Need to Know: April 5
There was a farmer whose horse ran away. That evening the neighbors gathered to commiserate with him since this was such bad luck. He said, “Maybe.”
The next day the horse returned, but brought with it six wild horses, and the neighbors came exclaiming at his good fortune. He said, “Maybe.”
And then, the following day, his son tried to saddle and ride one of the wild horses, was thrown, and broke his leg. Again the neighbors came to offer their sympathy for the misfortune. He said, “Maybe.”
The day after that, conscription officers came to the village to seize young men for the army, but because of the broken leg the farmer’s son was rejected.
When the neighbors came in to say how fortunately everything had turned out, he said, “Maybe.”
The Taoist parable above reflects the distance with which we’d like to view the Covid-19 pandemic.
I want to avoid wild speculation. But clearly this is a global landmark moment that will require policy makers to respond in myriad ways.
What are some of the already clear ramifications for Asia?
The chilly U.S.-China relationship will get much colder.
How icy?
It’s estimated as many as 250,000 Americans may die and trillions of dollars in damage has been done to the U.S. economy. At least 6 million people have lost their jobs. Both losses in Europe may be higher.
Look at these unprecendeted photos of empty tourist attractions in London. Fury is rising. There are already calls for Beijing to make reparations — a historically loaded word.
One U.S. Senator wants China to waive US$1 trillion in American debt. Another has called for an inquiry quantifying the harm caused by “The Party’s mishandling of this disease and designing a way to secure payment from Beijing to compensate for that harm.”
Some suggest the U.S. might allow affected individuals and businesses to sue China. Those claims could be in the trillions. (Despite what Bloomberg and the Washington Post — two American news organizations with deep commercial ties to China — said to cast doubt on the legality of that, Congress already changed American law so Americans could sue the Saudi government for giving support to the 9/11 hijackers)
I’ll leave the law to lawyers. But I do know politics. And politicians will shift blame in any way they can. “Opaque” China is a perfect mark. It will need its friends like Bloomberg and the Washington Post.
Decoupling or Divorce?
At best, the results of the recent trade war will be locked in place, and there will be little goodwill on either side to sit down and negotiate a more sweeping long-term deal. I suspect we will see a further review of Chinese trade practices and a reduction of American dependence on China for essential materials.
Pharmaceuticals will be one area, for sure. According to U.S. Commerce Department, China makes the following amounts of these drugs consumed in the US:
80% of antibiotics
95% of ibuprofen
91% of hydrocortisone
70% of acetaminophen
45% of penicillin
40% of heparin
Incredibly, Beijing’s blundering propaganda machine once again hurt its own interests by drawing attention to this dependency when it threatened to block those supplies and send America into “the hell of a novel coronavirus epidemic.”
Given the above sentiments already being expressed in Congress, there’s little doubt lawmakers will end this reliance on China.
And the US is by far the largest market for pharmaceuticals in the world. Americans consumers account for about 75 percent of total pharmaceutical profits, despite accounting for only 27 percent of global income. Total global spending on pharmaceuticals amounted to US$1.1 trillion with estimates of profits ranging from US$139 to $290 billion.
Just one example of how much a bad breakup will cost China.
For other Asian nations, American companies and buyers leaving China is an opportunity.
Vietnam, the Philippines and Taiwan are three that come to mind.
Vietnam with its long coast line, flat land, and young and cheap population has long been eyed by companies looking to leave China because of the trade war. However, many businesses were deterred by the lack of infrastructure.
Vietnam doesn’t have the electricity, roads and ports to support a mass movement of manufactures from China in short period of time.
As discussed in our Infrastructure primer, public-private partnerships with foreign companies would be a way to kick-start that in Vietnam. However, the weak rule of law makes it unlikely.
In Vietnam, the law is what the Communist Party says it is on the day it says it. That’s a huge deterrent to investors entering contracts in Vietnam generally; but it’s extra risky when the counter-party is the government itself and the time horizon to recoup the investment is around 25 years.
It’s a wonder the Philippines is not already a massive offshoring hub.
The population is large, young, cheap and speaks English. It’s easy to get there by sea from North America.
The reasons it’s not are similar to Vietnam. Infrastructure is poor. Power prices are high - almost double China and India.
In a report on the investment climate in the Philippines for 2019, the U.S. State Department also noted’ “a complex, slow, and corrupt judicial system prevents the timely and fair resolution of commercial disputes.”
Red tape is endemic. Incredibly, it takes twice as long to get bureaucratic approvals than in India, which is infamous for its inefficiency.
While the rest of Asia is generally seen as being safe — the Philippines is not. Violent crime rates and accompanying security costs are high.
The cult of personality media might also point to the mercurial President Duterte as a deterrent, but according to the State Department he has improved the overall climate. But not enough to make the Philippines a slam dunk choice for those looking to leave China.
Taiwan is an interesting dark horse.
It’s well run and the infrastructure is decent. Courts are legitimate. The workforce is skilled. Wages are high compared to Vietnam, but not as high as you would think compared to the West. Taipei is the most livable big city in Asia.
Drawbacks: the population is small (38 million). Corporate taxes are competitive though income taxes are very high and rates above 40 percent kick-in at about US$150,000. China will look dimly on businesses leaving it for its “renegade province” and may retaliate against those companies.
But already being lauded for it’s medical response to Covid-19, Taiwan may be a winner in more ways than people think coming out of this crisis.
Practically, I think you will see companies expand operations in all three countries and place bigger bets quickly on the ones that payoff.
What’s Next
When a storm passes, there’s relief and a tendency to think things will go back to normal; that they will “work out.”
But this is what George Friedman, one of the most sober geopolitical analysts around, had to say in Geopolitical Futures:
“We should remember that economic destruction due to war gave rise to Hitler and Lenin. Economic destruction in any form is destabilizing.
During Europe’s great Black Death, citizens marched with torches and burned those they felt were ill and those they felt were responsible for the illness. It was not only the plague that created a time of horror but the legitimate fear it generated in people and the inability of the state to protect them, in a world where kings were as likely to die as peasants. The virus is dangerous. The follow-on effect can be far more dangerous.”
Let’s hope our policy makers rise to the occasion. When I consider their responses to:
the 2008 financial crisis which indemnified the still wealthy bankers responsible
the European Union’s slow unraveling
Brexit and the rise of Trump which resulted from a callousness bordering on contempt to the suffering of communities hurt by globalism
the Chinese Communist Party’s shift from consensus driven dictatorship to Xi Jingping’s repressive regime of Han nationalism
Their more than ten-year track record of faceplants leaves me discouraged. The contemplative wisdom of that Taoist farmer has never been more necessary ...