We are in the depths of the worst global economic contraction since the Great Depression of the 1930s. But what’s making this a lot more dangerous is that it coincides with the “geopolitical recession” that I have written about before. COVID-19 was inevitably going to be an epic global challenge. But the reason that there has not been more international cooperation in dealing with it is only tangentially linked to the disease itself.
It is the result of the fact that it hit us at a moment when the guardrails of the global order were already coming apart. International institutions had been structurally weakened through a combination of benign neglect and deliberate attack, great power rivalries had been dividing the world into camps based on competing world views, and societies were growing ever more polarized by a social media–fueled breakdown in civil discourse.
The coincidence of COVID-19 and the geopolitical recession is what makes this moment so challenging.
In 2008, the onset of the global financial crisis saw the United States take the lead in elevating the G20 from from finance ministers talking shop to heads of government addressing the crisis. That brought around the table a much more representative set of global leaders than did the G7, which only includes the advanced industrial democracies. And China stepped up to the plate with a massive stimulus package that both sustained domestic growth in—and stimulated—a weak global economy. Global politics worked in 2008 and a worldwide depression was avoided.
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In today’s crisis, geopolitical tensions are exacerbating the challenges of dealing with COVID-19. China and the US have clashed over the origins of the virus, while hard-liners in both countries have sought to politicize patriotic nationalism to promote decoupling of both the economic and political ties between the two. It’s not as if there was a shortage of flashpoints before the virus: the race for dominance in 5G, competing geopolitical priorities in several regions, particularly South and East Asia, and the balance of trade. Charting a course through the pandemic is undoubtedly harder with so many pre-existing fault lines and getting resolution on any those issues, in turn, is going to be significantly more challenging in a post-COVID world.
But there still may be something of a silver lining here. It is the kind of crisis that touches on all the critical political issues of the day—inequality, social safety nets, healthcare, global cooperation ... all the things that the world has been struggling with and failing to make enough progress. Take climate and environmental, social, and governance issues for instance; early signs are that we’re set to avoid the mistakes of the post-2008-2009 stimulus, which locked in energy and emissions-intensive growth pathways. Several countries, including Germany and South Korea, have announced big green stimulus packages and I expect more to come. So, I am not a total pessimist here.
The current global contraction is unlike any the world has ever witnessed. It is the cumulative result of virtually all major countries going into economic lockdowns in order to minimize the health costs from COVID-19. This was the right thing to do. But it has put all political leaders into a very tough spot, balancing health concerns and a desire to minimize the economic costs. The fact is it’s a lot easier to shut an economy down than to restart it, especially when political leaders do not feel they have the time to wait out the disease. In this context, all politics are national, and having another country to blame can make for good domestic politics.
Crises have a habit of exacerbating pre-existing trends, and that’s true on several geopolitical fronts. For instance, pandemic relief efforts such as the supply of personal protective equipment (PPE) opens another front for China to expand its diplomatic and economic influence with Belt & Road countries. But that’s happening at the same time as several countries had already been growing wary of China’s direct and indirect influence, creating the conditions for a grand showdown in areas like 5G and advanced manufacturing with huge tail risks for companies and investors.
The same is true when it comes to state support for strategically important sectors. Pre-crisis, several countries had already been tilting towards guarding their key sectors like technology and energy more closely through investment screening, state aid, and trade controls. Now, the potential for shortages of key commodities—PPE most obviously, but also food and some manufactured goods—is further hardening those positions. Nowhere is that more apparent than in the case of vaccines where whichever country develops the “killer app” first is unlikely to make it available as a global commons but instead prioritize its own access, even to the point of exclusivity.
Whilst there’s considerable political debate on whether these are the right decisions to take, one advantage that presidential incumbents have over challengers is a far greater ability to shape the political landscape through policy action. So, I expect to see a lot of activity along these lines in the coming months as leaders try and make the most of the bully pulpit in a time of crisis.
On COVID-19, the third quarter of 2020 will bring the first signals of what the shape of the economic recovery will be. A couple of things to watch: First, will employment pick up enough to offset the scaling back of government support programs? Second, will the inevitable uptick in COVID-19 cases that restarting economies will generate be so serious that people remain afraid to go out to stores and restaurants and cancel their summer vacations?
On US-China, the two issues to watch are whether the US goes ahead full bore with the proposed restrictions on technology exports and whether the “Phase One” trade agreement remains in place. So far, US actions on Chinese technology have been limited, specific, and targeted, as the administration remains focused on leveling the playing field with China for US exports. But that restraint could quickly come undone if the China hawks in the administration win the case that a harder line on both technology and trade issues is necessary to meet primary national security aims.
For China, facing a weak external market makes continued access to the US more important to its own recovery. That’s meant a carefully calibrated response so far, including best-efforts purchases of US goods under the Phase One trade deal. But that could all change if the US or its allies act more forcefully on China’s red line issues, including Taiwan, Hong Kong, and the South China Sea.
Finally, it will definitely be worth watching the political and social change underfoot from the death of George Floyd. In any year, the scale of protest action we’ve seen would be deeply significant; in an election year with an already deeply divided electorate, its importance can hardly be overstated.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP.