Pension funds need a radical rethink

Fragmented schemes with limited investment horizons are detrimental to savers and the economy

Robin Harding

© James Ferguson

Good pensions finance good infrastructure. 

Good infrastructure pays for good pensions. 

This crucial relationship only gets noticed when they both go missing — as the US, UK and several other countries are finding out. 

Having largely dismantled the defined benefit corporate pensions of yesteryear, they now struggle to turn fragmented individual pensions into the long-term investments their savers and their economies require. 

Fixing this is vital. It will not be easy.

Given the human lifespan, pension savings are the natural source of capital that can be tied up for 30, 40 or 50 years. 

In return, they earn the premium that comes from volatile or illiquid assets, which is all the more valuable when interest rates are low. 

But as Bank of England governor Andrew Bailey noted in a speech, something has gone wrong. 

“We live in a time where there appears to be no shortage of aggregate saving, but investment is weak,” he said. UK pension funds allocate just 3 per cent of their resources to unlisted equity.

The UK hopes to address this problem by easing regulations, allowing defined contribution pension funds — where individuals bear the investment risk — to hold more illiquid assets, and loosening caps on fees to allow for complicated investments such as infrastructure. 

But even if such changes have no unintended consequences, they will not address the fundamental challenge of a fragmented pension system, where decisions fall to individuals and it is hard to link their lifespan to the assets they own.

It is time to consider a more radical transformation, away from employer-based pensions towards large, permanent vehicles that can pour money into infrastructure and private equity if that makes sense. 

Traditional pension funds for public employees and sovereign wealth funds such as Temasek and the Government Investment Corporation of Singapore already do this. 

This is not a matter of who takes the investment risk — for better or worse, defined contribution is here to stay — but of how the money is managed.

A look at the options available to me as a Financial Times employee through its defined contribution pension plan makes the difficulty clear. 

There are about 200 different equity, bond and property funds, from a range of providers, actively or passively managed, covering different regions of the world. 

They all show yesterday’s market price. The choice is left to the individual.

This creates a series of problems. The best investment brains in the world spend their days trying to figure out which asset or region will outperform. An individual has no chance — although they may choose to avoid any option that seems risky.

Even if there was an infrastructure fund, or a venture capital fund, and the default channelled savers towards them, this structure would pose a problem. 

The fund managers have no idea who their investors are, or when they are likely to retire. They know it is pension money, and therefore likely to be “sticky”, but they still have to provide regular prices for the fund and keep cash on hand in case some investors suddenly cash out. 

The structure is simply not suitable for illiquid, long-term investments, to the detriment of savers and the economy.

It is worth asking, also, whether employer-based pensions still make sense. When employers took the investment risk, the arrangement was logical, but all it creates now is fragmentation. 

Every time people change jobs, they get new pensions; small plans have high fixed costs. There are economies of scale: the smaller and more numerous the schemes, the more gets wasted, and the harder it is to make sophisticated investments. 

Giving everyone their own personal pensions is a mistake for the same reason.

Consider, instead, the following structure. The government licenses a modest number of not-for-profit pension plans, perhaps based on existing endowments, trusts or public sector funds. 

Employers would decide their pension contributions, as they do today, but then make the payments to whichever plan their employee selects. 

The plan would decide how to invest the money, subject to regulations, and employees could not withdraw the funds until retirement.

This would still be a defined contribution system but it would work quite differently. 

The pension plans would quickly become large, giving them economies of scale, lower costs and the resources to handle sophisticated investments. 

They would know exactly when they needed to pay out pensions and could plan liquidity accordingly. 

The burden on companies and individuals would disappear. This is a structure for low-cost, long-term investment.

It may seem paternalistic. 

Certainly, individuals who want to manage their own investments should be allowed to. 

But consider also where the current set-up is heading. 

The OECD recently warned governments against tapping into private pensions to fund pet projects such as renewable energy. 

There is growing demand for state investment to build infrastructure and for public pensions because private provision is inadequate.

The old defined benefit pension plans were great economic institutions: sophisticated pools of private capital with a long investment horizon. 

Sadly, the security they offered pensioners is no longer achievable. 

We must strive to offer defined contribution pensions of similar quality instead. 

