Read the full transcript of the podcast

• N – Narrator
• DR: David Rubenstein – co-founder of The Carlyle Group
• JH: John Haynes – head of research at Investec Wealth & Investment UK
• PH: Philip Hammond – British Conservative politician and former Chancellor of the Exchequer 
• RC: Richard Cardo – co-manager of Investec's Global Leaders portfolio
• JK: John Kay – economist, former director of the Institute of Fiscal Studies and a Financial Times columnist
• VC: Victoria Clarke – economist, Investec UK

• Introduction

  A time-traveller from last year from last year might be forgiven for thinking they’d stumbled onto the set of a dystopian science fiction movie. And for good reason: not since the last world war has a single event altered our way of life so dramatically in such a short space of time.

   

  From the onset of the crisis, some six months ago, Investec Focus has been documenting this seminal moment in a series of discussions with experts in a broad range of disciplines, all of which you can listen to in full in previous episodes of Investec Focus Radio.

   

  In this series, we shine the spotlight on a specific question that runs through these discussions: will this surreal detour in human history lead to lasting changes in the way we live and work, how we think about money, or even the dynamics of global trade and the political economy?

   

  Optimists among us might have hoped that a pandemic would bring countries together. But the spread of the Coronavirus has only served to highlight the tensions between global economic superpowers. In this episode, we explore the geopolitical landscape that Covid-19 will leave in its wake, starting with the US-China relationship…

  President Trump rarely passes up on an opportunity to blame China for allowing the disease to spread, while President Xi Xinping instead hails Beijing’s management of the disease.

   

  David Rubenstein, a former adviser to US President Jimmy Carter and co-founder of one of the world’s leading private equity firms The Carlyle Group, isn’t surprised given the pressures.

• David Rubenstein: "The two biggest economies in the world inevitably have tensions"

  DR: The most important bilateral relationship in the world is US-China. They're the two biggest economies in the world. Throughout history, over the last thousand years or so it's never been the case that the two biggest economies of the world said: “Hey, you know what, we got a good thing going here let's cooperate. Let's just work together as closely as we can.” It doesn't work that way - the two biggest economies in the world inevitably have tensions. And so, we have tensions with China.

   

  N: But, in an electoral year, the pandemic couldn’t have come at a worse time for President Trump. Aside from the focus on his personal handling of the virus and news that he contracted the disease in October 2020, Covid-19 has undone the economic gains that he has presided over. But despite the tensions with China, Rubenstein believes that there are reasons for optimism:

   

  DR: If Trump is elected, I suspect you'll see the usual confrontation and then making it up and then confrontation then make up that we've seen before, so I don't want to say which one is better, obviously the trade agreement that President Trump did is a good agreement for the United States, if there's a phase two, I think it could be even better.

   

  If Donald Trump is re-elected I suspect he will say: “Look, I want to get the second phase of my trade agreement. I really like Xi Jinping, let's forget about Covid-19 it's kind of behind us now” and I suspect he will try to embrace a closer relationship.

• John Haynes: "Uncomfortable times ahead if US pursues an aggressive China policy"

  N: Chair of Investec’s Global Investment Strategy Group John Haynes, an expert on the Chinese economy, isn’t quite so optimistic about a harmonious trade relationship if Trump is re-elected:

   

  JH: I expect some quite hard statements from both sides as you move into the next two or three years if President Trump gets another term of government then his China two policy if you like, China one was to get them to the table and to shout a little bit, China two is to get even more progress out of it and we will see whether that agenda is pursued in a way that is acceptable to the Chinese or not. If not, then I'm afraid we're going to have some uncomfortable times again which is totally independent of the current crisis.

• John Kay: "We’ve lived in a particularly benign political environment for the last 40/50 years"

  N: His thoughts are backed up by John Kay, a former director of the independent UK think-tank the Institute of Fiscal Studies and columnist for the Financial Times, who blames the rise of populist leaders.

   

  JK: As far as dynamics of trade and US-China relations are concerned this is a huge question much of which is not really economic because we have a new geo-political situation which is potentially very unstable.

   

  We’ve lived in a particularly benign political environment for the last 40/50 years. There’s almost no period of human history where there has been such an absence of major geopolitical conflict, as there has been during our lifetimes.

