How will US-China tensions impact global growth? Alastair Newton explains

Investors and the world at large needs to pay close attention to what China is doing, says Co-founder and Director of Alavan Business Advisory.

How do you see the US-China standoff shaping up?
Things do not look so good. But financial markets’ biggest concern weighs on this. I do not think we should get too concerned about the possibility of renewed open trade hostilities in the form of tariffs between China and the US, i.e., Donald Trump re-imposing trade tariffs on China. The reality is exactly the same as it was in December before we saw the phase I deal being struck. Anything which looks to punish China through tariffs is in fact going to punish American voters. With the US economy already struggling, which is certainly not negligible.

The last thing Donald Trump wants to do is to make the economic life of American voters even more difficult as he faces a critical election hoping to win a second term in less than six months time. So I do not think the market should get too concerned about trade tariffs. But clearly, the US is going to continue to look to inflict pain on China in other ways and of course continue to blame China for Covid-19 becoming a pandemic and try and cover up the failings of the Trump administration itself in getting to grips with the virus in America.

Do you believe that things can escalate from here especially because of the US elections this year?
I am not saying I do not expect things to escalate. What I am saying is I do not expect them to escalate in a manner which impacts trade flows. I do expect escalation to be on both sides because Xi Jinping has clearly decided that soft power projection is passé. He is going to continue to defend China robustly and will continue to ruffle feathers in any country which dares to challenge the Communist Party of China’s version of events. This is primarily for domestic reasons. He too has domestic pressures on him.

It is clear that China did make mistakes in the early phases of Covid-19. It is clear that there has been some sort of public disquiet over that. Clearly, he wants to sell the story about how the CPC grappled with the virus and cleared up the problem in China. Now keep in mind that in doing so, he is trying to promote China’s governance model over and above the democratic model. The US is helping him in that respect but two very near neighbours are not because both Taiwan and South Korea who are vibrant democracies have actually been outstanding performers in the fight against Covid-19. On top of that, he also has the problem of a pro-democracy movement in Hong Kong.

How do you think US-China issues can impact global growth?
I cannot rule that out completely but there are two big threats to global recovery in the near term and I stress on it because the economy will bounce back sooner or later. The first is the lack of international leadership and cooperation over the development of Covid vaccine. To be fair, the European Union is trying to fill that gap but it does not have political clout which the US has traditionally at times of international emergency. Since the end of the second World War, we severely lack US leadership in that respect. China is not yet ready to take over that mantle and of course since Xi Jingping is pursuing an aggressive form of diplomacy right now, there are many countries which will reject Chinese leadership on those grounds alone.

The second thing we should be concerned about is the situation in the US today. If we look at where Covid-19 is in the US, right now there are over 100,000 deaths. The real numbers probably are quite a bit more than that and some estimates put it at 30% higher. If you take New York out of the equation in the US, Covid-19 is far from under control. It is continuing to contage quite rapidly in the middle of America in largely Republican states. The lockdown is easing in an attempt to get the economy back on its speed but it could actually make the Coovid-19 situation worse and that in turn stands to have a detrimental effect on the US growth and therefore those for me are the two big concerns.

It is not just US-China. There is aggression even on the India-China border. How are you reading into that?
We have seen it all before and at least in the last few occasions, it has not spilled over into something which is really dangerous. The China-India border dispute is very long running. China frequently acts provocatively around the line of control. I am afraid that Xi Jinping again is probably doing this primarily for domestic reasons and the worst situation would be if he feels he can get away with throwing his weight around a bit because the rest of the world is distracted by Covid-19. One could say the same thing for Chinese actions in the South China Sea and around Taiwan as well.

We are dealing with a China which is being aggressive in several respects on several fronts at the moment and I sincerely hope that this is a show of strength on the Indian border rather than something more fundamental and serious. We should continue to watch the situation closely. We saw tensions on the China-India frontier around Bhutan, which was nearly two years ago. The world did not pay attention at that time to the extent it should have. Tension was resolved by the national security advisors of the two countries getting together on the phone and India being able to stand up strongly to the tensions which were prevailing at that time just before Narendra Modi was to make an important visit to Beijing. I do not know if those circumstances are likely to prevail again today. So I think investors and the world at large needs to pay close attention to what is going on your border.

How do you see US-China impacting the global recovery overall? Where do EMs like India stand when such a rift happens?
Well first of all, central banks have by and large risen to the challenge which has been presented to them despite concerns which are still relevant today that they are running desperately short of ammunition and sooner or later, the money which is going out is going to have to be paid back. So debt is going to continue to mount in the developed world and other countries where central banks can afford to show some largesse.

The US has had some big fiscal stimuli. It is not enough and it is not necessarily going to the right places. It is clear that it is not helping small businesses to the extent that certainly a lot of politicians in Washington had hoped, particularly the Democrats. 40 million newly unemployed Americans is a really frightening number. It is 20% of the total working age population in the US being thrown out of work in the last five weeks, which is very scary indeed and it gives you some idea of the scale of the challenge. European Union’s announcement yesterday that it is hoping to roll out a new package with grants and supported by loans will be approved in due course albeit with some issues attached. I think that actually is a big deal.