Ten years from now, when economists mull the exact moment the U.S. ceded the future to China this week’s events are sure to top the list of time-stamp candidates.
This was the week, after all, when Chinese President Xi Jinping tossed another 4 trillion yuan, or $565 billion, at an economy taking devastating coronavirus blows. The 4 trillion-yuan figure will sound familiar to students of 2008 and 2009, back when Beijing threw exactly that amount at plunging demand amid the “Lehman stock.”
It worked back then. China recovered rapidly from Wall Street’s crash thanks to aggressive infrastructure spending. By 2009, China was growing 8.7% again thanks to giant public works projects—six-lane highways, bridges, ports, new skyscraper-strewn commercial centers.
Now, as Xi’s Communist Party pulls a similar play, it’s hard not to lament this week’s missteps in Mitch McConnell’s Washington.
Within the same 24 hours during which Xi’s announced a nearly $600 billion plan to build even more airports, railways and power grids, Senate Majority Leader McConnell gave the thumbs down to comparable upgrades to America’s economic hardware. “Infrastructure is unrelated to the coronavirus pandemic that we're all experiencing and trying to figure out how to go forward,” McConnell said.
Music to Xi’s ears. The trillions of dollars his government lavished on the “Made in China 2025” extravaganza is already positioning China to lead the future of artificial intelligence, automation, micro-processing, renewable energy, robotics, self-driving vehicles, you name it. And Trump made it easy for Xi. As China prepares for the global economy it will confront in 2025, Trump is making coal great again.
Granted, Xi has been slow to get the state’s tentacles out of the economy. His pledges to let market forces play a “decisive” role in decision making have gotten only modest traction in seven years. China’s hulking $10 trillion shadow-banking system, meantime, continues to allocate capital recklessly.
Look no further than the recent jump in the number of bank bailouts, including Hong Kong-listed Bank of Gansu. Beijing’s rescue efforts highlight the deterioration of balance sheets and the extreme opacity that plagues China Inc. The accounting fraud at Luckin Coffee, China’s supposed Starbucks killer, is a reminder Asia’s biggest economy isn’t ready for global prime time.
But Trump’s three-and-half years in office have been a lost period for building the kind of economic muscle needed to stay ahead of China. Trump is doing zero to get under the economy’s hood. His trade-war and protectionist policies might’ve worked in, say, 1985. In 2020, though, his tariffs are merely added headwinds as the global economy fends off COVID-19 fallout.
Trump isn’t increasing competitiveness and productivity or catalyzing innovation. He’s cutting investments in education, training and health. Trump’s Republican Party is avoiding the infrastructure “big bang” needed to raise America’s economic game. Instead, it cut taxes in ways that reward billionaires without incentivizing companies to fatten paychecks or hone competitiveness.
Over the last few years, Trump widened the gulf between rich and poor by putting monetary easing ahead of structural reform. It’s the same mistake Japan has been making since the 1980s. Stimulus alone does nothing to reduce corruption, increase efficiency or level playing fields.
America’s crumbling infrastructure could use its own nearly $600 million—or even $2 trillion—facelift. Not only would it create jobs, and fast, but also better prepare the U.S. for a 2025 when China’s dominance passes the point of no return.
There’s an alternate reality in which China’s coronavirus debacle plays into Trump’s hands. China absolutely needs to account for its handling of a COVID-19 pandemic believed to have started in Wuhan. There should indeed be investigations and punishment doled by the global community. But Trump’s antics, lies and over-the-top bombast are helping China deflect blame.
Each bizarre Trump Twitter rant makes Xi’s China look serious and sober by comparison. Each Trumpian threat to impose new tariffs here, demand higher military payments there or manufacture some controversy over there plays into Beijing’s hands.
So does McConnell’s refusal to rise to the occasion. At 78, it’s reasonable to think the Kentucky Republican might not have many more years left in top Senate leadership. Yet the lost period of reform that McConnell represents will be with U.S.-China dynamics for decades to come.
Come 2025, U.S. investors may wish they could engineer their own alternative reality—one where McConnell and Trump favored a Marshal Plan of sorts to halt America’s slide toward developing-nation status in terms of infrastructure. When economic historians of the future mull when this risk morphed into fact, the last few days may haunt Washington.
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