   

  And we all of us have to ask the question: were we just very lucky, or can we actually turn this into a permanent state of affairs? For the latter it’s not looking too promising at the moment, with the rise of populism and various other forms of aggressive nationalism and polarisation around the world.

• David Rubenstein: "If Joe Biden is elected, he will try to have a closer relationship with China"

  N: But will everything be rosy if Joe Biden is elected President? Here's David Rubenstein again:

   

  DR: If Joe Biden is elected, I think he will probably try to have a closer relationship and say that he won't try to do the things that Donald Trump did but there will be more emphasis on human rights.

   

  I do think that if there is a President Biden, he will reassemble foreign policy experts who largely served in the Clinton and Obama administration, so you'll see a lot of faces that you've seen before. It's hard to go out and get people who have no foreign policy experience to serve in those areas, so typically the people who have the experience will be people who served in Clinton or on the Obama administrations. So, I don't think there'll be a lot of surprises if you see Joe Biden becoming President.

   

  I think he will have a traditional democratic foreign policy which is to say re-engage with the Allies in Europe and Allies around the world, try to deal with the China tensions as best he can, try to re-engage with the Iranian situation in terms of the agreement we had, re-engage with the Paris Climate Accord and probably try to strike up some renewed trans-pacific partnership that deals with trade in Asia. 

• John Haynes: "Will China behave in a reasonably predictable way?"

  N: While Haynes believes the onus is as much on Beijing to behave as it is on the US, he believes that China’s rise since the turn of the century, and the support it received from the West, will only add to its sense of entitlement for a fair slice of the economic pie in a post-pandemic world:

   

  JH: You've got to make a decision, you've got to decide it's not so much about America, you know, America is going to essentially behave in a certain way, reasonably predictably. You have to make a decision about whether you think China is going to behave in a reasonably predictable way.

   

  We rode the rise of China in a very positive way in the post-2000 period. We essentially had a stable exchange rate mechanism with China that enabled it to bring itself out of poverty and make itself into a second world nation and essentially establish an economy and an economic base which is now the second largest on the planet.

   

  And now it is and has been starting to try and exercise the rights that it perceives to have accrued as a result of achieving that status, and the idea that this crisis is going to do anything other than convince them that they need to do that even more is, I think, pie in the sky. 

• Philip Hammond: "Europe increasingly feels like a very large economy with absolutely no strategic power"

  N: Philip Hammond, former Chancellor of the Exchequer for Theresa May’s Conservative government, says that while the pandemic has had a significant impact on the global economy, it will do little to upset the balance of power in the long term.

   

  PH: We will go back to what I think was happening before this crisis. The world was polarising into two power blocks, two economic blocks; one led by the US and one led by China. And if you're European that's quite an uncomfortable position to be in because Europe increasingly feels like a very large economy with absolutely no strategic power squeezed between these two massive economic and strategic power blocks. So, it's a very uncomfortable prognosis for the Europeans.

   

  I think the key thing here is whether the Western Powers led by the US are going to allow the international institutions that we have to evolve in a way that gives China a reasonable bite of the cherry.

   

  China is the world's second-largest economy, if we want China to be pro the status quo then we have to make the status quo work for China. If we insist on keeping China out of what it sees as its rightful role, then it will start to set up rival institutions and become a force for instability. So, I think China is instinctively a force for stability, but we have to ensure that China can exercise that instinct for stability within the institutions we've created. 

• Philip Hammond: "Supply chains will become more localised"

  N: But while the US and China wrestle for control of what they both see as their rightful share of the global economy, other factors could upset the balance. Questions over efficient lean global supply chains which have worked very well to date, will come into sharper focus, as governments look to insulate themselves from similar problems in the future, especially when they consider items that are critical to national security. Here’s Philip Hammond again:

   

  PH: I think across the globe people will be looking from a national security perspective at the way trade supply chains work and will be asking whether we need to mandate the building in, for national security purposes, of greater resilience.

   

  I can't imagine for example that in the UK the public isn't going to want to see some greater domestic capability to produce vital medical supplies and equipment in case there's a further crisis of this nation.

   

  We already do this in the military sphere where we routinely accept that we will pay a price in terms of economic efficiency for having a domestic military production capability that we know we need for example to be able to produce submarines in the UK, for strategic reasons, and we therefore produce them very expensively when we could buy them much cheaper from the Americans.

