While modern science is creating miracles, the world needs more than a vaccine in the wake of the new corona epidemic. The global economy struggled out of the quagmire of sudden stagnation in early 2020 like a drowning man trying desperately to get air, only to have a brief strong economic recovery come to an end with the re-implementation of the stay-at-home order. A restart after a sudden economic halt can hardly be considered a sustainable economic recovery. With or without a vaccine, the world economic outlook for 2021 is much more challenging than a simple rebound.
Plagues throughout human history have had long-term negative effects. They cause irreversible disruptions to aggregate demand and supply, and when overlaid with a rethinking of human norms of behavior, the economic recovery process can easily be aborted. As a result, the economy is often in a fragile position of stagnation and fragile after an epidemic, and in this regard, the current wave of the new corona epidemic is hardly an exception.
The first half of 2021 looks to be a repeat of history. With the exception of China, which has effectively contained the second wave of the epidemic by prioritizing public health over economic development, major developed economies, including the United States, Europe, Japan, and Canada, have begun a new round of stay-at-home orders. This round of stay-at-home orders is not as harsh as the first wave of the epidemic, but it coincides with the end-of-year consumption peak, and the seasonality of consumption data this year is likely to be less pronounced than in previous years.
For the US and European economies, this means the risk of a double-dip recession in the world economy. The resurgence of the real economy is in stark contrast with the rapid advancement of the stock market. The optimism of the stock market is largely due to the zero interest rate monetary policy of major economies, rather than the resilience of the real economy. The performance of the stock market can be regarded as a vote of confidence in the future.
At the same time, we cannot be complacent about other risks to the world economy. The U.S.-China conflict is my biggest concern. As the trade war evolves into a technology war, the world’s two largest economies stand at a critical juncture on the road to a “new cold war. The post-epidemic outlook for the world economy depends in large part on whether the U.S. and China can move from conflict escalation to conflict resolution.
The election of Biden as the next U.S. president offers an opportunity, but it will not be easy to achieve a resolution of the U.S.-China conflict. Tensions between the two countries have been sinking for a long time, going back to before Trump took office. The United States and China today desperately need a new framework for interaction, and the three most important cornerstones are as follows.
The first is dialogue. While there have been regular strategic and economic dialogues before, a better solution would be to establish a permanent Secretariat in a neutral zone to deal full-time with all topics involving the U.S.-China relationship, from trade and technology to cyber and human rights. The Secretariat would be responsible for data sharing, joint policy writing, bilateral agreement enforcement, and transparent dispute arbitration.
The second is trade. The core issue should shift to addressing the savings imbalance by increasing U.S. savings and decreasing Chinese savings to ease the trade imbalance between the two economies. This approach could equally help the domestic economies of both countries. By reducing surplus savings, China would find new support for domestic demand, consistent with its policy of a large domestic cycle and a dual domestic and international cycle. Similarly, if the United States commits to boosting domestic savings, investment and productivity in the medium to long term, its long-term growth prospects could improve.
Third, there are structural considerations. Ultimately, the focus of U.S.-China dispute resolution needs to shift from bilateral trade to key structural issues, such as intellectual property rights, technology transfer, subsidies to state-owned enterprises, and cybersecurity. The U.S.-China structural agenda framework should be based on improving market access for both countries and providing opportunities for growth. Rules-based market access should begin with the resumption of bilateral investment treaty (BIT) negotiations. This will stand the test of time and is an approach that has been used by both countries for a long time before. The United States has 42 BITs in place, while China currently has more than 100 BITs in force.
A U.S.-China BIT would remove the ownership cap on direct investment by multinational firms in both markets. This single provision would do away with joint venture structures in cross-border investments, , and the curve will resolve disputes over forced technology transfer. Without joint ventures, there would be no technology transfer to joint venture partners. A broader, enforcement-effective BIT could also be used to resolve disputes over intellectual property rights, industrial subsidies, and cybersecurity. Admittedly, it will be difficult for either side to choose to back down voluntarily after years of ongoing conflict, but both the United States and China need to take some steps to begin rebuilding mutual trust. Taking the first step toward rebuilding mutual trust is far better than staying where they are. With a fragile global economy struggling in the shadow of the epidemic, this is the time when the two most powerful countries in the world need to show leadership. The world cannot afford greater conflict in the wake of the epidemic.
(The author is a senior fellow at the Yale School of Global Affairs and Management, former chairman of Morgan Stanley Asia, and author of “Out of Balance. This article was translated by Yizhi Ye)