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China And US: Different Approach To Same Challenge Risks Only One Winner

Business, China, Company Strategy, Economics, US
By John Richardson on 10-Feb-2017


By John Richardson

WHAT do Xi Jinping and Donald Trump have in common? Both confront the challenge of income inequality.

President Xi’s approach is centred on the One Belt, One Road initiative, which involves an attempt to create the world’s biggest free-trade zone involving more than 65 countries. Meanwhile, President Trump is moving in completely the opposite direction.

President Xi hopes that:

  • Better infrastructure and manufacturing links within China, and between China and OBOR partner countries, will help raise the income levels of China’s disadvantaged inland provinces.
  • These same links will help China escape its “middle income trap”. If it fails to execute the escape, then its economy will stagnate. Average and low-income earners would fall further behind as the rich in any country are always able to better protect their wealth.
  • The OBOR will also enable China to secure the oil and gas it needs on long-term secure contracts, and at the right prices, to enable its economy to continue to prosper. China has no chance of on its own becoming energy independent.

President Trump hopes that:

  • Domestic infrastructure spending and tax cuts will encourage more labour-intensive manufacturing in the States, thereby raising the income levels of America’s squeezed middle class.
  • Renegotiating, and possibly withdraw even withdrawing, from the North American Free Trade Agreement (NAFTA) will have the same effect. So will imposing new trade barriers on China and other major trading partners.
  • The US has every chance of becoming energy independent on its own, without the help of any other country, thanks to the shale gas and shale oil revolutions. This will again equal more good-quality middle class jobs. President Trump is attempting to accelerate the shift to energy independence by relaxing regulations on exploration.

Political credibility and political survival

XI has staked his political credibility on successfully tackling China’s income inequality with these comments during his speech to the World Economic Forum in Davos Switzerland last month:

The richest one percent of the world’s population own more wealth than the remaining 99%. Inequality in income distribution and uneven development space are worrying. Over 700 million people in the world are still living in extreme poverty. For many families, to have warm houses, enough food and secure jobs is still a distant dream. This is the biggest challenge facing the world today. It is also what is behind the social turmoil in some countries.

Xi was of course talking globally here, but his comments mean that everyone will place greater focus on how much progress he makes at home.

Meanwhile, President Trump has probably staked his very political survival on the same challenge of income inequality with these words from his inauguration speech: 

For too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost. Washington flourished, but the people did not share in its wealth. Politicians prospered, but the jobs left and the factories closed. The establishment protected itself, but not the citizens of our country. Their victories have not been your victories. Their triumphs have not been your triumphs. And while they celebrated in our nation’s capital, there was little to celebrate for struggling families all across our land.

Not since the Cold War have two economic and geopolitical models pulled in such completely opposite directions. And as with the Cold War, the risk of military conflict will be high as these two opposite models play out, with only one side likely to emerge as a winner. Be prepared for the worst.

How do we track which President is winning?

One free and easy way of tracking the success of these two opposite models is the Gini Co-efficient, which measures income equality/inequality in different countries. Zero is perfect equality and 1 perfect inequality, with anything over 0.40 viewed by the World Bank and the United Nations as severe income inequality.

In China, as you can see from the top chart at the beginning of this blog post, it Gini Co-efficient got better from 2008 until 2015, but then got worse against last year. This was due to falling farm incomes and slower growth in the incomes of migrant urban workers.

The latest data I could find for the US Gini-Coefficient showed a steady rise up until 2014, with the US also above the O.40 market. The bottom chart is more up to date. It shows the rise in the top US wage earners’ multiple over bottom wage earners from 1979 until 2016.

President Xi and President Trump have a lot of work left to do.