On December 29, 2019, we wrote a major article titled THE END OF AMERICA highlighting one of today’s world’s most powerful trends; the tectonic shift of leadership between America and China.
At the time we were writing :
“The world is in this transition phase today, a transition of world leadership between America and China.
America’s Kondratieff cycle started in 1949 and ended in 2016.
It followed the rule of the British Empire, which itself came on the heels of the French empire, the economic dominance of the Dutch cities, Spain, Portugal and the Italian cities.
China’s Kondratieff cycle has just started.
America’s fears about being overtaken economically and militarily are heightened, particularly since Donald Trump’s election in December 2016.
The current change of leadership is not simply a matter of China overtaking America in terms of GDP or economic might,
It is a much deeper questioning about the efficiency and the sustainability of the American model.”
11-months later, the striking contrast between a polarized American democracy that is reeling from a Presidential election where the loser refuses the rules of its own democracy and 15 Asian Nations led by China signing the world’s largest regional free trade agreement, covering 2.2 billion people, more of humanity than any previous free trade agreement, cementing China’s image as the dominant economic power in Asia, is a testimony of the dynamics at play and the loss of dominance of America as the world leader.
R.C.E.P cements China’s leadership in Asia
Last Sunday, after eight years of talks, China and 14 other nations from Japan to New Zealand to Myanmar formally signed the world’s largest regional free trade agreement:
The Regional Comprehensive Economic Partnership ( RECP)
The R.C.E.P. encompasses the 10 countries of the Association of Southeast Asian Nations plus Australia, China, Japan, New Zealand and South Korea.
The R.C.E.P. eliminates tariffs for goods that already qualify for duty-free treatment under existing free trade agreements. It allows countries to keep tariffs for imports in sectors they regard as especially important or sensitive. The pact’s rules of origin set common standards for how much of a product must be produced within the region for the final product to qualify for duty-free treatment. These rules will make it simpler for companies to set up supply chains that span several countries.
China builds multilateralism when America has retreated to isolationism
The very use of the word “partnership” rather than the words “Trade agreement” gives the scope of the treaty and the presence of Australia and Japan, two countries that are going through a tense relationship with China at the moment testifies of its strategic importance to all participants.
India bailed out of the negotiations in July as it wanted a far more comprehensive and binding agreement.
What is truly striking is that It comes after a global retreat by the United States from sweeping trade deals over the past four years and the use of unilateral tariffs sanctions by the USA to influence trade.
Nearly four years ago, President Trump pulled the United States out of the Trans-Pacific Partnership, or T.P.P., a broader agreement than the R.C.E.P. that was widely seen as a Washington-led response to China’s growing sway in the Asia-Pacific region.
China is taking the opposite direction. It is now filling the void left by Donald Trump, taking the leadership role in building partnership and multi-lateral agreements with its neighbours and even further away countries in Latin America, Europe, Africa and the Middle East
This new agreement shows that the rest of the world will not wait around for the United States to rejoin multilateralism and President-Elect Joe BIDEN has been mostly silent on the subject for now.
At the same time, and within the last two months of his Presidency, Donald Trump is enacting new sanctions against Chinese companies, trying to bind the next administration into its confrontational policies, playing on the anti-Chinese sentiment he has fuelled consistently over the past four years.
The RCEP’s lower trade barriers could encourage global companies to try to avoid Mr. Trump’s tariffs on Chinese-made goods to keep work in Asia rather than shift it to North America, forcing the US Administration to extend its sanctions and tariffs if it wanted to pursue these destructive policies.
R.C.E.P. gives foreign companies enhanced flexibility in navigating between the two giants. Lower tariffs within the region increase the value of operating within the Asian region, while the uniform rules of origin make it easier to pull production away from the Chinese mainland while retaining that access.
At a time where the American democracy is bickering with its own democratic rules with vote recounts, legal actions and tens of millions of Americans convinced that the elections were rigged, China is powering ahead bringing with it the mots populated and most productive economic area of the world.
There is no doubt that the R.C.E.P. will replace the Trans-Pacific Partnership, shutting out America Canada, and other American Nations from an agreement that gives the Asian Nations a considerable competitive advantage, at a time where China is becoming the world’s largest consumer market.
In full coherence with China’s philosophy of not interfering in other Nations’ domestic affairs and sovereignty, the Partnership applies only to goods and excludes services in general, such as legal, accounting, digital services or state support to economic sectors and enterprises.