New Covid variant will increase stress on global economy and widen inequality

Policymakers need to take more action to tackle rising risk that short-term problems will become embedded

Mohamed El-Erian

A pharmacist puts a plaster on the arm of a New York nursing home resident after administering a dose of the BioNTech/Pfizer Covid-19 vaccine © Bloomberg

As the new Covid-19 strain triggers tighter restrictions on economic activity and limits even more the movement of people, it has become increasingly clear that the road to vaccine-induced immunity will now have more potholes.

Already it was a journey that was likely to add further stress to the great disconnect between a buoyant and profitable Wall Street and a struggling Main Street.

The change should force policymakers and markets to pay more attention to three other features of this Covid era that are also consequential for the longer-term: the unusually large dispersion in performance in big economies, a significant worsening in inequality and deeper economic scarring.

Because it spreads much faster, the new Covid-19 variant has altered the health risk assessments of both individuals and governments. 

This inevitably imposes even bigger pressures on economic and social interactions even though the mutation is not thought, at least as of now, to change the treatment of the disease or immunity formation. 

Economists have no choice but to push out their expectations for a 2021 economic recovery.

Inevitably the new strain will amplify the dispersion in economic performance around the world. Europe is experiencing further disruptions to the movement of people and goods and accelerating the fall into a double-dip recession. 

So it is probable that we will see previously unthinkable differences in the growth rates of big economies. This may well include as much as a 20 percentage point annualised difference between the most stressed G7 economies and China for 2020, according to my calculations. 

Even within the G7, growth dispersion will be at exceptionally high levels.

Once again, an already excessive level of inequality in many countries will worsen. The burden of the mutated virus environment is suffered disproportionately by the disadvantaged segments of society.

Once again, the wealthy are likely to benefit if central banks feel compelled yet again to inject liquidity into markets. Once again, large companies with access to capital markets will benefit at the expense of smaller ones who rely on banks and local lenders.

Once again, the inequality of opportunity will rise as more schools go online and the young unemployed face a higher risk of the type of prolonged joblessness that can render them unemployable over the medium term.

Because the new Covid-19 variant both worsens the immediate economic hit and delays the subsequent recovery, short-term problems are more likely to become structural ones, and, thus, harder to solve.

If left unchecked, this would translate for most countries into lower longer-term productivity growth, higher household financial insecurity and a higher risk of disorderly financial volatility. This also risks undermining the social fabric and fuel greater political polarisation.

Meanwhile, on the global stage, dispersion in economic performance would aggravate cross-border tensions and lead to further weaponisation of trade tariffs and investment sanctions as well as other “beggar-thy-neighbour” policies.

Policymakers were already facing a very complex task in simultaneously delivering improved public health, restoring normal economic and social interactions and respecting individual freedoms. They now need to take on even bigger challenges.

Governments must urgently speed up pro-growth domestic reforms, rebalance their mix of fiscal-monetary policy and strengthen social safety nets. At the international level, we need much better multilateral policy consultation and co-ordination.

Central banks need to carefully consider their response to greater volatility in markets, including currencies, as the appropriate choices vary significantly from country to country. 

On financial sector issues, they must improve their understanding and prudential supervision of non-banks lest continued excessive risk-taking there undermine economic wellbeing.

As we head into 2021, investors will likely maintain an attitude that has served them well this year: put your faith in central banks’ ability to shield financial markets from any and all economic and corporate shocks.

This will encourage more irresponsible risk-taking by investors and debt issuers. It will also fuel investment approaches that fail to account for a longer term in which governments and central banks themselves face massive and persistent policy and operational challenges.

The writer is president of Queens’ College, Cambridge university, and adviser to Allianz and Gramercy 

BIDEN WILL EXTINGUISH THE DOLLAR

By Egon von Greyerz

If president Biden wants to save the US economy, his first measure should not be to print $trillions of worthless new money but instead tell his secretary of the treasury Janet Yellen to withdraw all debased currency from circulation just as Aristophanes suggested in 405BC, Copernicus in 1517 and Gresham in 1560.

There is only one problem with withdrawing the debased dollars… THERE WOULD BE NO MONEY IN CIRCULATION AT ALL since all dollars are totally debased.

