Montrose Journal Covid 19 Edition


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US/CHINA: TIME FOR THAT GRAND BARGAIN -

PHILIP DELVES BROUGHTON

If there was any doubt about the declining state of US/China relations, the spread of Covid-19 has banished it. The world’s two economic superpowers neither trust each other nor like each other at almost every level of their relationship.

Their militaries are jostling in cyberspace and in the shipping lanes of the South China Sea. Their technology giants are battling to control market share and establish standards in everything from network infrastructure to digital payments. Their universities are fighting for talent and their researchers competing to establish leads in the decisive technologies of the future, artificial intelligence and biotech. And their governments are seeking to carve up the world into a new map of strategic alliances and dependencies.

The world may be desperate for its leading powers to cooperate in the face of a threat with no respect for borders. But the dangers and mistrust on both sides bring to mind the old zoologists’ joke: how do porcupines mate? Very carefully.

Since Covid-19 spread from Wuhan, the communication between Beijing and Washington has ranged from moderately effective to disastrous. President Trump and senior members of his administration have spoken of the “Chinese virus”. Republicans in Congress have suggested it was a bioweapon deployed by the Chinese to take down the world and ensure their ascent. Unsurprisingly, recent polling has found that two-thirds of Americans now hold an unfavourable view of China, the highest for more than a decade.

The Chinese are said to have observed how successfully Russia has infiltrated America’s domestic politics, and been scheming for some time to do the same. The panic over Covid-19, according to reports in The New York Times and The Wall Street Journal, gave them their chance. Fake stories have been circulating among Trumps’ fervent online base of deep state plots to establish authoritarian control under the guise of health lockdowns and nationalisation by stimulus. The Chinese are rumoured to have put them there.

China’s aggression is said to be part of a new kind of “Wolf Warrior” diplomacy; the name taken from a wildly popular series of action films about an elite unit of the People’s Liberation Army special forces. These fighters are to modern China what Sylvester Stallone, Arnold Schwarzenegger and Bruce Willis were to Reagan-era America. A fist-first fantasy of might.

In China, nationalism bordering on xenophobia towards America is on the rise. And America’s poor handling of its domestic COVID crisis has created opportunity for China to assert itself. It’s an opportunity that the Chinese Communist Party will not want to miss.

Even when the two countries have tried to assist each other, they have stumbled. China is the world’s largest maker of personal protective equipment (PPE). America’s corporate titans have competed to procure and ship equipment for American hospitals.

But the US-China supply chains, which seemed so robust when all they had to do was ensure a steady stream of iPhones or sneakers, have become chaotic bazaars in the face of a pandemic. Badly needed medical equipment has been sold right off the truck on its way to the airport for shipping, or proved faulty or inadequate.

When Chinese companies and moguls have made similar donations, their motives have been questioned. In early April, Huawei gave a large supply of masks and respirators to Canada, even as the company’s chief financial officer, Meng Wa Zhou, was under house arrest in Vancouver pending extradition to the US on fraud charges.

Coincidences happen of course. And truck-loads of masks and gowns do vanish. But there is so little trust now on each side of the US-China relationship, that the slightest mistake or slip of the tongue is taken for hostile intent.

Washington cannot simply forgive and forget an article in Xinhua in which a writer speculated that if China restricted exports of PPE and essential medicines it could plunge America “into the mighty sea of coronavirus”.

Equally, Beijing doesn’t take kindly to the US Secretary of State, Mike Pompeo, repeatedly calling for the closing of China’s wet markets, which the Chinese insist are clean. Or to the prospect of America’s ferocious class-action lawyers limbering up to sue Chinese companies and the Chinese government.

The state of Missouri is leading the way with a suit claiming that China deceived America about the virus, which led to economic catastrophe. Senator Ben Sasse, a Republican from Nebraska, a one of the keenest China hawks on the Senate Intelligence Committee, said of Missouri’s lawsuit: “The Chinese Communist Party did what authoritarians always do: they hid the truth to save their hides. After Americans beat this nasty virus, we’re going to hold China’s corrupt government accountable.”

There have already been collateral victims of the collapse in US-China relations. The US was the largest contributor to the World Health Organisation until President Trump decided to suspend that funding as retaliation for what he said was the WHO’s Chinese bias and misreading of the pandemic. Within days, China announced it was increasing its contribution to the organisation.

Another victim has been President Trump’s initial pitch for re-election. Until the virus emerged, the markets were booming and unemployment was at record lows. Trump hoped the strong economy would persuade voters to give him another four years. He is now banking on a nationalist, America-first message. He will depict himself as the President who has brought American business back to America and shored up the borders and hope that carries him to victory against former Vice President Joe Biden, who has struggled to make himself heard since securing the Democratic nomination for President.

With so much in flux, it is not surprising that many are predicting the great decoupling of the US and China. Or worse, a coldish war fast becoming a hot one. America doesn’t want to give ground to China, but China badly wants to take it. The question is whether in this moment of global frailty, they can restrain their own worst instincts and help the world instead of themselves. The answer begins at the top. President Xi was already facing opposition at home before the crisis, as China’s economy faltered and protests flared in Hong Kong. His authoritarian streak had led to criticism from within his own party. China’s poor reputation for human rights was only getting worse with its treatment of its minority Uighur population.

