It is easy to get agitated about Donald Trump's crass and insensitive comments and dubious business practices, or for that matter Hillary Clinton's lack of judgement and deviousness, depending on what your political inclinations are. However, I believe that the election is being fought in the context of trends that are inexorable and in the absence of black swan events, irreversible.
Globalization of trade is under a cloud in the United States and to a smaller extent in Europe. All this while, the biggest proponents of globalization in the US and Europe were those with capital, looking to secure the best possible returns for their investments.
The US embraced Japan and China for strategic reasons to start with. They wanted Japan to stay out of the Soviet orbit following WW II. US mended fences with Communist China in the early '70's to wean China away from being aligned with the USSR.
In order to accelerate the post war recovery in Japan, the US allowed the very same Japanese conglomerates which had armed the Japanese war machine to be lead the Japanese industrial recovery. In addition, the US opened up its market to Japanese goods. The Japanese kept their markets largely closed and ensured that there was fierce domestic competition. Out of this competition arose world class competitors who are now household names. By the time the '80's came around, there was pervasive alarm in the US about the success and domination of Japanese conglomerates. However, Japan's own domestic real estate bubble deflated in the early '80's and this put the Japanese economy in a deflationary/low growth spiral. Add to that the impact of demographic decline, and Japan ceased to be a potential peer competitor to the US. The important thing to realize is that while Japan embraced much of the consumer culture from the US, it never quite lost its mercantile trade zeal. Its manufactured goods are still top notch and it still runs an overall trade surplus.
US multinationals rushed into China for many of the same reasons as European and US traders had two to three hundred years back. They wanted trade access to a huge market. With India under British control and a very fragmented polity in South East Asia, the only real possibility for trade and profits was China. I do not want to repeat the tumultuous history of a declining China's interaction with the West (and Japan) . Turn the clock forward to the '70's when China agreed to normalize relations with the US in return for access to the US market. Basically, China was marching down the well traveled path trodden by Japan and the other Asian tigers. Opening up the Chinese market to multinational investments would bring jobs and raise local incomes. But similar to the Japanese, China was able to keep certain sectors shut to foreign investment. There was no equivalent to the Japanese Zaibatsu, so China nurtured its state owned national "champions". Unique aspect of Chinese development was the role of overseas Chinese investments, including from Taiwan. Over the course of three decades, China has transformed from a mostly agrarian society to being the workshop of the world. US multinationals reaped huge profits from this transformation in China, as they became part of the landscape of the new Chinese society.
What the US and Europe had conveniently chosen to ignore was Napoleon's observation about China being a sleeping giant that should be woken at your own peril. The sheer heft of China's population, economic productivity and manufacturing prowess had a huge impact on industries in the US and Europe. China's top down economic planning and central control meant that China over invested in many sectors such as coal, steel, cement, etc. The glut in these sectors when coupled with a Yuan exchange rate that was kept artificially low, meant that Chinese products enjoyed a huge price advantage in every market in the world. [All this has of course come with a huge debt bubble in China.] Over the last two decades US industries that had been bruised by the Japanese industrial might, were decimated by the onslaught of Chinese products. The giant had awoken and was now moving the world, again harking back to Napoleon!
An important transformation has been underway in the supply chain in China. Despite the development of many major industrial producers in China, there had always been a cadre of products that were pretty much the exclusive domain of Western and Japanese companies. However, this has been changing over the last decade. Now the supply chain is increasingly 100% in Chinese hands and Western and Japanese multinationals are being increasingly squeezed out of the Chinese market. China has also protected its private sector "national champions" in the new economy - Alibaba, Baidu, Didi, Tencent, Weibo, to name just a few. They have complete domination in China and are spreading their wings abroad. Bottom line is that multi-nationals no longer enjoy some of the advantages of the past in China. At this point China needs foreign multinationals less than the multinationals need China!
While Chinese society had liberalized, the Communist Party had kept a stranglehold on political power. The assumption of economic liberalization leading to political liberalization has China as an exception.
All this had taken place under the umbrella of globalization, introduction of NAFTA and the Euro, and the expansion of WTO to include China. Clearly the US miscalculated the trajectory of how China would evolve. As the US found itself mired in unending conflicts in the Middle East, China used the breathing room to emerge as a peer competitor.
The backdrop to the current election is an angst that revolves around the following:
Globalization of trade is under a cloud in the United States and to a smaller extent in Europe. All this while, the biggest proponents of globalization in the US and Europe were those with capital, looking to secure the best possible returns for their investments.
The US embraced Japan and China for strategic reasons to start with. They wanted Japan to stay out of the Soviet orbit following WW II. US mended fences with Communist China in the early '70's to wean China away from being aligned with the USSR.
In order to accelerate the post war recovery in Japan, the US allowed the very same Japanese conglomerates which had armed the Japanese war machine to be lead the Japanese industrial recovery. In addition, the US opened up its market to Japanese goods. The Japanese kept their markets largely closed and ensured that there was fierce domestic competition. Out of this competition arose world class competitors who are now household names. By the time the '80's came around, there was pervasive alarm in the US about the success and domination of Japanese conglomerates. However, Japan's own domestic real estate bubble deflated in the early '80's and this put the Japanese economy in a deflationary/low growth spiral. Add to that the impact of demographic decline, and Japan ceased to be a potential peer competitor to the US. The important thing to realize is that while Japan embraced much of the consumer culture from the US, it never quite lost its mercantile trade zeal. Its manufactured goods are still top notch and it still runs an overall trade surplus.
US multinationals rushed into China for many of the same reasons as European and US traders had two to three hundred years back. They wanted trade access to a huge market. With India under British control and a very fragmented polity in South East Asia, the only real possibility for trade and profits was China. I do not want to repeat the tumultuous history of a declining China's interaction with the West (and Japan) . Turn the clock forward to the '70's when China agreed to normalize relations with the US in return for access to the US market. Basically, China was marching down the well traveled path trodden by Japan and the other Asian tigers. Opening up the Chinese market to multinational investments would bring jobs and raise local incomes. But similar to the Japanese, China was able to keep certain sectors shut to foreign investment. There was no equivalent to the Japanese Zaibatsu, so China nurtured its state owned national "champions". Unique aspect of Chinese development was the role of overseas Chinese investments, including from Taiwan. Over the course of three decades, China has transformed from a mostly agrarian society to being the workshop of the world. US multinationals reaped huge profits from this transformation in China, as they became part of the landscape of the new Chinese society.
What the US and Europe had conveniently chosen to ignore was Napoleon's observation about China being a sleeping giant that should be woken at your own peril. The sheer heft of China's population, economic productivity and manufacturing prowess had a huge impact on industries in the US and Europe. China's top down economic planning and central control meant that China over invested in many sectors such as coal, steel, cement, etc. The glut in these sectors when coupled with a Yuan exchange rate that was kept artificially low, meant that Chinese products enjoyed a huge price advantage in every market in the world. [All this has of course come with a huge debt bubble in China.] Over the last two decades US industries that had been bruised by the Japanese industrial might, were decimated by the onslaught of Chinese products. The giant had awoken and was now moving the world, again harking back to Napoleon!
An important transformation has been underway in the supply chain in China. Despite the development of many major industrial producers in China, there had always been a cadre of products that were pretty much the exclusive domain of Western and Japanese companies. However, this has been changing over the last decade. Now the supply chain is increasingly 100% in Chinese hands and Western and Japanese multinationals are being increasingly squeezed out of the Chinese market. China has also protected its private sector "national champions" in the new economy - Alibaba, Baidu, Didi, Tencent, Weibo, to name just a few. They have complete domination in China and are spreading their wings abroad. Bottom line is that multi-nationals no longer enjoy some of the advantages of the past in China. At this point China needs foreign multinationals less than the multinationals need China!
While Chinese society had liberalized, the Communist Party had kept a stranglehold on political power. The assumption of economic liberalization leading to political liberalization has China as an exception.
All this had taken place under the umbrella of globalization, introduction of NAFTA and the Euro, and the expansion of WTO to include China. Clearly the US miscalculated the trajectory of how China would evolve. As the US found itself mired in unending conflicts in the Middle East, China used the breathing room to emerge as a peer competitor.
