JFIR Commentary

June 3, 2020

Geoeconomic Observation on COVID-19

By KAWAI Masahiro

The free and open international economic order which has flourished in the post WWII era has been stumbling lately due to the relative decline of the United States’ economy and the Trump administration’s negligence on multilateralism and international cooperation as well as China's rapid rise and its challenge to the existing international order. The hegemonic competition between the US and China, which intensified from 2017, has widened from trade and economic areas to technological and security domains, and now it can be regarded as a systemic competition between the free and open, democratic and market-based economy and authoritarian and despotic, socialistic state capitalism. The global pandemic of the novel coronavirus (COVID-19) fueled this US-China confrontation with ‘geoeconomic’ impact, and has been raising further issues to the future of the international economic order.

The outbreak of COVID-19 has caused substantial economic contraction not only in China but also in Japan, the US, Europe and elsewhere. The International Monetary Fund (IMF) forecasts world economic growth in 2020 to be negative 3.0 per cent due to the COVID-19 pandemic, and Ms. Kristalina Georgieva, Managing Director of the IMF, warned the world would face "the worst economic fallout since the Great Depression (of 1929).” China, the epicenter of the outbreak, marked a 33.8% decline in its real GDP in the first quarter of 2020, in comparison to the previous quarter at an annualized rate, the first negative growth ever since 1992 when the quarterly GDP growth record began. In the same quarter, Japan, the US and Europe also marked a decline in their GDP growth too (Japan -3.4%, US -4.8%, and the Euro Area -14.4%), and the biggest economic shrinkage will likely come in the second quarter of 2020. China most likely hit the bottom of its economic downfall in the first quarter, while Japan, the US and Europe will likely do the same in the second quarter. The IMF forecasts the growth rates of the US and China for 2020 and 2021 to be -5.9% and 4.7% for the US and 1.2% and 9.2% for China, suggesting that China will likely recover earlier and faster than the US (and Japan and Europe).

During the global financial crisis following the Lehman Shock, the Group of Seven (G7) and the Group of Twenty (G20) promoted international policy coordination with US’ leadership, while this time the US is not assuming global leadership reflecting its ‘America First’ policy and as a result the drive for international cooperation to get out of the worldwide COVID-19 pandemic and economic crisis is weak. In addition to the pre-pandemic concern of US-China economic decoupling, there are signs that globalization could be reversed as countries have tightened their border control to contain the spread of COVID-19 and secure their own medical supplies and equipments and are considering to alter the trade structure that is excessively dependent on China-centered supply chains. In Europe, each country responded unilaterally particularly at the beginning of the cross-border spread of COVID-19, rather than in unity as the European Union (EU) member states. The framework of issuing the EU’s joint bonds to assist hard-hit southern European countries such as Italy and Spain has not been approved due to the opposition by the “frugal four” including Austria and the Netherlands despite Germany’s change in mind in the affirmative direction.

The US-China confrontations have intensified over the naming of and the origin of the virus, as well as the role played by the World Health Organization (WHO). The Trump administration is in consideration to suspend its financial contribution to, and even withdraw its membership from, WHO as it views Director-General Tedros Adhanom Ghebreyesus as being too close to China and having made inappropriate decisions and advice at the initial phase of the global pandemic. Even if WHO had problems, it must continue to function as the central institution coordinating global fight against the pandemic at the moment, so additional funding is urgently needed to prevent further spread in developing countries. Its member countries should evaluate the performance of WHO after the current COVID-19 crisis is over. China has been actively engaged in ‘mask diplomacy’ to assist European countries and many developing countries in Africa and other regions, but the US and advanced European countries have regarded this as an attempt to expand its sphere of influence at the time of crisis. China is advised to focus more on providing its assistance through multilateral frameworks such as WHO.

In terms of systemic competition, the question is which system would be more effective in containing COVID-19, authoritarian, despotic one like China’s or democratic one that values transparency and human rights. China strictly censored virus-related information when the spread began in Wuhan, Hubei Province, which as a result did not help stop the spread nationwide and worldwide. After that, however, China seems to have been successful in containing COVID-19 by enforcing heavy-handed lockdown of the city of Wuhan and others in Hubei Province, and strengthening the monitoring of the infected individuals. Based on these successful measures, China has moved to restart its economic activity and embark on ‘mask diplomacy’.

On the other hand, in the democratic world, the numbers of infected patients and deaths have risen enormously, to more than 150 thousand infections each in the US (1,811k), the UK, Spain, Italy, Germany and France and more than 27 thousand deaths each except Germany (with an astonishing 105k in the US while less than 9k in Germany). The explosive pandemic in the US and Europe is admittedly caused by the underestimation of, and inadequate response to, COVID-19 at the initial stage. The democracies have responded to the pandemic by applying less severe behavioral restrictions on individuals than China, expanding virus tests, isolating infected persons and focusing on the treatment of severely infected patients, while protecting their human rights and privacy under information transparency and respect for scientific findings. Japan, the US and Europe have been trying to demonstrate to the rest of the world that the pandemic can be controlled through transparency and the protection of human rights and privacy, not through authoritarian censorship nor strict surveillance of its nationals. Its success would help restart their economic activity.

Meanwhile, China has not loosened its grip over the effective control of the South China Sea, when Southeast Asian countries and the US are occupied to combat COVID-19 domestically. In April this year, China made an announcement of establishing new administrative districts ---Nansha and Xisha--- in Sansha City, Hainan Province, over their disputed, militalized artificial islands. China had drawn the ‘nine dash line’ over the entire South China Sea since 1953, and established the administrative city of Sansha in July 2012, to oversee 3 islets of Nansha (Spratly Islands), Xisha (Paracel Islands) and Zhongsha (Macclesfield Bank). In July 2016, the Permanent Court of Arbitration ruled that China had no claims to historic rights with respect to the "nine-dash line" in the South China Sea (beyond the territorial sea, exclusive economic zone [EEZ], and continental shelf to which it was entitled by the Law of Sea) and had violated the Philippines’ sovereign rights in its EEZ, backing a case brought by the Philippines. Despite this ruling China has not stopped operations in, or militarization of, the Spratly and Paracel Islands. China’s announcement this time of the establishment of the new administrative districts, is clearly an attempt to change the status-quo of the South China Sea by force and confirm de-facto control over the area.

The international community must appeal to China that the forceful change to the status-quo and an attempt to strengthen de facto control clearly violates the international law so that it should be withdrawn. For that matter, it is absolutely important for the US to exercise its leadership, organize international cooperation with like-minded countries and regions of Japan, Australia, the EU, ASEAN and others, and put pressure on China in unity so that it acts more responsibly in the South China Sea.

(This is the English version of an article written by KAWAI Masahiro, Distinguished Research Fellow of the Japan Forum on International Relations / Professor Emeritus of the University of Tokyo, which originally appeared on the e-forum “Hyakka-Seiho (Hundred Flowers in Full Bloom)” of JFIR on April 21, 2020.)