Xi has been good at drafting long-term strategic plans for China’s economy and its global influence. Given his domestic troubles, the question was whether he would still be around to see them come to fruition.

In the US, Trump was as popular as at any point in his Presidency. The strong economy seemed to validate his decision to lower taxes, hold back regulations, and renegotiate America’s major global trade deals. He had come out hard against China early in his Presidency, and won the backing of most of Congress and America’s business leaders.

Neither leader has done well leading their countries through this crisis.

China has deployed every one of its authoritarian tools to contain the spread of the virus, but its reputation as the source of it has tarnished the all-seeing, all-knowing reputation of the Communist Party. Compounding the embarrassment, Taiwan has been a leader in handling the virus both domestically and offering helping to other countries.

Trump flailed as the virus spread, first diminishing its likely impact, then struggling to catch up, and finally riffing on bizarre potential treatments from drinking detergent to pulsing one’s insides with ultraviolet light.

Now, in this post-COVID world, the danger is that both leaders will dig in. Trump will lash out at the world and Xi will over-reach as he accelerates China’s plans to usurp the United States in key economic sectors like technology and medicine, and fill the vacuum left by America’s diplomatic withdrawal from the world.

In consumer technology, the US and China are already standing face to face. On the US side, Google, Apple, Amazon and Microsoft; in China loom Alibaba, Tencent, Xiaomi and Baidu. Europe has produced no rivals. The Chinese firms have been allowed to grow with few restrictions on their use of personal data. In areas like mobile payments, this has allowed them to streak ahead.

At some point, the rest of the world will have to decide which model they prefer: the lightly regulated, fast moving, data-snatching Chinese firms; or their more-staid American rivals, constrained by US and European standards.

A similar version of this debate has already played out very visibly over the installation of 5G infrastructure. Many countries have opted for China’s Huawei, despite America’s insistence that this will create a back door for the Chinese state.

China is striving to become the world leader in artificial intelligence, which it believes will be the next defining technology. It is making a similar effort in biotech, pouring money into research, supporting scientists and start-ups, hoping to overtake America’s far more evolved start-up ecosystems.

China is banking on a concerted, top-down approach to innovation. America hopes its grassroots system will win out again. History says America’s approach wins. Ideally, this would be a moment to reinvigorate US-China relations. Rather than China building out its Belt-and- Road infrastructure initiative, to send its goods through a network of client states, and America torching its global alliances, we would see them working together at the United Nations - a ghost at the COVID feast.

They would be leading the G20, unleashing all the resources of the WHO, the World Bank and the IMF. In a Kumbaya world, this would be a chance for the United States to join the Asian Infrastructure Investment Bank, which it has belittled up to now, to help rebuild COVID-ravaged economies. Imagine US and Chinese boats patrolling the shipping lanes of the South China Sea together, for the good of all of their regional neighbours, instead of jostling dangerously for primacy.

Europe is desperate for help to get through this crisis. Rather than Trump defaulting on America’s oldest friendships and threatening its commitment to NATO, and China trying to harvest the economic debris of Greece, Italy and Eastern Europe, perhaps they could formulate an economic plan to help a continent yet again on its knees.

For all the talk of decoupling, there is in fact a grand bargain to be had here, if only the leadership in Washington and Beijing could sit down together long enough to draft it.

The sub-text of the recent US-China trade deals is that it is time for China to grow up and behave more like a developed economy than a developing one. There isn’t a lot of positive spin in that message. So how about this: as the United States reels in its supply chains post- COVID, it helps China move more quickly away from export-dependency. In return, China is more observant of trading rules. It respects intellectual property and research. It opens its markets to international firms.

One huge and obvious area would be health insurance. China’s public hospitals are vastly understaffed and over-used, a fact exposed by Covid-19. A more vibrant private market of clinics available to those with their own insurance would relieve that load. A country which fancies itself a leader in AI, could deploy new technology to advance its health care system, but it won’t get there without non-Chinese expertise.

Similarly, China’s already debt-laden banks are going to struggle with the economic consequences of the pandemic. Opening up China’s financial markets to foreign firms would bring discipline to capital markets which are too often rendered inefficient by the state.

This might bring to an end China’s bad habit of allowing bad businesses to roll over their debts and carry on, crowding out the possibility of newer, better firms taking their place.

It is fantasy, of course, that the US and China could pivot so quickly from the current rhetoric to a more positive set of plans and ambitions, which the entire world might cheer. But then so is the idea that detergent might be a treatment for virus sufferers, and that didn’t stop the leader of the free world publicly speculating on the possibilities.

Philip Delves Broughton is a Senior Consultant to Brunswick, based in New York. He was previously a Senior Adviser to the Executive Chairman of Banco Santander. His books have appeared on The New York Times and Wall Street Journal bestseller lists and been published around the world.


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