The US is struggling to contain COVID-19 while China is apparently awakening from a nightmare of the Communist Party’s own creation.
This is setting off debate whether the US is losing its capacity to lead, either through policy mistakes or structural trends working against it. The 1956 Suez Canal crisis, which marked the end of the UK’s reign as a global power, was even raised by Kurt Campbell, the Obama administration’s point man on Asia, as a portent of how tenuous things will be for still the world’s only superpower.
Much blame is directed towards Donald Trump, who has made mistakes in preparing for COVID-19, although one could point to the far more grievous errors by Xi Jinping arising out of incompetence and malfeasance, in particular obfuscating about the nature of the virus for several weeks when the Communist Party knew how contagious and lethal COVID-19 actually was.
Regardless, assessments of the changing of the guard ought to be based on far more than what we think about the respective governments and their immediate response to COVID-19. The sources of underlying strength remain firm for the US and fragile for China.
Before that, one should dispense with any comparison with the Suez Canal crisis, which is an ill-fitting analogy. Britain’s inability to prevent Egyptian dictator Gamal Abdel Nasser from nationalising the Suez Canal Company was primarily due to the former’s declining position in the world.
The British Empire was already shrinking with decolonisation well under way. In 1956, the British defence budget had declined to around one-tenth that of the US.
Economically, Britain had become dependent on “American benevolence” through schemes such as the Marshall Plan (1948-50) and Defence Aid (1951-7). Correctly, prime minister Anthony Eden was resigned that the UK was a junior partner of the US. Britain’s inability to impose its will in the manner of a pre-eminent global power was due to the fact it no longer was one.
These circumstances do not apply to the US. Consider its underlying economic strengths based on a significantly larger, more innovative and productive economy than China’s. The US is ranked far higher in all comparisons of innovation. China might be the world’s factory, but it is still a net importer of technology and know-how from the world, especially from the US.
China’s total factor productivity (TFP), which is one of the best measurements of enduring economic health as it accounts for material expansion not driven by direct capital or labour inputs which are limited, has been declining since Xi came into power. US TFP growth remains positive.
Beyond the immediate economic hit, which will be considerable, the pandemic is already leading to domestic discussion about how better to protect and enhance the US’s already powerful knowledge, industrial and economic base. This will be the mission whether Trump or Joe Biden is the president in 2021.
It is also worth identifying where institutions, firms and individuals flee for safety and choose to park their wealth and capital in times of crises, like the present. This is an indicator of where true confidence in the future lies, or where long-term bets are being made.
American financial markets are still the deepest, most diverse and among the most trusted in the world. It is telling that as the pandemic develops, global entities are fleeing to purchase US dollar assets, followed by the Japanese yen, Swiss franc, and gold.
In contrast, the onset of the pandemic has deepened wariness of the long-term prospects of China as a safe and reliable political economy with trustworthy institutions. This is precisely why Beijing is fighting so furiously to eliminate the term “Wuhan coronavirus” from parlance.
With respect to the Chinese renminbi, it is neither free-floating nor freely convertible. This continues to place severe limits on the extent to which it can become a store of value and therefore a genuine reserve currency. The latter allows the US to reduce borrowing costs, given the enduring demand for US dollars.
China might have the largest bond market in the world to sustain its overleveraged economy, but only 2 per cent of these are owned by foreigners.
Finally, some believe China’s present capacity to supply countries such as Italy, Serbia and Australia with ventilators, masks and testing kits will create fertile ground for Beijing to seize leadership from Washington. The reality is that these countries are largely holding their nose while receiving Chinese largesse as they agree with Trump’s blunt assessment that COVID-19 began in China and should have been stopped in China.
While calling on the US to refocus on better meeting the demand for global leadership is reasonable, including through better collective action with its numerous and long-standing allies and partners, it is too long a stretch to conclude that COVID-19 is leading to the passing of the torch to China. Beijing’s ad hoc allies and partners such as Russia, Iran and Pakistan can command attention, foment considerable problems, cause disruption, and coerce neighbours.
But China and these countries will have immense difficulty reshaping the world and redefining global institutions and governance.
There is no doubt China is trying to use the pandemic to enhance its global standing and position. It is not underlying US weakness but distraction, complacency or else losing its nerve that will determine whether Beijing succeeds.