Since our programs in April have been postponed to the Fall, we are bringing you Tower Center Thursday Thought. Every other Thursday, we will post a Q&A with one of our Fellows on the current pandemic and their thoughts on how it might affect the economy.
This week, we interviewed Dr. Hiroki Takeuchi, the SMU Tower Center’s Director of the Sun & Star Program on Japan and East Asia, on the implications of this pandemic on China and its impact on trade with the U.S.
How much damage will COVID-19 wreak on the global economy?
It will be huge. I believe COVID-19 will bring much larger damage to the global economy than the 2008 global financial crisis or the terrorist attacks of September 11. The global economy creates wealth by the mobility of three factors: goods, money, and people. During the global financial crisis, the mobility of money stopped but goods and people still moved globally. This time, the mobility of people stopped, which also stopped the mobility of goods and money. Unlike in the past, we have lost the mobility of all the three factors, which means that we have lost the main mechanisms that create wealth.
Moreover, the global value chains (GVCs), which locate different stages of production in different parts of the world, have come to a halt. Even after things have settled down, and borders have reopened, the global economy will have to invest and rebuild GVCs, which will be very costly.
With the reported COVID-19 data, it seems that China has been able to turn the tide in the war against the epidemic. How does this reflect on President Xi Jinping’s leadership and the role of central governments in the future as mankind continues to face these challenges?
In 2014, I wrote a book about local governance of rural China, titled Tax Reform in Rural China: Revenue, Resistance, and Authoritarian Rule. In the book, I gave a systematic analysis of the central-local governmental relationship and argued that competent, empowered, and responsive local leaders are the key to good governance in China’s authoritarian political system. Unfortunately, Xi has undermined local authorities’ popular legitimacy and administrative capacity by blaming the local governments, causing local officials to be fearful of punishment, and paralyzing them from performing routine tasks.
China’s response to the epidemic shows the importance of local governance. At the beginning, local leaders of Hubei Province and the city of Wuhan tried to dwarf the problem and hide the outbreak. The central government’s initial response to the crisis was delayed because local governments did not report the truth to the central government. When the central government imposed a blockade on Wuhan and other cities, the virus had already spread nationwide—and probably worldwide. Xi blamed the delayed initial response on local leaders, but it occurred because he had shifted the blame onto local officials at the cost of administrative capacity of local governments. If Xi had expanded true institutions of democratic accountability based on representative institutions, the central government would have gotten accurate information more quickly and responded to the epidemic more effectively from the beginning. The Xi administration has implemented many good policies, but they were implemented not because of China’s authoritarian system, but despite it.
How quickly can China’s economy rebound from its outbreak?
China’s manufacturing sectors may resume production fairly quickly. But I’m afraid that it will take time for the whole Chinese economy to rebound from the outbreak of COVID-19. The Chinese economy is connected to the global economy, including the U.S. economy, with GVCs, thus the Chinese economy will not recover until the U.S. economy recovers. For example, Wuhan’s semiconductor factory did not shutter during the COVID-19 outbreak. Factories that build advanced electronic products almost never close due to the extensive and costly process of reopening its production spaces – or clean rooms – once production ceases. Until the demand for Apple products recovers worldwide, however, the demand for silicon chips will not recover.
Do you think that the COVID-19 will threaten the U.S. economy more than China’s? Why?
The COVID-19 will threaten both the U.S. economy and Chinese economy because both economies are connected to each other and to the global economy. However, there is concern for the damage to the Chinese economy in the long run. The Chinese economy had slowed before the COVID-19 outbreak and needed structural reforms such as the state-owned enterprise reform to increase productivity in the long run. By contrast, in the long run the fundamentals of the U.S. economy will be strong as long as foreign investment continues to create jobs for American workers. Foreign companies—especially German, Japanese, and Korean companies—invest and create jobs in the United States thanks to GVCs. For example, Toyota’s new assembly plant in Mexico would increase high-skilled parts-supplying jobs in the United States and hence increase manufacturing jobs in both Mexico and the United States.
Through the 21st century, China has become an economic powerhouse in the international arena. With COVID-19 paralyzing the world economy, what impact will that have on China’s ambitions to become an economic leader in the international arena?
For the last two decades, China has become an economic powerhouse in the international arena through its involvement with GVCs. Recently China has shown its intention to take over the leading role in the international economic arena, replacing the United States, which has played the role since the end of World War II. For example, President Xi gave a clear statement opposing protectionism in the 2017 World Economic Forum in Davos. Now that the United States and China are becoming nationalistic, Japan and Germany—the third and fourth largest economies—have the potential to take the leading role to maintain the international economic order.
China also has ambitions to become a political leader in the international arena. Many have seen China’s rise as a threat to U.S. leadership in Asia and beyond. Contrary to conventional wisdom, a “weak China” is not good news for the world, because China is already strong enough to destabilize the Asia-Pacific region and to influence economic and political affairs worldwide. This does not change with the pandemic of COVID-19. However, I believe China is nowhere near powerful enough to be considered a global competitor of the United States—unless the United States itself abandons the leadership role.
If you have specific questions about this article, contact Dr. Takeuchi via email at htakeuch@smu.edu.