   

  But we choose to have a domestic production capability and I would expect public opinion to want to see that approach applied to other strategic areas of the economy including healthcare. 

   

• Richard Cardo: "We've got to look for stocks and sectors that have strong sourcing and distribution networks"

  N: Richard Cardo, a South African who co-manages Investec’s Global Leaders investment portfolio, alongside colleagues in the UK, acknowledges that the debate raging over global supply routes will have a significant impact on the markets, but does he believe that globalisation as a concept is dead?  

   

  RC: We don't think so, but we do think that things may be done differently going forward. Certainly, there's going to be a reduced reliance on a single producer for critical components, there'll probably be a move away from the over-reliance on one single supplier, moving supply chains close to home. For example, on the medical front currently China supplies about 80% of the US's antibiotics, that's not something that's sustainable.

   

  So, I certainly think there's going to be a move to moving close to home for products which are deemed critical to economic and National Security. So, we've got to look for stocks and sectors that have strong sourcing and distribution networks and stocks we own that certainly play to that are things like Microsoft, Visa, Roche and Adobe.

• John Haynes: "It's in China's interest to be a force for stability"

  N: If there is a move towards shifting to more localised supply routes, in an environment that is increasingly protectionist and nationalistic, is it possible to find a resolution without upsetting the second largest economy in the world? John Haynes offers a word of warning to the West if it tries to take on China in a global trade war:

   

  JH: Taking China on in an aggressive way is never going to work. So, trade war as an option for for rebalancing the global power base is not going to work. How is China going to respond? Well they are going to look for a respectful relationship with the United States and all their partners and the first shots that were fired in attempting to reset that debate last year and the year before by the Trump administration those echoes are going to come back and come back and come back.

   

  Is it a force for stability or a force for instability? And you have to have an explicit view on that because if you think China is going to be a force for instability in the economic equation then we have some very unpleasant periods ahead of us.

   

  For me, I read the Chinese as understanding their interest as being a force for stability is their whole dynastic justification. The justification of any dynasty is that they have the Mandate of Heaven, they provide stability for their people.

   

  So I think the Chinese agenda is positive in terms of the development of the global economy, but if it isn't, if they get pushed too far by the way that people decide to aggressively pursue a single-interest slicing of the economic cake, then a little like Saudi Arabia and Russia have decided to do a beggar-my-neighbour strategy in the oil markets, there is no guarantee that China wouldn't do the same thing for trade markets in order to make a point.

• Victoria Clark: "Will changes in trade dynamics affect Brexit terms?"

  N: Away from China and the US, the most significant set of international negotiations currently under way are those between the UK and the EU, as they lock horns over Brexit terms. Investec economist Victoria Clarke questions the impact that likely changes to global supply routes could have on trade negotiations.

   

  VC: One interesting angle from all of this is whether this likely changes the dynamic in trade talks globally, but perhaps also on Brexit, you know, will it make the EU and the UK more or less inclined to go for, a freer more integrated trading arrangement to try and make sure that that drives the upturn that comes at the end of all of this, or perhaps, given that there's more resilience, more security in having more of a domestic process, does that reinforce the dynamic of on-shoring. That's obviously a difficult question to answer because we could be facing quite a different economic landscape, in terms of globalisation, but also in terms of perhaps the structural mix of the economy.

• John Kay: "Governments' ability to print money should be limited"

  N: Whatever the changes in the global geopolitical landscape and global trade patterns that are on the horizon, the financial impact of the pandemic cannot be underestimated.

   

  After governments initially focused on reducing the human impact of Coronavirus, implementing lockdowns and providing emergency funding to healthcare systems in an effort to control the spread of the virus and keep death tolls as low as possible, they could not lose sight of the economic impact of their actions.

   

  With billions poured into support for individuals and businesses in an effort to prop up economies and keep companies afloat, how much longer can governments afford to fund this support? Here’s John Kay again...

   

  JK: Well I think in most developed countries around the world, governments are a long way short of the borrowing being at levels where markets are worrying that they mart start to default, but that doesn’t mean that there isn’t a limit somewhere. If you want to refute the idea that governments can print as much money as they want to finance whatever they need to do, you can look at the success of these policies in countries like Venezuela and Zimbabwe. I think at that point you think again.

   

• Philip Hammond: "It's not so easy to unwind government intervention"

  N: While Hammond acknowledges that extraordinary times warrant extraordinary measures, he’s mindful of the difficult decisions that we now face, and the international cooperation that is required to extract ourselves from this situation.

