Post- virus world needs economic booster shot
The post- COVID- 19 world is in need of more than just a vacc cine. The global economy has struggled to emerge from the unprecedented plunge of early 2020. Like a swimmer gasping sping for air after surfacing from a deep dive, there was a powerful rebound und as lockdowns came to an end. But ut reopening after a sudden stop hardly qualifies as a self- sustaining economic c recovery. Vaccine or not, the outlook k for 2021 is likely to be far more challenging enging than a post- lockdown bounce might ght suggest.
History speaks to long shadows of major pandemics. The first st half of 2021 seems poised for just t such a setback. Apart from China, a, where the discipline of public health l h practices i took precedent over economic stimulus, the long- feared second wave of COVID- 19 infections is now at hand. This has prompted a new round of lockdowns in most major developed economies – especially the US, Europe, Japan, and Canada. To be sure, these lockdowns are not as severe as they were when the first wave hit, but they are still likely to result in significant disruptions to economic activity.
For both the US and European economies, that spells heightened risks of “double- dip” recessions in the months immediately ahead. The relapse scenario stands in sharp contrast to the V- shaped recovery that financial markets seem to be counting on. Optimism rests more on the zero interest rate policies of major central banks.
At the same time, it is important not to lose sight of other risks to the global economy. The US- China conflict is at the top of my worry list. With the trade war having morphed into a tech war that has now taken on the early manifestations of another Cold War, the relationship between the world’s two largest economies is at a critical juncture. The post- pandemic outlook is critically dependent on shifting from conflict escalation to conflict resolution. Can that happen in 2021?
The answer will very much depend on the willingness of both nations to find common ground for mutual cooperation rather than confrontation. The presidential leadership transition in the US from Donald Trump to Joe Biden offers such an opportunity. This will require nothing short of a new framework of engagement between the US and China. Three building blocks should be emphasized:
Dialogue. Periodic strategic and economic summits – whether biannual ( during the George W. Bush era) or annual ( during the Barack Obama era) – achieved little. A better approach would be to establ establish a permanent Secretariat in a neutral jurisdiction that deals full- t time with all aspects of the US- China rel relationship – from trade and technolo technology to cyber and people. Staffed with p professionals from both nations, the S Secretariat would have responsibility for data sharing, framing joint policy p proposals, implementation of mutual agr agreements, compliance, and transpare transparent dispute adjudication.
Trade. The focus should shift to a correction of saving disparities – with the US savin saving more and China saving less – as the m means to alleviate the global trade i imbalances of the world’s two largest ec economies. As China draws d down i its surplus saving, internal demand will find new support – consistent with the new emphasis on “dual circulation” aimed at boosting internal consumption. Similarly, if the US commits to medium- term improvement in domestic saving, investment and productivity should improve – boosting longer- term US economic growth. Growth challenges for any economy are best addressed from a position of strength, not weakness. A correction of saving and trade imbalances is key to unmasking such strength.
Structural considerations. Ultimately, the focus of US- China conflict resolution needs to shift from bilateral trade to key structural issues such as intellectual property rights, technology transfer, subsidies to state- owned enterprises, and cyber security. The US- China structural agenda should be framed around expanded growth opportunities that come from improved access to each other’s markets. Negotiations should be restarted on a bilateral investment treaty ( BIT) as the principal means for enhanced rules- based market access. This is a time- tested approach to opening- up that both nations have long embraced. The US has signed 42 such treaties and China has over 100 BITs currently in force.
Such a treaty would eliminate ownership caps on direct investments by multinational corporations in each market. That single provision would eliminate the joint- venture structure of cross- border investments, taking the thorny issue of forced technology transfer off the table. No JVs, no transfer of anything from one partner to another. A broad, enforceable BIT ( its implementation falling under the purview of the Secretariat outlined above) could also be used to address contentious disputes over IP rights, state- supported industrial subsidies and cyber security.
It won’t be easy for either nation to stand down after years of escalating conflict. At first, small steps will be required of both the US and China to rebuild a spirit of trust and mutual cooperation. But small steps are far preferable to staying the current destructive course. A vulnerable global economy, struggling under the long shadow of a devastating pandemic, is in desperate need of leadership from the world’s two most powerful nations. There is no room for a great power conflict in a post- pandemic world.