QUEEN ELISABETH I WITHDREW THE DEBASED COINAGE

But this didn’t worry Queen Elisabeth I (daughter of Henry VIII) in 1560 in England. 

She ordered her adviser Sir Thomas Gresham to withdraw all debased currency from circulation and replace it with silver and gold coins with the highest fineness.

Queen Elisabeth’s father Henry VIII did not only got rid of many of his wives but also of good money. 

Gresham counselled her to get rid of the bad money that Henry had introduced. Henry had a lavish lifestyle and also conducted expensive wars against France and Scotland. 

Thus he did what virtually every nation has done in history and debased the currency.

Gresham noticed that bad money drives out good money. The consequences were that people saved the good money and only traded in bad money. 

Also, merchants in the Low Countries (Belgium, Netherlands) insisted to have bigger quantities of the new money since the purity was much lower.

THE BIG SWINDLE

The problem with paper or fiat money is that you can’t evaluate the fineness. The fact that $100 in 1971 has been debased by 98% is impossible to tell since it is still called $100 although the purchasing power in 2021 is only $2!

And this is how governments and central banks continually swindle their people by debasing their money without the people’s understanding or knowledge.

Imagine if Biden instructs Yellen to take all dollars (bad money) out of circulation and to replace it by good money – gold.

Good money could naturally not be another fiat currency or digital money but would have to be gold backed money. There are many ways to calculate what the gold price would need to be, depending on which measure for money supply is used.

But if we take US M3 which is a broad measure of money supply, and 100% gold backing, that would value gold at over $70,000.

This is obviously not a forecast but just a theoretical calculation. And as we know, gold is an international currency so China and Russia would have a major say in this issue.

Also, it is very questionable if the US has the 8,000 tonnes that it officially declares. There has been no full physical audit since the 1950s when Eisenhower was president.

China and Russia declares holdings of around 2,000 tonnes each. But China’s real holdings could be well in excess of 20,000t and Russia’s also well above the official 2,300t.

SPEND TODAY BEFORE IT IS WORTHLESS TOMORROW

Gresham was clearly right that bad money pushes out good money. This is why most people in the world spend bad money today since it is continually debased and worthless tomorrow.

Instead assets that maintain purchasing power better are held and not spent such as gold and silver. But other investment assets such as stocks, bonds and property are also hoarded as they have appreciated considerably more than worthless fiat money.

Just for clarity the phrase Gresham’s law was coined 300 years after his death. But it wasn’t actually Gresham who came up with this concept but Copernicus (picture) in 1517 already.

Copernicus described this phenomenon as QTM (not MMT!) or Quantity Theory of Money. In simple terms this meant that if money quantity doubles, price also doubles. Thus the value of the money halves.

This is exactly what happens in the economy today. The chronic disease of budget deficits, debt expansion and money printing can never end well.

And nor will it this time, just as it didn’t in Roman times (180-280AD), for John Law in France around 1720 and hundreds of other times in history.

This is why Voltaire coined the phrase: “Paper Money Eventually Returns To Its Intrinsic value – ZERO.”

HISTORY – HISTORY

History gives us the same lesson over and over again and still mankind seems incapable of learning from history.

Arrogance and greed are clearly much more dominant traits than humility and contemplation.

Why would we otherwise make the same mistakes without fail when history so lucidly teaches us that we need not?

But since we are in a very ugly era when history is often eradicated with government’s or parliament’s tacit approval, we can see how history is not just ignored but also repudiated.

BAD OR DEBASED MONEY EXISTED 2,400 YEARS AGO

A final point on Copernicus’ or Gresham’s law about bad money and good money. We can even go back 2 1/2 millennia to find the same phenomenon.

In 405 BC, the Greek playwright Aristophanes wrote a play called the Frogs. This play was about Old Ways – Good and New Ways – Bad and that Athens should turn back to men of integrity as well as GOOD money:

“Gold or silver, each well minted, tested each and ringing clear.

Yet, we never use them! Others always pass from hand to hand.

Sorry brass just struck last week and branded with a wretched brand.”

Plus ça change, plus c’est la même chose (The more it changes, the more it stays the same).

So the world has seen money destroyed regularly for 2,400 years at least and still we haven’t learnt.

