Even as the Covid-19 pandemic rages, it is also impacting and shaping wider economic and political trends. The 2008 crisis pushed China several notches higher in the global power order.
The current crisis, which comes in the wake of an increasingly belligerent US-China relationship, could lead to an intensification of the strategic competition between the two countries and have similar consequences.
Both the US & China will be hit hard. The question is: Who will be damaged less, and who will have the will to apply the lessons of the experience better?
The pandemic has already led to mass casualties and economic damage to China, which has now kick-started its recovery. The situation in the US is only now developing and things could get worse before they get better. Though it had time, the US mismanaged its early response. Its political system, where authority is divided between federal, state and local governments was not able to provide the coordinated response that authoritarian and centralised China could.
The Covid outbreak was centred in Wuhan and brought China’s huge industrial machine to a standstill. Global supply chains were disrupted and markets crashed as China locked down to deal with the situation.
The over-centralised Chinese political system was responsible for the delays in alerting the world to the virus, resulting in its spread. But that same system also undertook an unprecedented quarantine of an entire province and, in a sense, brought the world time to cope with it. The new propaganda narrative in China is already emphasising this and the ‘victory’ of the Communist Party of China (CPC) and Xi in countering the spread of the virus.
The peak has passed in China and the epicentre of the virus is moving westwards from Iran, Italy to Spain. All of Europe, including the phlegmatic Scandinavians, are in a panic. Like Italy and Spain, the US fumbled in its initial response. Now, the pandemic is expected to accelerate and, if it follows the pattern of China, Iran and Europe, the US healthcare system could be overwhelmed at places.
There are some already forecasting recession in the US, two successive quarters of negative growth. The sudden stop of economic activity through quarantines and social distancing will come with attendant loss of jobs and income. The Trump administration reacted last week by declaring the pandemic a national emergency and the Congress has passed a sweeping coronavirus relief package.
Meanwhile, Bloomberg has reported that the Chinese economy is on its way to recovery, operating at 80 per cent of its normal capacity as of last week. Though, a deeper collapse of demand in the US could hit China once again, given that 19 per cent of Chinese exports go to the US.
Both the US and China will be hit hard, but the question is: Who will be damaged less, and who will have the will to apply the lessons of the experience better? The initial US responses have not been heartening and the Trump administration seems to be out of step with the evolving situation.
The Covid outbreak has brought out the holes in the US system the working conditions of many who do not get paid sick leave, the large number of uninsured people or the undocumented immigrants who are unable or unwilling to seek treatment, thus endangering efforts to deal with a contagious pandemic.
Conventional wisdom has it that Covid hit China’s already slowing economy, and that the CPC’s approach will be to put off further reform and focus on a short-term economic stimulus. In fact, the opposite could happen.
Shocked by the outbreak, the CPC could actually be pushed to take the economic and political steps it has been dithering on for the past five years.
This could mean Beijing doubling down on the economic and financial liberalisation it has undertaken since the 19th Party Congress, enforcing steps to provide a level playing field to its private sector in relation to the State Owned Enterprises (SOEs), removing barriers to the functioning of foreign firms in the country, especially those relating to transfer of technology and regulation. Having already expanded the role of the party in private businesses in the past two years, the CPC may be less leery of going down that path.
The outbreak will accelerate trends towards deglobalisation and technological decoupling between the US and China. And, indeed, to go by the Chinese experience, push the trend towards using AI, Big Data and facial recognition, as well as the use of robots in healthcare and industry.
Businesses are likely to reassess the consequences of maintaining long global supply chains and look for more proximate options, as well as build a degree of redundancy in sourcing their critical supplies.
Meanwhile, even as the outbreak still rages across the country, Beijing has ensured that it continues to look outward even as Europe and the US have turned inward.
China has already seized the initiative in public health leadership by sending aid to the affected countries. Besides Iran and Iraq, China sent experts, ventilators and masks to Italy and offered to provide help to all those that needed it.
Last Thursday, President Xi spoke to the UN Secretary General, calling for the international community to take action to fight the epidemic. China has been holding teleconferences with experts, officials from Azerbaijan, Belarus, Georgia, Moldova, Armenia, Turkmenistan, Italy and several Pacific Island countries. In the coming days it is likely to intensify this effort, which, not surprisingly, follow the tracks of the Belt & Road Initiative.