch up with the U.S. until 2090.
  • The most important driver of any economy is the working-age population, which is still growing in the U.S. but started shrinking in China five years ago.

Conclusion.  Perhaps “the experts may be correct to argue that the United States should modernize its global strategy, restore ties to traditional allies and critical trade partners, rejoin international agreements, and help rebuild the international pillars of the postwar order.”  But such moves would be icing on the cake.  They are not needed to preserve U.S. leadership because the United States is not in decline.

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