There’s a theory of business cycles which essentially says that the US follows a boom and bust cycle every four years. The election year and the lead-up to it will be characterized by a boom, supported by government spending by the incumbent party, and the slowdown occurs about midway through the cycle. It then picks up again upon the start of the next four-year presidential election cycle.
This hasn’t been the case this time or indeed the past decade after the slow recovery from the major banking crisis of a decade ago.
Instead the US economy rather unusually boomed early in 2018 with a fiscal package put in place by the new Trump administration which petered out around the time of a global cyclical slowdown.
That was 2019. It was a broader global slowdown as some European (notably Germany and Italy) and other major economies were in or on the brink of recession. Thus, 2019 was a year marked not only by the US central bank cutting interest rates, as others were doing even more. The European Central Bank (ECB) not only reduced rates, including cutting its deposit rate deeper into negative territory, but it also restarted its quantitative easing (QE) programme of cash injections to boost the euro area economy. China and Japan similarly undertook stimulative monetary as well as fiscal policies to prevent a global economic slowdown from turning into a recession.
The risk of the global slowdown becoming a recession has been worsened by geoeconomic tensions, such as the US-China trade war and Brexit. These tensions dampen economic prospects during the worst part of the business cycle. For the US, the main geoeconomic risk arises from the ongoing tensions with China. It’s worth noting that this trade war started in 2018 during the better part of the cycle.
Perhaps unsurprisingly, there are a lot of election-related reasons to try and resolve the US-China trade war during 2020. A so-called phase one agreement is in the works between the two countries in a rather important year for the US As a middle-income country that is hoping to become rich, China is also keen to resolve this dispute.
But, this ‘truce’ is just that – a temporary pause. This tension between the economic superpowers is likely to continue after the 2020 election regardless of who occupies the White House. The nature of the tension also points to the emerging importance of geoeconomics.
The US-China tension has seen the politicization of economic issues, including what might be called the weaponization of trade. It is not limited to these two countries. The recent trade war between Japan and South Korea was not really about economic issues, but political differences that led these countries to deploy trade tactics to exert pressure on each other.
In the US-China case, there are economic grounds for trade tensions. The long-standing dissatisfaction of the Americans over the lack of a level playing field for US companies and the higher barriers to trade and investment to get into the Chinese market are perennial complaints. The spillover of these issues beyond the trade realm and into global mergers and acquisitions (M&A) deals and technology indicates that there are broader concerns than trade, related to both economics and geopolitics.
One of the lesser noted but rather negative effects of the US-China trade war is the dampening impact on global M&A deals. For a multinational corporation to a do a major deal, it requires competition authority approval from the US, EU and China. By doing nothing and allowing the deadline to pass, China scuppered the multi-billion deal between by US tech firm Qualcomm and Dutch chipmaker NXP.
It’s also in the technology and investment areas. President Trump has linked access to the US market for Chinese tech firms, e.g., Huawei and ZTE, to trade negotiations. That is not the only front in the tech war. The US has also pressured allies, such as the UK, Germany, Australia and New Zealand who share intelligence, for them to exclude Huawei from providing 5G. Technology is an area where economic and non-economic concerns are linked. This is the current but by no means last conflict over technology between the US and China.
Both of these areas point to the confluence between economic and geopolitical issues. Underlying the trade, investment and technology tensions is the shift in global power, i.e., the relative rise of China elbowing into a world where the US for much of the 20th century had been the sole superpower. The dominance of American influence, its firms, its culture and many other aspects of US exceptionalism is under pressure from China, which is not an ally like the previous second largest economy in the world, Japan, or the world’s biggest economic bloc, Europe. Though those relationships are also under strain.
This is seen acutely in the area of technology. Whichever country’s firms set the tech standards will have a strong position in one of the most important economic arenas in the 21st century. There are also security, intelligence and other foreign policy implications to technology which are well known. Thus, the 5G conflict is very unlikely to be the only issue that will be under contention between the US and China for the coming years if not decades.
Such geoeconomic tensions look like they will be around for some time to come. But for a US election year, there will be an attempt to resolve as many of the headline conflicts as possible. Trade, investment, technology and other foreign economic issues will still likely be heard on the campaign trail.
It is because it has become evident that all economic policies, whether they are categorized as foreign or domestic, affect the American people. And not just them. It seems that all economic policies are domestic.
Whether it’s unfair competition from China or the ineffectual World Trade Organisation that epitomizes the international system that takes advantage of the US in the view of President Trump, he will direct the discontent felt by Americans in this direction. But it won’t just be the Republican president. The Democrats also have reservations about America’s foreign economic policy and in particular the rise of China. For instance, the scrutiny of Chinese investments has rare bipartisan support in Congress and Democratic presidential candidates also do not shy away from these issues.
In an election year, all of this will all be heightened. At least the rhetoric. That is because no incumbent would want a trade war which has already cost billions in subsidies among other costs to negatively affect the economy, especially during the vulnerable part of the business cycle. And thus 2020 is likely to see a truce between the US and China to see the former through the presidential election. But, thereafter, tensions are very likely to resume.
So, the impact of geoeconomics on the business cycle is likely to follow the pattern noted at the beginning of this article, i.e., geopolitical economic tensions flare up during the boom and ease in the lead up to the election.
But it is worth bearing in mind the answer of former British Prime Minister Harold Macmillan. He was asked by a journalist what would most likely to blow the government off its course. His reply was ‘Events, dear boy, events.’
Once unleased, it may not be straightforward to bottle back up geoeconomic tensions. The other country or countries have to play ball, and domestic expectations have been ratcheted up. What might be sellable as a trade truce may not be if Americans expect more of a surrender.
The US may well face a tricky year ahead.