Among the headaches Donald Trump is leaving for President-elect Joe Biden is Asia’s pivot away from U.S. economic leadership.
As the White House was throwing every policy weapon in its arsenal at China, Xi Jinping was throwing open China’s economy to 14 other countries. The title of the newly signed Regional Comprehensive Economic Partnership, or RCEP, indulges in a bit of hyperbole. It’s more vaguely worded, highly targeted, sector-specific pact that sadly excludes India than a “comprehensive” anything.
Yet RCEP represents an infinitely greater win for free trade than any of the limited bilateral pacts Trump signed. It will add an estimated $200 billion to global gross domestic product annually. It also comes as Japan and South Korea join China in the rarefied club of major economies stabilizing amid Covid-19 fallout.
The real memo to Biden’s incoming government is that China just formalized the extent to which the globe won’t wait for America to undo Trump’s trade policies. He needs to hit the ground running to prevent Asia from moving on without the U.S. economy.
It’s no exaggeration to say “Beijing has successfully positioned itself at the center of the region’s trade and investment networks, ousting the U.S. as the leading power in Asia-Pacific economic diplomacy,” says analyst Tom Miller of Gavekal Research.
Biden’s administration will inherit Trump’s ever-escalating trade war, but he need not continue it. Biden is a life-long multilateralist whose first impulse will be hosting a series of summits with China’s Xi Jinping, Japan’s Yoshihide Suga and South Korea’s Moon Jae-in. Perhaps even bringing North Asian leaders together for trilateral talks at the White House.
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There’s a limit to how much multitasking Biden can do. Trump leaves behind a full-blown coronavirus epidemic and considerable economic fallout. The fractured nature of U.S. politics might limit Biden’s own pivot to working with Asia, not sabotaging it.
Biden starts out with a soft-power deficit. The one saving grace is that RCEP is hardly the game-changer Beijing suggests. Sure, the bloc covers about 30% of world gross domestic product and 2.2 billion people, making it a record accomplishment. But it is still fuzzy on details and enforcement mechanisms.
It will, in theory, eliminate tariffs and quotas for 65% of traded goods, which in many ways makes RCEP less ambitious than the Trans-Pacific Partnership trade deal. Even so, pumping the equivalent of Peru’s GDP into world markets annually is not nothing. It’s a tailwind the U.S. won’t enjoy as 2021 begins.
Priority one for Biden’s White House is getting the coronavirus under control. The first wave saw U.S. growth plunge toward Depression-era depths. A second could hit demand and confidence even harder—and with less policy latitude to stabilize growth. Washington’s debt load has already surpassed the $27 trillion mark. And the Federal Reserve’s balance sheet has already swelled past a Japan-like $5 trillion.
Right out of the gate, Biden must mind the dollar. Time will tell if Trump’s economic policies gravely injured the reserve currency. The same goes for aggressive and opaque Fed policies more consistent with developing nations than a Group of Seven power. The only way to explain Wall Street rallying to all-time highs amid a once-in-a-century pandemic is massive Fed liquidity.
Count the ways all this feeds into Xi’s longer-term objectives. One is increasing the yuan’s role in global trade and finance. Yuan internationalization, ironically, owes the Trump era a debt of gratitude. And the dynamic is sure to keep Biden’s economic team on its toes.
So will the widening divergence between the growth trajectories of the U.S. and China. Economist Takeshi Yamaguchi at Morgan Stanley says the bank’s China team “looks for recovery to continue.” Adds Diana Choyleva at Enodo Economics: “Beijing has done ‘whatever it takes’ to stoke a V-shaped recovery.” Odds are, China’s leaders will continue to do just that.
China isn’t out of the woods domestically. The recent $151 million default by Yongcheng Coal and Electricity Holding highlights the cracks lurking beneath the surface. Turmoil in credit markets is compounded by Beijing’s crackdown on internet companies like Alibaba and Tencent and finance giants like Ant Group.
Yet 2020 may be remembered as the year Washington ceded China the future. New International Monetary Fund data show China is set to leapfrog over 56 countries on the per-capita income tables by 2025. By then, China will rank 70th, pushing it closer to the orbit of the wealthiest one-third of nations.
Trump’s advisors should have heeded Friedrich Nietzsche’s argument that what doesn’t destroy you makes you stronger. The German philosopher’s view certainly seems to be vindicated by Xi’s economy three-plus years into Trump’s campaign to hobble China Inc.
Though Trump’s attacks on Huawei Technologies, ZTE Corp. and other national champions drew financial blood, Xi’s economy is spreading its wings and gaining altitude. The one Biden inherits is leaving $200 billion on the table at the worst of times.