Reminds me of Pete Seeger’s song from 1962 – “Where have all the flowers gone” with the lines: “When will you ever learn, when will you ever learn”

I do realise that there might be too much history and nostalgia in this article for the younger generation. My point with this is obviously to stress the utmost importance of history and the past in order to understand the present and the future.

DREAM TEAM – BIDEN & YELLEN (BY)

I would expect the new Dream Team of Biden and Yellen (BY) to set all records when it comes to money printing. They are already out of the starting blocks with $2 trillion of new fake money before they have even begun.

Trump increased the debt by almost $8 trillion but once BY have got going with all the multiple programmes they have laid out, no one can predict where it will all lead to. It is likely to be a minimum of $3.5 trillion per year as we have just seen. But to increase that to $5-7t is more likely. So a total of $20-28t for 4 years doesn’t seem implausible.

This sum doesn’t include higher interest rates which is very likely or saving a failing financial system which is even more likely. All this could easily amount to $100s of trillions or more.

And once the $1.5 trillion derivative bubble bursts, BY will set the record as the biggest money printers in history and the ones that extinguished the dollar.

We must remember that the current problems started in September 2019 with the ECB and Fed panicking due to problems in the financial system.

The Covid-19 outbreak couldn’t have started at a better time for the EU and the US.

Normally governments start a war or a major terrorist attack in order to justify massive increases in debt and money printing. No one knows how the coronavirus started but it certainly came at a very opportune moment for governments and central banks under pressure.

INFLATION IS HERE

So far the $10s of trillions of printed money has not translated into inflation in official consumer prices.

But we are now seeing major inflation in commodity prices.

If we just look at food commodity prices, they are up 54% since July 2020.

And if we look at general commodity prices – up 89% since April 2020 – they are telling us that hyperinflation is not far away.

STOCKS – FINAL HURRAH? BEFORE IMPLOSION

The 50 year chart below of the Dow looks frightening with its bright red colour. 

That is obviously intentional because the Dow is now finishing an incredible move which started in the low 800s 50 years ago.

This quarterly chart shows four higher tops since 2017. But the warning signal is the blue RSI indicator at the bottom. Every new top in the Dow has been unconfirmed by the RSI momentum indicator as all the blue tops are lower in spite of higher Dow tops.

Normally this is a very bearish sign.

In addition our proprietary cycle indicators are telling us that the Dow could be topping now.

But whether the Dow tops here or we will see a final hurrah is irrelevant. What is important is that once the Dow turns, we are going to see the most vicious bear market in history. A fall of 90% or more in real terms is very likely.

That will be the start of a hyperinflationary depression of a magnitude that few can imagine.

After the hyperinflationary period, a deflationary depression is likely. So very difficult times ahead.

The catalyst could be anything from the sheer size of the bubble, to debt or banking problems, or that the Covid vaccine is not effective or even dangerous.

WEALTH PRESERVATION

Gold is finishing its correction now before a very strong move to new highs.

It serves no purpose to give targets for gold. Over 10 years ago I indicated that gold should reach $10,000 in today’s money.

Many gold experts are now giving higher and higher targets. In my view these forecasts serve no purpose if at the same time the forecaster doesn’t indicate what happened to the purchasing power of the currency.

Gold $20,000 or $75,000 sounds sensational. But what is a dollar worth at that point.

When the dollar reaches almost Zero gold will reach almost Infinity

As I have indicated above, the dollar and most currencies are likely to reach “almost” zero. At that point gold will not be $50,000 or $100,000 but should reach “almost” infinity.

Infinity sounds unreal and it is of course. But the point I am making is that all these bullish price forecasts for gold serve very little purpose if the forecaster doesn’t indicate how much the currency has depreciated at the same moment.

Suffice it to say gold is likely to at least reflect the debasement of the currency it is measured in but probably a lot more.

The reason for that is again Gresham’s law.

Remember that bad money drives out good money. Also remember that gold is the only money that has survived intact in history.

The gold market is definitely the best example of Gresham’s law.

Not only does bad fiat money drive physical gold out of circulation. So why spend your gold when it throughout history has always appreciated against paper money, or to express it more correctly, when paper money is repeatedly debased against gold.

