US should not be so quick to talk up its economic superiority over China

Japan and others are flocking to invest in the US, where private firms are joining public-sector entities to invest in areas like infrastructure. The US model grows increasingly attractive to the world, he suggested, exuding confidence to the point of triumphalism.

But Emanuel’s predictions on the course of the US economy over the short to medium term and his vision of a new form of US-led globalisation appear shortsighted. They are questionable on economic grounds.

Globalisation from here on will be about “stability and sustainability” rather than “efficiency and cost”, he suggested. Global manufacturing will bifurcate into two spheres, one led by the US and its democratic values-conscious allies while others coalesce around a narrower China-led model.

Choosing which bloc to join will involve not only value judgments but also the risk of having trade and investment sanctions levied against those who join a China-led model. Sanctions can lead to economic or even physical confrontation, just as real wars – as Carl von Clausewitz famously put it – are an extension of politics.

As Brigitte Granville, professor of international economics at London’s Queen Mary University, noted in a recent article, the use of sanctions may “change the world” by “accelerating the creation of rival power blocs, economically and financially sealed off from one another”.

Or as Cornell University historian Nicholas Mulder argued in his book The Economic Weapon: The Rise of Sanctions as a Tool of Modern War, they “stitch animosity into the fabric of international relations”. From World War I to Donald Trump’s trade wars against China, sanctions have been problematical.

Why does someone not challenge the US for using globally divisive tactics? The International Monetary Fund said in a recent report, “China, together with other countries, should continue to work on multilateral efforts to address global challenges amid an increasing threat of geoeconomic fragmentation.” Those “others” certainly include the US.

America, meanwhile, has potentially rough terrain to cross before it reaches the promised land envisaged by Emanuel and some in the White House. The long-term investment in energy and infrastructure being made now will bear fruit in the future but it is the short to medium term that should worry the US.

Consumer demand has remained brisk in the US, and that is what has saved the economy from the kind of recession that now threatens Europe. But it is being financed largely by a depletion of US household savings and, once that little spree ends, it will be a different story.

As the US Federal Reserve noted in a commentary, “over the pandemic, historic levels of government transfers boosted household income while household spending was severely curtailed by social distancing”, leading the personal saving rate to soar.

US households accumulated about US$2.3 trillion in savings in 2020 and through the summer of 2021, above and beyond what they would have saved according to pre-pandemic trends. But, since then, they have “decumulated about one-quarter of these excess savings”.

This has buoyed US household consumption, which accounts for 70 per cent of GDP, and it remains high as inflation bites and unemployment rises. It is good that the US is finally boosting capital investment but that will not compensate once a consumer recession hits.

There is already the possibility of a global economic recession unless China can shake off its pandemic blues and supply-chain interruptions to act as a locomotive again. It is plain daft and frankly irresponsible to invite a recession by dividing the global economic order at a time like this.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs