The COVID-19 pandemic is hammering the United States. Thus, it is pummeling the deep U.S.-China economic interdependency, also known as “Chimerica” (Jean-Michel Valantin, “The US-China Covid-19 Competition (1)", 红色（团队）分析, April 17, 2020).
(Traduction française automatique par intelligence artificielle.)
The mammoth impact of the pandemic on the U.S. results from the shutting down of entire sectors of the economy. These are the effects of the lockdown and social distancing measures the U.S. political authorities implemented to counter the virus (Hélène Lavoix, “COVID 19- Worst case baseline scenarios, March 13 2020 and COVID 19 scenarios- Making sense of antiviral treatment", The Red Team) Analysis, April 8 2020). Thus, the combination of those sanitary and economic shocks is tearing apart the very fabric of the American economy.
In the second article of this series, we investigate the strategic consequences of the COVID-19 pandemic on the China-U.S. relationship, from the “American front” perspective.
However, to understand those dynamics, one has to understand the way the crisis of the U.S. economy is deeply interacting with the Chinese one. This means that, as the U.S. economy slows down, this will also impact China, and reciprocally. Hence, the fundamental issue at stake is the status of the United States as a great power in a locked down and distanced world.
The geopolitics of an unconsumerist America
In order to slow the Covid-19 down in the continental U.S., the Federal government and the state governments implemented a mix of lockdown and social distancing policies. As everywhere in the world, those sanitary policies are hitting hard on the economic activity, especially on consumer spending.
This brutal slowdown of the economy has very deep consequences, because it also slows, if not stops, the U.S. consuming trend. This trend is fundamentally important for the U.S. and thus for the Chinese economy, because U.S. consumerism is the main driver of the U.S. economic growth (Peter Cohan, “Consumer spending is keeping the economy from shrinking – but a new survey of 10 000 Americans says that might end in 2020”, Inc.com, 4 December 2019).
Mass consuming is inherent to the U.S. agricultural and industrial development since the end of the 19th century. As it happens, the alliance of big oil, industry, finance, transport, and urban development induces an intimate relationship between economic growth and consuming growth (Kevin Philipps, Bad Money, Reckless Finance, failed politics and the global crisis of American capitalism, 2008).
This is turning into a massive problem because, since the 2008 financial crisis, consumption has become the main driver of the U.S. economic growth. Consumer spending accounts for 70% of the economic activity (Clark Merrefield, “Economic earthquake: consumer spending in the wake of the Coronavirus pandemic", Journalist Resource – Harvard Kennedy School, 17 April 2020). The index of consumer sentiment that lost 30 points since March, at a historical low, highlights this trend (Carmen Reinicke, “Those 5 jarring economic signals flashed red this past week – and they show just how quickly a recession is descending on America", Business insider, 19-04-2020).
ǞǞǞ Covid -19 as the new “Limit(s) to Growth”
As it happens, between March and April 2020, more than 32.5 millions American have lost their jobs, because of the lockdown of the economy and of the social distancing of dozens of millions of people (Anneken Tappe, “Leading Indicator: 1 in 5 American workers filed for unemployment benefits since March", 有线电视新闻网业务, May 7, 2020).
At the start of March 2020, 211.000 American people were unemployed. That was a historic low in unemployment. At the end of March, almost 7 million people were filing for unemployment benefits. Then, during April, more than 22 million more people lost their jobs. This means that one month of lockdown wiped out the 22 million jobs created since 2008 financial crisis (Anneken Tappe, ibid).
For Americans, losing their job means losing health insurance and any financial security. Thus, their consumer spending and purchasing power is drastically diminishing; worse still, their very subsistence is threatened. This gigantic professional, social and economic disaster embeds itself in the slowing down of the U.S. economy as a whole.
This “shutdown” of the economy translates into a contraction of the whole economic activity. If, as a consequence of the shutdown, the U.S. GDP fell at a 4.8% annualized rate during the first quarter of 2020, then, according to JP Morgan and Bloomberg this could translate into a, a historic 40% contraction of the U.S. GDP during the second part of 2020 (Patti Domm, “JPMorgan now sees economy contracting by 40% in second quarter, and unemployment reaching 20%“, CNBC Markets, April 10, 2020). This catastrophic recessionary trend is tied to the systemic consequences of the pandemic, which reveals and amplifies the multiple vulnerabilities of the U.S. and global economy.
Towards the Abyss
The Federal Government tried to alleviate this tremendous shock through the USD 2 trillion relief act, in order to finance expanded unemployment, support for businesses and a direct check of USD 1.200 to people. However, by mid-April, the Small Business Administration ran out of its USD 346 billions relief fund after just two weeks (Mark Niquette and Jennifer Jacobs, “Small Business relief funds drained fast, with many shut out", 彭博社, 17 April 2020). Moreover, the combined consequences of the lockdown and of unemployment are triggering a mammoth fall in retail sales of 8.7% in March only.