Contrary to the TPP which included them and aimed at forcing global standards, the RCEP is a true free-trade agreement lowering uniformed tariffs and eliminating the notion of country origin.
Ironically, this was exactly the model pursued by the USA at the end of the Second World War in the building of international organisations and the principles that founded the unification of Europe in the 1950s.
Today’s America is doing exactly the opposite, targeting countries such as Mexico, Canada, Colombia, the UK, France or China individually and sanctioning private corporations on the questionable logic of their National Security, against the very principles of the freedom of enterprise and the rule of Law that were at the core of the American dream.
Interestingly enough, all the sanctions and tariffs imposed by America on China and its neighbors since 2018 had ZERO impact on the trade surpluses of China or Mexico with the US, while causing major damage to the presence and sales of American brands in China if the 29 % decline in Apple Inc.’s sales in China in Q3 2020 are to be analyzed.
Equally, and apart from symbolic gestures such as Apple re-opening a factory in the US and LVMH doing the same, the impact on US employment and relocation of manufacturing has been close to nil. Due to COVID, America is living with the highest unemployment in decades while investments hover at a historically low level
It is unclear how the United States will respond to the new trade pact.
While Mr. Biden is set to assume office in January, trade, and China have become fraught issues.
The T.P.P. came under fire from both Republicans and Democrats for exposing American businesses to foreign competition. It remains contentious, and Mr. Biden has not said whether he would rejoin the deal — renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — once he enters office. But analysts say it is unlikely to be a high priority.
Mr. Biden has said he would wait to negotiate any new trade deals. He wants to focus his energy on the pandemic, the economic recovery, and investing in American manufacturing and technology.
Clearly, for as long as the Electoral College has not voted and Joe Biden has been officially declared the next President of the USA by the Senate, the President-Elect will avoid making contentious policy decisions.
Electoral College electors do not vote until Dec. 14. The electors’ votes typically align with the popular vote in each state. But not all states require the votes cast by electors to mirror the popular vote. Certificates recording the electoral vote results in each state must be received by the president of the Senate and the archivist no later than Dec. 23. The official results of the electoral votes are sent to the newly elected Congress, which is set to meet in a joint session on Jan. 6, 2021, and announce the results.
Two major uncertainties may disturb the process. Donald Trump could well try to deal the vote of the Electoral College through a last-minute global action in front of the Supreme Court and the re-run of the two Georgia Senatorial seats could have an major impact on the majority of the US Senate.
The contrast between a dysfunctional American Democracy and China’s smooth management of its affairs is also visible in the handling of the COVID health issue, its lasting consequences on the two countries and their respective pace of economic recovery.
COVID‘s Health crisis
At a time where the world is hitting a devastating second wave of the Coronavirus with 55 million cases worldwide and 1.3 million deaths, the differences in numbers and ways of handling the crisis could not be more striking between the Usa and China.
America is by far the most affected country of the entire world with 11.3 million cases and 251’000 cases while China ranks at the 62nd position with 86000 cases and less than 5’000 death.
Obviously, the Chinese data must be taken within a large pinch of salt as cases and deaths are probably not attributed in the same way.
Nevertheless, the contrast between the USA and the rest of the world also testifies to the failure of the American system to handle the crisis.
America took a very long time to address the problem, the endless debates about the necessity of wearing masks, the usefulness of lockdowns and the recurring criticism of the President towards his own scientific team created a sense of chaos and made the American People less sensitive to the risks of the virus.
By contrast, China acted swiftly, locking down entire regions and 100 million people and started working on vaccines and treatments very early on. It built hospitals in a matter of days and its face recognition and population tracking systems enabled swift containment of citizens identified as having been contaminated.
Today, China is not experiencing a second wave while Europe and the USA are facing damaging lockdowns that will have a major bearing on their economic recovery in the 4th quarter of 2020. The W-shaped recovery is well upon us in western democracies while China’s recovery is powering ahead.
the whole issue of COVID-19 and of its handling raises the question of the respective efficiency of the two systems.
Are Western Democracies better-equipped to deal with natural catastrophes ?
The long-held view by the Chinese that their public governance system is far superior to the Western Democracies system seems to be proven right by the COVID episode.
The power of Nations comes from their economic might
As history and the long term cycles studies of Nikola Kondratieff show, the change of geo-political dominance is a constant phenomenon in the history of humanity and the changes in leadership always come from changes in the economic might of the declining and rising Nations.
These changes often come through new technological breakthroughs, the quality of infrastructure and the relative efficiency of their social and political models.
