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Who Comes Out On Top Post-Pandemic: The U.S., Or China

This article is more than 3 years old.

Everybody knows it. The economic power center of the world will either be the U.S. or China. Or to denationalize it: democratic capitalism or communist capitalism? Take your pick. Only one will ultimately win because the two systems are not compatible.

The real fight begins post-pandemic.

Indeed, it’s already starting.

The U.S. is blaming China for the viral outbreak, namely citing lackluster biosafety measures at the Wuhan Institute of Virolgy, a P4 safety lab that was studying bat coronaviruses and counted on millions of dollars of funding from the National Institute of Health in the U.S.

China is mad about being called out. The U.S. is mad about having more deaths from the new SARS coronavirus that started in Wuhan than any other country.

President Donald Trump has spent much of the last few months criticizing China and the multilateral organizations that many, including those in the market, now view as failures. “I’m not sure which is worse,” he says: the World Health Organization or the World Trade Organization, both of which he accuses kowtowing to China’s government.

That used to be just Trump being Trump. Post-pandemic, that won’t be the case.

“The big difference now is that anti-China rhetoric is growing more strident and common in many nations, including Britain, France, India, Brazil, Italy and Japan,” says Ruchir Sharma, the chief global strategist at Morgan Stanley Investment Management, in an op-ed published on Tuesday.

Although the European Union is a U.S. ally, we can probably cross them off the list as coming out on top. They will be neutral, playing footsies with both sides, trying to be the “voice of reason” when necessary. In most parts of Western Europe, they’ll be very open to keeping China happy.

So far, beyond Washington, the U.K. and Australia have started fights with the Chinese government.

U.K. Defense Secretary Ben Wallace says China was not forthcoming in just how deadly and quickly the new SARS spread.

Australia and China are at each other’s throats, with Beijing threatening to stop buying Australian goods. The Global Times, a China state run newspaper, infamously referred to Australia as its vassal state — or, to put it their way, “a blotch of gum stuck on China’s shoe.”

“I don’t think China is afraid of U.S. or European leadership right now,” says Perth Tolle, a Chinese-American and founder of the Life + Liberty Index.

Who Wins ‘The Pandemic Wars’

Many people, including the President, have referred to the pandemic in war terminology, with Trump saying we are at war with an “invisible enemy.”

In sticking with that analogy, and looking strictly at the economic fallout, who is coming out ahead so far? Who will come out ahead when the pandemic is just a bad memory?

Measuring it by stock market wins is a Pyrrhic victory — one in which the beating taken by the victor is so severe that the win is meaningless. The S&P 500 is up 23% from its 12-month low reached on March 23. By comparison, the MSCI China is up 9.6% since then and the CSI-300 is up 5.4%. Year-to-date ending May 4, has the CSI-300 (ASHR) and the S&P 500 (SPY) in a deadheat, with the MSCI China (MCHI) beating both and down the least at -9.99%.

Wall Street wins won’t matter. Main Street wins will.

The U.S. has a big bazooka to protect the market and, to some extent, the physical economy. It’s spent like never before. For some of the roughly 31 million unemployed, state and federal unemployment insurance is even worth more than a job.

But that’s temporary. And the money is a cork on a sinking ship with new holes bursting every week the longer the lockdowns remain. It’s designed as a relief to companies in quarantine. What about after quarantine?

That said, China has a bigger bazooka. How so? Because China said it will do whatever it takes to save its blue collar workforce, they have over $3 trillion in central bank reserves, and at least a third of their economy is state run, meaning if a provincial leader, or Xi Jinping himself, orders ghost cities be built, they’ll be built; if they order electric cars to be built without buyers, they’ll be built; if they order solar panels be put on the roof of every government building, Xi will wave his magic wand and it shall happen. There’s no green opposition to say it’s a waste of money. There’s no oil lobby to change the Communist Party’s (CCP) collective mind. The CCP owns the oil companies. And if no one wants the solar panels, then they will sit in a warehouse, so be it, and can rot there. That’s China’s bazooka. They’re not playing the same game.

The Chinese economy is coming back to life. The American economy is on life support.

“China is coming out of this first and everyone else is still weak,” says Keith Wade, chief economist for Schroders.

See this gathering below? It’s this past weekend in Shanghai.

Good news for China: there has been no serious second wave of infections. Beijing and Shanghai, both larger than New York City, have had under 1,000 reported cases — since January.

We are not hearing about breadlines or food shortages. But we have them in the U.S.

Post-pandemic, China will still be the largest low-cost producer while its rivals are still stuck fighting the virus. India says it will be closed for international travel until July, so they are not going to be your new go-to country right off the bat. Brazil is a complete mess. Mexico is getting worse, so in the near-term, they are not the place to source your widget. Factories are closed. The Pentagon is begging some of them in Mexico to open because it needs them for parts used in defense contracts.

Any U.S. company that is thinking of moving supply chain out of China has to consider what other countries are able to do take its place. India, Brazil and Mexico, to name a few, are not ready because of the health crisis.

“China has done a much better job at controlling the virus after their initial failure,” says Jamie Metzl, senior fellow at The Atlantic Council. “Everyday that we fail to mount a strong response we get weaker and China gets stronger,” he says. “But this is an early chapter. Things are still unfolding.”

The Immediate Aftermath & Then 2021

For the next several months, post pandemic, the U.S. will be in election mode. The pandemic will become even more politicized. China will be the punching bag. So will Trump, as the incumbent, who will be blamed for the public health crisis. No one blaming him for the unemployment will be taken seriously.

