BFI Capital Group
The New Cold War: Corona Obscuring the “Elephant in the Room”
The corona pandemic, the rise of Bitcoin, booming commodity prices and soaring stock indices are dominating the financial news. However, there’s another shift underway that is likely to have the most decisive impact on the global economy for the years and decades to come. The tensions between China and the US are escalating. The question is how this new “Cold War” will play out and how other countries will divvy up between the two sides on the geopolitical playing field.
Felix Zulauf paints a clear picture: “A new conflict has begun between the United States and China that will shape the coming decades. No country will be unaffected, and Europe some day may have to pick sides. Risk premiums for financial assets will rise.”
The coronavirus, or its mutated variants, is here to stay. Bloomberg’s Vaccine Tracker shows that while the U.S. has administered doses to almost a quarter of its people, the European Union has yet to hit 10%, while rates in Mexico, Russia, and Brazil are below 6%. In Japan, the figure is less than 1%. At the current pace of 16.2 million a day, it would take years to achieve a significant level of global immunity.
The impact of the pandemic on the world economy is also set to linger. By 2024, world output will still be 3% lower than was projected before the pandemic, with countries reliant on tourism and the service industry suffering the most, according to the IMF.
However, due to the media focus on the pandemic, the world appears to be missing the “elephant in the room”: the new Cold War between the US and China. In the original Cold War, the demarcation lines between the two superpowers, America and Russia, were relatively clear and unidimensional: it was mostly a battle in the realm of military prowess and ideology. Now, however, the Chinese challenger is much more formidable. China, within a few short decades, has been able to catch up, and in some sectors, already surpass America.
Western leaders seem distracted by all kinds of political side shows, while China resolutely and effectively pulls ahead. This should be the number one concern and the primary point of focus in the West. Unfortunately, it is not.
Many states that were once great have now become small, and those that were great in my time were small before. Knowing therefore that human prosperity never continues in the same place, I shall mention both alike.
~ Herodotus, Histories 1:5
Currently, America is leading the western charge by pumping out trillions of dollars in fiscal and monetary stimulus and attempting to resume its role as the leader and guardian of the global economy. However, there’s a worrying lack of policy initiatives that would serve to truly strengthen economic competitiveness and resilience. On the contrary, most of the new President’s priorities seem to add little-to-no value on that front.
This is especially problematic given the political focus and determination of the rival superpower, as well as its proven ability to put economic growth first and to expand its sphere of influence primarily with economic incentives, business deals, and corporate support.