   

  PH: It's much easier for governments to get involved, intervene, than it is to unwind that intervention.

   

  Some of the things that are being done by governments around the world, and that need to be done, just a few weeks ago, would have been described as unfair trade practices and would have invited potential trade retaliation in what has been an increasingly prickly trade environment in the world.

   

  So there does need to be coordination at the level of the G20, the OECD to ensure that there is some coordinated understanding of what is legitimate and for how long and that on the down curve we don't find people playing games around unfair competitive trade advantage trying to keep intervention measures in place to unfairly advantage the businesses and industries of one country over another.

  In a crisis it's relatively easy to get people to play along, once the crisis is over and we're on the recovery slope, the temptations to game the system will, I'm afraid, come back very quickly.

   

  Within domestic economies some of the interventions that are made will be quite difficult to undo quickly - let me give an example. It seems likely that governments will have to intervene to support the airline industry across the world and yet the airline industry is at the forefront of another very controversial debate around climate change and global warming.

   

  If we end up in a world where our governments control our airlines, those who would seek a more radical solution to addressing climate change will want governments to use that control in a very political way and governments extracting themselves from control of the airline industry, for example, may prove to be quite difficult and controversial politically.

• Philip Hammond: "Future and current generations will have to bear the economic costs of this crisis"

  N: Arguably the most difficult decision lies with how we are going to repay the debt. Here’s Philip Hammond again:

   

  PH: We will have to work out who's going to bear the costs of this crisis and apportion it through borrowing to future generations, through taxation and spending reductions to current generations, or through allowing, encouraging more inflation to ensure that it's distributed in within the current population.

   

  And I think what we will see is that our system is pretty resilient, but we will have to fight off challenges not just from the traditional left but also from those with a radical climate change agenda seeking to use this crisis as a catalyst to challenge our institutional structure and the status quo of our economy.

• John Kay: "Debt forgiveness has to be a selective story"

  N: John Kay isn’t in favour of drastic action to balance the books. But given the disproportionate impact of the pandemic on emerging markets, does he support calls from World Bank President David Malpass for countries to receive debt relief or, in some cases, cancellation?

   

  JK: I think the unwinding will be not adding further to the debt rather than actually repaying it. I think this goes back to how will this be repaid? Well, very slowly. And if course it’s another force that will encourage governments and central banks to keep interest rates very low for a more or less indefinite future.

   

  And so long as interest rates are as low as they are, then the debt burden is not very serious. It creates other problems of which the largest is how people will actually fund their retirements, but that’s a problem on a rather different account.

   

  As for debt forgiveness, well I think that has to be a selective story. It’s country by country and issue by issue, and almost everything about emerging countries depends on whether they actually have the institutional structures that are needed to enable them to be able to use financial instruments effectively. 

• John Kay: "Adopt prudent fiscal and monetary policies in normal times so you're prepared for abnormal times"

  N: Whatever the short and long-term outcomes, as global economies seek to rebuild post-pandemic, what lessons can we learn from the crisis, and how can institutions protect themselves from any future pandemics? The final word goes to John Kay:

   

  JK: I hope the lesson that people will take away is the need for robustness and resilience in strategies, and the ways in which these are developed. We talk about modularity and redundancy as being important to help deal with this. And if you look especially at the financial sector, you’ll realise that over the past 20/30 years we’ve regarded modularity as undesirable, that is we’ve tried to break down the barriers between different kinds of finance, and redundancy is a sign of inefficiency.

   

  If you conduct relatively prudent fiscal and monetary policies in normal times, you’re in a much better position to deal with abnormal times.

• Conclusion

  N: That was the final episode of a special Investec Focus Radio series on preparing for a post-pandemic world. Don’t miss the three previous episodes on the future of work, the investment landscape and the evolving role of business.

   

  To listen to these podcasts or to the complete interviews with any of the people featured on today’s podcast, please subscribe to Investec Focus Radio wherever you get your podcasts. And if you’re enjoying the content, please take a moment to rate us.

   

  Thanks for listening.

   

• Disclaimer

  Focus and its related content is for informational purposes only. The opinions featured on the site are not to be considered as the opinions of Investec and do not constitute financial or other advice. The information presented is subject to completion, revision, verification and amendment.