“I don’t think anyone knows how to tap into the populist rage regarding 30 million unemployed like Trump,” says Vladimir Signorelli, head of Bretton Woods Research. “Do you say Trump failed on the coronavirus? Then he just points to statements that Fauci has made,” he says about Dr. Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, and a favorite of the Hollywood Dem-donor class.

Gaming this out, if Trump wins, we get more tariffs on China.

He’s already said they were on the table. Companies that want to import from there will just have to pay more for it. More U.S. tax revenue. If they don’t want to pay tariffs, they will have to source elsewhere. Less money for China.

“We have companies in our fund that have factories in China and they plan to move out of there,” says Tolle about the Freedom 100 Emerging Markets (FRDM) fund. “China will do everything to keep them, including all sorts of shady stuff. As long as investors push back, they will be forced to move.”

Should Trump not elect to raise tariffs, China wins. If a Democrat wins, the trade war fades or it just goes sideways. Either direction is a China win.

China is working on new products and industries it wants to lead in, like robotics. China’s making major investments in biotech. The next Amgen will be from China, which is probably why Trump wants Operation Warp Speed to come up with a COVID-19 vaccine quickly — to beat China to it.

If China comes up with a vaccine, and they’re selling it to the Aussies and the Euros, good for China. Good for the world. Another China win.

Larry Kudlow has been touting the Japanese approach, paying billions to help companies relocate back home, or a few hundred million just to get out of China. It’s rhetoric for now.

Washington will have to offer them something Congress cannot reverse through taxation.

If the supply chain leaves China, so long as it leaves in a slow and steady drip, China may be able to replace that lost labor. This may be the best case scenario for both sides. It will keep China investors happy. The Chinese people will still have opportunities for work. The politics can be dealt with later.

Looking into 2021 and beyond, China can beat on robotics, and other future tech, if the state owned banks are allowed to paper over losses. Think of them as an endless supply of darts being launched blindfolded in the direction of a dart board. Eventually, a few hit the bullseye. Wasting money is no problem for China, if it employs people.

How can the U.S. compete with that?

If China cuts taxes, the U.S. has to cut too.

The U.S. and China will be in a race to the bottom: meaning the country that makes it cheapest for capital can come out on top.

Thinking out loud for a second: as the U.S. pushes its way out of the pandemic, should consider zeroing out first and second quarter taxes for all small businesses and sole proprietors earning under $5 million. Companies that try to balkanize themselves to break up into tiny entities to take advantage of the tax break could be banned by qualifying only those companies with those revenues effective now, not next week, giving savvy firms no chance to rejigger their corporate structure.

If China subsidizes the robotics industry, the U.S. will have to do it, or slap it with mega tariffs, and ban it from acquiring any component made by an American brand traded on the U.S. stock exchange, even if they are HQ’d in the Cayman Islands. If the U.S. cannot provide equal fiscal and monetary stimulus to strategic industries, China wins.

The post-pandemic world could devolve into a Cold War, an us versus them whereas if you believe in individual liberty and a somewhat honest government, and if you prefer democratic governance over a communist autocracy, then trade with us like-minded nations. If you like the other side, then maybe you can pay more money to access our markets.

Writing in The Washington Quarterly, ex-Bush foreign policy official Aaron Friedberg and former GOP congressman from Louisiana, Charles Boustany Jr., said in a post-pandemic world, the U.S. “needed to seek closer cooperation with other advanced industrial democracies.” The report actually finds merit in decoupling from China while maintaining Friedberg and Boustany’s penchant for big free trade deals like the Trans-Pacific Partnership.

“Western nations should cooperate more closely to slow China’s systematic and relentless efforts to extract technology and other intellectual property from Western economies,” they wrote in the March issue. “If China can meet the necessary norms, it should eventually be able to enjoy the benefits of inclusion. If, as seems more likely, it refuses to change course and remains an outlier, China will find itself at an increasing disadvantage,” they wrote.

Much of that depends on U.S. leadership. Even if Japan and Australia did something, in trying to jumpstart the Trans-Pacific Partnership that Trump killed, they will need U.S. involvement.

“Let’s go back to this ‘winning’ thing,” says Dan DiMicco, former chairman for Nucor Steel and a Trump advisor during his 2016 election campaign. “As soon as Trump took over, he shone a light on the CCP and what their intent was. And then Xi came out and reinforced the reasons why Trump is right on China. Xi comes out and tells you ‘we will dominate all the industries of the future’ in their Made in China 2025 project. They’ll use the same strategy they used all along to dominate other industries,” he says, without naming them.

They’re not hard to name: wind turbines, solar panels, steel, aluminum...N95 masks for hospital workers. PPE. Ibuprofen. Your kitchen cabinets. Textiles.

So who comes out on top post-pandemic?

“I think China is the biggest loser, namely the leadership in China,” DiMicco says. “What we have been fighting to show the world, they have now shown. This is just the beginning. You’ll have the big multinationals fight against it. You’ll have big Wall Street players fighting against it, but I don’t think the world is happy with China right now,” he says. “Will they all go back to status quo? Who thinks that?”

Sharma doesn’t. He thinks the world turns increasingly inward. He’s not happy about it.

DiMicco’s more upbeat. He’s placing his bets. “I’m picking the U.S. in this dog fight.”

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