23 January 2020: The Day Trump Lost Asia

Introduction:

In the midst of the global pandemic engulfing the world, that has yet reached its peak – and may yet make a comeback in China, there are things that are emergent and apparent even now, if we choose to see it.

 When China cancelled Chinese New Year, imposed draconian lockdowns all over China to stop the spread of Covid-19 and prevented a greater disaster – many in China wondered if the authorities were incompetent and when it reached the more modern Western nations, with their wealth and their technology – coupled with the precious commodity of democracy (freedom!), their own government would be shown up. The reality, as it unfolds today, is that with few exceptions (Germany, Nordic countries) the usual flagbearers UK, France, Italy and US have stumbled badly and their people have suffered worst than China. This is the pivotal moment, that China realises that the gains in economic progress is real – and draws the (wrong) lesson that the West’s time has passed.

The Day China Cancelled Chinese New Year

Dan Ariely, in “Predictably Irrational” stated that ‘most people don’t know what they want until they see in context.’ In other words, everything is valued relative to something else in order to have value.

On the day China cancelled Chinese New Year, they announced that Wuhan will be locked down. Unconditionally. For an unknown period. Soon similar measures were enforced in the rest of China, as it became clear that Wuhan, being a transport hub and center of commerce in China, has also been transporting the virus via human traffic as people went about their business or went home for Chinese New Year. What would follow would be as mentioned above, draconian, top-down, heavy-handed and at the expense of 3,000+ deaths (official numbers) – effective. It also damaged the economy that was just looking forward towards a year of recovery stemming from the trade war détente with America, signed in November 2019.

There were missteps by the Wuhan government officials in the early stages of the epidemic; certain warning signs were missed (One of the early warnings came from Dr Li Wenliang, who was arrested for rumour mongering and on release went back to work in the frontlines. Tragically, he succumbed to Covid-19), certain mass events were not postponed/cancelled and the Wuhan officials did not dare sound the emergency alarm for fear of being branded ‘alarmists’ in case it was a false alarm.

If the missteps caused China to lose time and the opportunity to handle the virus spread locally, their response would be nothing short of … everything the government could mobilise at the problem. Not enough doctors and nurses? Mobilise the military medical teams, conscript ‘volunteers’ from cities less affected and send them into Hubei. Not enough beds? Convert buildings, hotels into makeshift holding zones and build new hospitals in 10 days. Not enough PPE? Companies were mobilised to manufacture these products. Why? Because China understood that epidemics were exponential entities and only a maximum

It was crude. It was massive. And it worked. In the words of Lenin, quantity has a quality on its own.

However, the Chinese population were upset. Lives were lost. Livelihoods disrupted. The economic fallout is just beginning to be felt 2 months after the lockdown as savings run out, as incomes and jobs evaporate in the lockdown. Officials that felt that Wuhan residents were not grateful for their efforts in saving their lives, were ridiculed for putting their own feelings before the hardships endured by the Wuhan populace.

How the West Blew It

Certainly, the West would do better. They had advanced warning, ‘advanced’ medical facilities and wealth. 

The first sign that the pandemic had spread outside East Asia, was a high number of deaths in Iran. It didn’t quite make the news because the world was riveted by the drama of the Diamond Princess anchored off Yokohama. As governments dawdled over how to evacuate their citizens from the ship without infecting Japan, and then their own people on landing – the virus spread probably by business travel and tourists to Europe (or if some of the latest unconfirmed reports are true, its original epicentre could be Italy before it spread to China).

Italy initially lockdown a few towns in Lombardy. Then the whole province. Then the north. Then the whole country. The PM was confident that they got it contained, and then realised it wasn’t. Then made the difficult decision of declaring a national lockdown. As of today, the death toll reached 10,000.

To most of us in Asia – Italy is the land of LVMH, Italian food, Serie A and the occasional holiday. We sampled the culture but we didn’t see ourselves as Italian wanna-bes. The economic crisis of 2008 had badly weakened the economy, drained public coffers and imposed an austerity that lasted the better part of a decade that resulted in the election of a clutch of populist parties that were not aligned with each other. We thought of them as the one of the weaker EU countries (Greece being the weakest).

Certainly, America would do better? Trump closed travel from China early on, despite official objections from China. And then his administration did nothing. It was as if the US Navy on detecting the approaching Japanese carrier fleet (for the record, they didn’t) to Pearl Harbour, put out a general alert AND DID NOTHING ELSE. This despite all the medical experts in government employ, and those not in government employ but in the know, saying that the government should have begun mobilising. The reaction of the White House administration has been nothing short of indolent, wishful and in a state of denial. From Larry Kudlow’s ‘airtight’ to Trump ‘it will go away like magic”, the American reaction has left the richest nation in the world finding out that there is no supply of key resources even if you have money. It, thus, revealed that America had not invested sufficiently in a pandemic scale resource; and that America First also meant unproven American test kits that existed in insufficient numbers. As I write this, the number of deaths attributed to Covid-19 is just north of 2000; in the next 4 weeks, it is not unlikely that the number will be as high as 20,000. (Dr Fauci warns it could go as high as 200,000, but I’m taking that number with a pinch of … whiskey.)