Knowing that the previous worst slump was 3.8% in November 2008, the March 2020 fall is particularly stark. The same is true for industrial and manufacturing outputs, which lost respectively 6.3% and 5.4% in March. As we write, the April numbers are not known yet, but will undoubtedly be worse. Suffering from the same trend, the new residential construction market fell like a rock by 22.3% in March (Carmen Reinicke, ibid).
This integral slow-down of the U.S. economy is one of the drivers of the oil barrel prices fall. The prices went from around USD 50 to USD 20 to USD-37 at the end of April (“Oil price crashes below 0$ for the first time in history amid pandemic", CGTN, 21 April 2020). It is also a consequence of the global shift to teleworking.
In the U.S., half of the workers are teleworking since the start of the Covid-19 crisis (Katherine Guyot, Isabel V. Sawhill, “Telecommuting will likely continue long after the pandemic", Brookings, April 6, 2020). Home-working triggers a sharp decline in fuel, and thus oil, consumption. Furthermore, this trend is also radically diminishing the flows of petrodollars, which are irrigating the U.S. and the international financial system.
Chimerica: towards the (financial) dark side?
On the China-U.S. relationships front, this U.S. economic and social catastrophe is also triggering a massive geopolitical crisis. As it happens, the USD 300 billion U.S. trade deficit with China rests upon the purchase of “made in China”goods (Office of the United States Trade representative, “The People’s Republic of China – U.S-China Trade facts“). Thus, the diminishing U.S. consumption also means a lesser consumption of the exported Chinese industrial output in the U.S.. In other terms, the COVID-19 driven U.S. economic disaster is also turning the U.S.-China relationship into a mammoth geo-economic disaster.
Dialectics of recession
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As we saw in “Chimerica”, the American economic activity is intimately linked to the Chinese economic growth. The expression Chimerica translates the quasi-intimate process of hybridation between these two mammoth national economies (Niall Ferguson, Xiang Xu, “让奇美拉再次伟大", Wiley单行图书馆, 2018年12月21日）。
This process emerges from the installation of thousands of U.S. industries and corporations in China since the 1980s. It creates the template for the mammoth trade relation between the two countries. In the same time, China buys huge amounts of the U.S. debt by purchasing Treasury bonds. In February 2020, China possessed USD 1,097 trillion of Treasury securities.
This sum amounts to 15.4% of U.S. foreign holdings. It turns China into the second largest foreign holder of U.S. debt, just after Japan and its USD 1.26 trillion (Adam Tooze, 崩溃，十年的金融危机如何改变世界，2019年和杰弗里-马丁，"中国经济在冠状病毒封锁后迎来40年来最糟糕的季度，导致世界陷入衰退"。 新闻周刊, 4-17-20).
From trade war to cash war?
This relation is also the driver of the fantastic trade imbalance between China and the U.S.. As such, it is at the core of the trade war that President Donald Trump has been leading against China since 2018 (Jean-Michel Valantin, “The Midwest floods, the trade war and the pandemic swine flu: the agricultural and food super storm is here", 红色（团队）分析会, September 3, 2019). Since April 2018, Washington D.C. has imposed new tariffs on the majority of Chinese goods, while Beijing retaliates in kind, with variations on the agricultural products (“Factbox: nearly all goods traded by U.S and China will have tariffs by December 15", 路透社, October 10, 2019).
However, as we saw in Chimerica (1), the COVID-19 pandemic is dramatically slowing down the Chinese economy. Indeed, as highlighted here, the economic catastrophe in the U.S. makes it more difficult for its market to absorb Chinese goods. Hence the flows of cash going back to China decrease (Shane Croucher, “China, until recently America’s largest creditor, won’t be funding your stimulus check", 新闻周刊, 4-22-20).
In other terms, terms, the pandemic is turning the Chimerica growth driver into a twin engine of dialectical recession. Indeed, the U.S. recession is fueling the trade, industrial and financial Chinese slowdown. In the same dynamic, this trend is reducing the financial capabilities of China to buy U.S treasuries.
In this financial environment, China is starting to sell U.S. bonds, in order to generate dollars. Beijing uses these dollars to buy yuans to support its own currency. Beijing thus tries to alleviate the domestic consequences of the 6.8% contraction of its economy during this first quarter. Those dollar sells tend to outweigh U.S. treasury security purchases. (Croucher, ibid).
Cultivating reciprocal (currency) vulnerabilities
This situation takes place at a very bad moment for the U.S. Indeed, the U.S. Treasury issues a tremendous flow of bonds in order to finance the 2 trillion dollars stimulus package. Currently, the Fed is the main buyer of U.S. debts. But the U.S economic authorities are starting to search for domestic investors (Croucher, ibid).
This situation could rapidly become problematic, given the huge flows of dollars both produced by D.C. and by China. Meanwhile, both are turbocharging their respective crisis, not to say recessions.
Thus, the deeply intricate interdependencies built in and upon Chimerica are becoming dialectics of vulnerabilities for the two super powers.
With the next article, we shall see how the dangerous crisis of Chimerica may also super charge its tense geopolitics.
Featured image: Cupertino, California, 10 April 2020, Friday 9-30 a.m. Commute by Travis Wise / CC BY 2.0