The backdrop to the current election is an angst that revolves around the following:
- Wariness with foreign wars and US role as policeman of the world,
- Weariness with being an open market for the entire world's products without corresponding market access for US products
- A revolving door of Democratic and Republican administrations and Congress that have been proponents of globalization, largely ignoring the segments of society which have been devastated by job losses
This is why Bernie Sanders' message had such huge traction with Democratic voters. Donald Trump also tapped into some of the same sentiments as he fought his way to the Republican nomination. In addition, Trump was able to leverage a backlash against the changing demographics of the US. Immigration from Mexico and Central America, as also from Asia, has been changing the face of the country.
All this has clear portents for US foreign and domestic policy.
Regardless of who is elected President, it is likely that the US will increasingly step back from the the mantra of free trade and globalization. As dependence on Middle Eastern oil has declined, the US will expect major consumers - China, India, Japan, South Korea, and Europe to play a greater role in keeping the peace. From patrols to reign in Somali pirates, we will see naval flotillas from diverse countries wearing blue UN helmets stabilizing the fires that will keep on burning in the Middle East. Interestingly, this may well suite the goals of China which has built an impressive domestic defense industry but whose products are largely unproven and the Chinese military has been sorely lacking in combat experience. If China is to become a true peer competitor to the US, it will have to earn its stripes in the Middle East.
A retreat from Globalization also provides China with a perfect opening to move forward and complete its multiple initiatives - One Belt One Road, Maritime One Belt One Road, CPEC, to name just a few. All these initiatives are the perfect outlet for the huge industrial overcapacity in China. Most of these initiatives will involve Chinese construction companies, Chinese power plants, etc., and will serve as a perfect extension of the Chinese economy. What is critical is that this will also allow China to maintain a high rate of growth and more time to transition to a consumer economy from its current orientation as an export powerhouse.
At a megatrend level, the timing for US retreat from globalization works perfectly with the Chinese impulse for growing offshore into in emerging markets. Most global growth scenarios in teh 21st century center around rapid urbanization in South and South East Asia and to a lesser extent in Africa. Faster economic growth is also going to be centered on emerging Asia and Africa as the demographics of these areas are favorable. As the US withdraws, this growth will have Chinese characteristics.
These scenarios are within the realm of possibility. The major wild card is the transition to this scenario. A precipitous retreat from globalization by the US could cause huge economic and financial upheaval. If this happens over a decade or two, the transition can be "managed". And this is where the current election is of great interest.
Even in a Clinton Presidency, I would expect to see more confrontations with China over trade. As TPP gets put on the back burner, it is quite possible that some aspects of NAFTA will get revised. This will play well to voter anxiety and xenophobia, and will help Hillary to shore up a new and vocal segment of voters. I can see Hillary making a historic trip to Moscow to freeze confrontation in Eastern Europe and allow for a slow draw down of US forces from Europe and the Middle East. Do not be surprised to see US and Russian alignment over keeping the peace in the Middle East by getting the consumers of the oil and gas putting boots on the ground.
A Trump Presidency throws up too many wild cards. It is likely that escalating trade barriers thrown up by the US will be met with similar actions on the part of China. This has implications for the US dollar, as well as the Yuan. With US trade under a cloud, the Chinese are more likely to shift from USD bonds to Euro or Yen denominated bonds, causing a sharp selloff in the USD. This may not be enough to stave off a crisis in the fragile European banking sector. The Yuan is likely to take a hit regardless, and this will be followed by a wave of devaluations in emerging market currencies and defaults on foreign loans. If China is unable to manage its domestic debt bubbles during these crises, the consequences for the Chinese economy and politics are dire. We could be looking at a scenario that is similar to the 30's when trade barriers were thrown up and most world economies were depressed. It was WW II that dragged the world out of the depression, and resulted in a very different world order.
In summary, we are on the cusp of a retreat from globalization on the part of the US. What is up for grabs in this election is whether this decline will be gradual and managed, or if it will be precipitous and potentially risky to the global economy.
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