Right now, the population of China is looking at America in disbelief. Many of the younger generation yearn for the freedom enjoyed by America and hope to experience a major fraction of the same, they look towards the wealth with envy, resentment and a sense of inferiority – and their idol SCREWED IT UP?

‘Most people don’t know what they want until they see it in context.” The Chinese having lived under a lockdown could not put their own experience to compare with what was happening elsewhere until they could see what was happening in Europe and US. (Note: What was happening in S Korea and Singapore, which do not have lockdowns but still kept the infection numbers down is not given a lot of bandwidth in China. Bad for the ‘We got it right’ narrative, I’m guessing)

In China, there is a feeling of schadenfreude, of America getting its comeuppance. There will also be a shift of pro-Xi sentiment in the country, which the CCP would no doubt leverage on it to enforce a greater level of alignment with the central government diktats, to more centralised economy. There will be people that will (Again) be writing America off. And the EU.

Learning the Wrong Lessons

It is dangerous to count America out. The English did in 1812. The Japanese did in 1941. The Soviets did in 1978. And everyone has been projecting the fall of the American hyper-power since 1980 and they have been wrong.

It is important to understand one giant unpleasant truth. Of all the developed economies in the world, only America is not aging. China is aging. Singapore is aging. Japan is aging. Korea, Thailand, France, Italy, Germany …. Only The USA is growing younger. This means that they have a longer runway than all the other countries.

The second fact is that the muddled response in America is not a sign of weakness in its system but a clutch of factors inhibiting its ability to mobilise as quickly as China, when caught on the wrong foot. China and the United States have different government systems, where a lack of central unity is seen as a weakness – it often disguises a practical, diversity – therefore, there is little that New York can learn from Wuhan; and little that Wuhan can learn from New York. Think about it – the Governor of New York can call the President a fool, and only suffer political consequences for it – but imagine the same comment coming from the Mayor of Wuhan on the Premier of China.

It is the diversity multiplied by scale and magnified by the financing power of the greenback that allows America its strength today. It is no accident that they possess the most powerful technology, the most lucrative patents in the world.

China has risen. And it will claim dominance in a few fields – 5G technology, e-commerce. But then so did the Japanese in the field of electronics and automobiles before them. It needs to decide if it wants to build an economic base or a military base – it cannot pursue both. The fact that the Chinese Navy has recently cancelled planning for the 5th and 6th carriers, is an indication that they have realised that unless their economic base has increased even more, they cannot increase their military base. I will go as far to say that China will not build their 4th carrier in the coming decade. By comparison, America has 14 carriers – each larger than what the Chinese can field and they are building more. (And don’t get me started on hypersonic missiles, if they were so effective, China would start scrapping carriers.)

China will become the world’s largest economy. Every consumer brand in the world needs to penetrate the country. Yet it is telling that Chinese brands have difficulties translating local success into overseas success. Chinese culture have difficulty projecting soft power overseas. Chinese movies are so made for China that they are almost not made for anywhere else.

IMHO, without some serious missteps United States will not let their dominance in finance and technology slip.

However, Trump has lost Asia. The idealised reality that America is competent in keeping its people safe, keeping its people fed – better than Asia can, is gone. With Trump, we have lost the notion that America is the world’s No 1 best friend. Now, we wonder if America can keep it together.

What’s Next in 2020

Despite all the talk of united global response from the G7, nothing is settled in this current environment unless there is a response backstopped by both China and America – which is either bilateral or at G20 summit.

Yet, with America heading to the polls, Trump will be vulnerable to pot shots by Biden. As the President, he is the lightning rod for backseat quarterbacks. Trump did that very successfully against Obama during his election run, I can’t see Biden not taking free shots. (He already said he would have locked down the country months ago, called out the Army etc.) He can’t push a deal that leaves him looking weak, not with the election so near.

With the newly won mandate from Trump’s missteps, Xi will be less likely to want to be seen as a willing partner for Trump’s election win. He will push for a hard deal at the G20. Remember China committed to purchasing American goods OVER 2 years – so they could purchase a little now, and make up for it next year AFTER the election. And the Covid-19 virus, gives them just the convenient excuse to purchase less this year. The trade war is not over, but with an economy ravaged by Covid-19, with a divided nation – Trump would be hard pressed to push for more concessions.

Will the trade war end? No.

Will they smile for the camera? Yes.

Will we have a lasting deal that will be an orchestrated stimulus by all nations? No. The state of finances in all the countries are strained. They can commit, stand together for a photo op – but the ECB and the EU have run out of gunpowder in currency crisis following the 2008 crisis.

Advice

So what should you do as a business owner? First, look a few months ahead to see what opportunities are likely to present themselves and start anticipating how to capture these opportunities. If you can’t see them, then you will have a tough few months. If you can, don’t work alone – work as a group of companies, a loose co-operative if you will.

In the longer term, understand that Chimerica is over – the stabilising coupling that was the foundation of globalisation in the last 20 years is fraying. With it, the window that consumerism and export-led economies will be the passport to wealth through industrialisation will close. This has helped the 1% own 50% of the world’s wealth; the next change will start to rebalance the pyramid and help more wealth be created in the bottom 40%.

Because if Covid-19 showed us anything, it is that underpaid, under-respected frontline workers doing drudge work are essential. Consultants like me are asked to sit at home.