After a long succession of dominant powers since year 900, the UK took the world leadership after the Napoleonic wars and that leadership lasted until 1949, when the United States of America became the dominant power after WW2.
But the decline of the British Empire and the rise of the USA really started way before.
It started at the end if the First World War when the British economic dominance started being challenged by America’s heavy investments in its steel, railroad, electricity and oil industries.
The United Kingdom was ahead of the other European Nations in its industrialisation process in the 18th century and its infrastructure reach the peak of its efficiency in the 19th century. Its economy was powered by coal an its geopolitical dominance coming from its mastering of the seas and of shipping.
America then was an emerging economy, a bunch of English Colonialist who made the decision to free themselves from their King of England Ruler during the American Revolution and created an entirely new political system, Democracy, that negated the previous existing system of the Monarchy, established for milleniums.
They created a Society based on the Rule of Law where “The People” was at the center and no longer the King or the Emperor, in a class-less society. Their hard work and entrepreneurship yielded phenomenal economic result while the freedom of their political system attracted talented workers leading to innovation, investments, and a phenomenal economic development.
America saw the birth of widespread electricity, telephone, railroads and its economy was powered by this new found gold : Oil, a very American phenomenon.
The differential in their economic growth rate and the quality of their newly installed infrastructure gave the country a massive productive competitiveness and the size of their own domestic markets led to unheard of wealth creation and increases in living standards.
They became the producers of everything during the 1st World War, supplying the old world with ships, armaments, ammunitions and foodstuff that their industrial capacity could churn out, outpacing the industries of the old world.
And they finally became the largest economy of the world after the Second World War, dwarfing the size and might of the previous leading power, the United Kingdom of Great Britain.
China is today vis a vis America exactly where America was in 1918 vis a vis Great Britain.
China’s political system is as much misunderstood in the West than the American democracy was misunderstood back in the 19th century.
Like America, China values free enterprise but it also understands that free-wheeling capitalism leads to excesses that creates massive depressions.
China’s political system is based on a “Political by Professionals” logic, giving the full economic freedom to its citizens while keeping the community and the Nation at the centre.
Democracy ad Freedom of speech happens within the Professional Political Apparatus of the Communist Party, not on the public scene or through Tweets and Executive Orders.As is the case with Western private corporations, its CEO’s are not chosen by the owners of ipHones, but by a professional board of Directors that choses highly qualified executives to run the country under the control of their Board of Directors.
China’s infrastructure is of the latest State of the Art while America’s infrastructure is outdated and derelict, as was the case with the UK in the 20th century. It has more airports, ports, high-speed train, renewable energy, manufacturing capabilities and innovation capabilities than the US today.
It patents more innovation than any country in the world and its financial markets are starting to compete significantly with the US financial markets.
Its consumer market is 4 times larger than the USA, and it has none of the financial imbalances that plague the US, and in particular high savings ratios that are funding its own level of indebtedness.
China is the largest holder of foreign exchange reserves and has the highest trade surplus of all nations in the world.
Its military, space and digital know hows are now competing head on with the rest of the world and sometimes, as is the case with Hua Wei or Ant Financial way outpace the US where no company has made any foray in the 5G technology.
China’s Competitive Advantage is unstoppable because it is embedded in its superior infrastructure, superior public governance system and a more cohesive society.
America in making a big mistake in thinking that it can stop or contain China’s rise through the use of force, sanctions, tariffs or any confrontational measures.
In our lengthy article titled THUCYDIDES TRAP, we analysed the risks associated with the shift in power leadership, a traditional challenge of the history of humanity first described by the Greek Historian Thucydides about the Peloponese wars between Sparta and Athens in 300 BC.
It is the same trap that led to the 1st World War as Germany was challenging the British Empire and that ultimately caused two of the most devastating wars in the history of Humanity.
Rather than fighting the unstoppable rise of China, America should accompany it with the aim to create a globalised world where no nation can become Ruler Supremo by itself.
COVID actually accelerated the shift of power by enabling China to leap forward economically
COVID -19 amounted to the most global and the most devastating external shock to the world economy ever in peace time.
But China, where it originated, will be the only economy of the world to experience a positive growth rate in 2020, when America, Europe and Japan will have gone through the deepest recessions since WW2.
America is particularly affected as highlighted above because mainly of its handling of the health situation and it is likely that we will be experiencing a W-shaped recoc=very leading into 2021.
By contrats, China’s economic number look bright for Q4 2020 and 2021
China’s economic recovery strengthened in October, with consumer spending picking up steadily and industrial production and investment rising faster than expected.
Industrial output rose 6.9% in October from a year earlier, versus a median estimate for a 6.7% increase, the National Bureau of Statistics revealed today.
Retail sales growth accelerated to 4.3% from 3.3% in September, though missing
expectations for a 5% increase.
The data shows China’s recovery is well on track, supported by stimulus policies, strong export demand, and the nation’s success in containing the spread of the coronavirus.
Consumer spending is catching up after a slow start, complementing the industrial-led recovery. Retail spending received a boost from the golden week holiday last month, though many shoppers also delayed purchases to take advantage of the Singles’ Day shopping festival in November.
In the first 10 months of the year, retail sales were still down 5.9% from the
same period in 2019.
The recovery continued to broaden out in October and growth is expected to accelerate in the fourth quarter, Fu Linghui, a spokesman for the National Bureau of Statistics, told reporters in Beijing.
Larry Hu, head of China economics at Macquarie Bank Ltd. in Hong Kong, said he expects growth to pick up to 5.5% in the fourth quarter from 4.9% in the previous three months.
China continues to move closer to its potential growth and growth is projected to pick up to 8.4% in 2021, as the global economy is set to recover from the health crisis, Unemployment is expected to fall back towards its long term trend as well and the implementation of the RCEP signed yesterday should add another boost t the Asian economies at large.
By contrast, the US economy now has to deal with lasting consequences of the Coronavirus.
America’s unemployment is at the highest since the 1930 depression with still 20 million Americans out of a job at close to 800’000 people filing claims for unemployment benefits every week.
High unemployment will remain a drag on consumption for many quarters to come.
Economists have become less bullish about U.S. economic recovery from the COVID-19 induced recession amid concerns about the second wave of the virus, according to a survey released Monday.
A panel of 52 economists has lowered the forecast for U.S. economic growth rate for the fourth quarter of 2020 as well as for 2021.
U.S. GDP shrunk by a record 32.9 percent in the second quarter of 2020, when annualized and adjusted for inflation. This compares to an increase of 2.4 percent in the fourth quarter of 2019 and a 5 % decline in the first quarter of the year.
The median forecast calls for a 33.1 percent real GDP (inflation-adjusted GDP) growth in the third quarter and that would reverse much of the 32 percent decline from the second quarter, the survey said. The final data will be published on November 25.
However, the median forecast for real U.S. GDP growth for the fourth quarter of 2020 was lowered to an annual rate of 4.9 percent from 6.8 percent in the prior survey in June and the median real U.S. GDP growth estimate for 2021 is 3.6 percent, compared with an expected increase of 4.8 percent in the June survey.
Most economists do not expect the US economy to reach back its pre-pandemic levels before the second half of 2022, another two full years ahead, and that is not taking into account the dampening effects of the second wave of the virus.
By contrast, China’s economy will power ahead at a clip of 8 % in 2021, adding a full US$ 1 Trillion to its 14.3 Trillion economy.
The massive monetary and fiscal stimulus enacted by America to fight the economic consequences of COVID has left its budget deficit ballooning to unprecedented levels and the balance sheet of the FED expand to 335 Of GDP.
U.S. government budget will end fiscal year with a more than $3 trillion deficit. The final tally for the budget deficit in fiscal 2020 came to $3.13 trillion. That was more than triple last year’s shortfall of $984 billion and double the previous record of $1.4 trillion in 2009.
Corporate America is more indebted than ever, thanks to the combined effect of low interest rates and the counter-cyclical tax cuts enacted by Donald Trump in 2018.
Their sensitivity to rising interest rates makes it a dangerous environment for corporate America.
Finally, households are severely impacted by high unemployment and almost record high indebtedness. For now, with interest rates at close to zero and bond yields at 1.4 %, the impact has not been severe, but any increase in interest rates could have a tremendous impact on solvencies.
In other words, China is pulling ahead and returning to normal while America will take several quarters if not years to recover from the Pandemic.
China is powering ahead and closing the gap with America faster than would have been expected before COVID.
Its rise is unstoppable for structural reasons.
What may have changed in the picture is a secular shift of global portfolio flows that will favour Chinese assets at the expense of American assets.
The Chinese currency has started a secular ascend against te US dollar.
US equities are highly overvalued while Chinese equities remain cheap historically.
US Bonds yield half their Chinese counterparts.
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