For example, the dollar is down 98% against gold since 1971 and down 85% since 2000.

But what has really driven out real or physical gold is paper gold.

With paper gold currency determining the gold price, it serves absolutely no purpose to spend your physical gold.

The diagram below show why:

Daily gold trading, virtually entirely paper gold, is 850x daily mine production!

There can’t be a clearer sign that price discovery is impossible in this totally fake paper gold market.

Whilst fake paper gold is traded at $70 trillion a year, annual mine production is a mere $213 billion. 

Doug Casey on Whether the US Dollar is Headed for an Inflationary or Deflationary Collapse

by Doug Casey

International Man: In the past decade, the Fed’s money printing has created bubbles in stocks, bonds, real estate, and other many areas. It’s likely that the stimulus and money printing will not only continue but accelerate at breathtaking speeds in 2021.

What do you think the prospects are for what the great Austrian economist Ludwig von Mises called a "crack-up boom?"

Doug Casey: First of all, we have to define what Mises meant by a "crack-up boom." It can occur when the public realizes that money is being printed at a great rate, and it's likely to continue being printed at a great rate. 

The public then starts moving out of money to buy anything of real value. All that money is passed around faster and faster, like an old maid card, causing a "crack-up boom." It's not a real boom. 

It’s caused by fear, not prosperity. The desperation of trying to get into real goods and get out of the US dollar creates what you might call uneconomic economic activity.

They won’t try to put the money into productive enterprises, rather just tangible assets that will defend them from inflation. 

The most famous crack-up boom in modern history, of course, was in Weimar Germany during the early 1920s.

Are we heading in that direction in the US? Well, there are differences. For one, the US isn’t just coming out of a devastating war. That was an element why it got as bad as it did in Germany. 

On the other hand, the US government is much more profligate with many more programs than the German government after World War I. 

Of course, the US is losing it’s Forever Wars in an undisclosed—but large—number of countries.

Despite being so much bigger and with so much more real wealth, the US government’s current spending habits may make things even worse than for Germany after World War I and subsequent reparations in the 1920s. 

A chaotic crack-up boom is possible, and a significantly lower standard of living for the average American is a sure thing. Now is the time, the last minute as it were, to start planning for it. A few years ago would have been better.

International Man: On the other hand, what are the prospects for a deflationary collapse, at least initially, as one or more of these historical bubbles in the financial markets inevitably burst?

Doug Casey: This is an argument that students of Austrian economics have debated since at least the mid-1960s.

Is all this money printing going to result in runaway inflation, or will all the debt result in catastrophic deflation and collapse—or both in sequence? 

So far, the inflationists have been right because the Federal Reserve has always come to the rescue, printing enough money to prop up the house of cards built by previous inflation, but there's no guarantee that they'll succeed in the future.

Their failure to bail out Bear Stearns and Lehman Brothers during the collapse of 2008 almost brought the system down. 

This time they’ll be forced to bail out almost everybody. 

Ultimately, we'll wind up with a worthless dollar, but along the way, there will be some serious deflation scares. 

If the Fed doesn’t bail out a major corporation or industry quickly enough, or to a great enough degree, things could get out of control.

They're walking a tight rope above the Grand Canyon, but they’re economic stumblebums.

The economy is being run by a bunch of suits in the Eccles Building in Washington DC. 

They’re academics with no practical experience in the real economy.

International Man: The gap between GDP growth and the Fed’s balance sheet is widening to previously unthinkable levels. It’s an indication of just how much currency is being created relative to the underlying economy. What do you make of this, and where are things headed?

Doug Casey: Trends in motion tend to stay in motion until they reach a crisis—at which point, anything can happen. That’s where we are right now.

If the Fed were a poker player, I’d say it was on tilt—making desperate but foolish bets hoping to get out even. It’s hard to recover from that. 

They can’t stop printing money, or the whole rotten structure will come down. 

But if they keep printing money, there’s no telling where the next explosion of inflation will erupt. So far, it has been in the stock, bond, and real estate markets. I suspect that commodities will be the next area.

The more that government tries to fine-tune the economy—which, incidentally, is a phrase that they don't use anymore, in recognition of the fact things are actually out of control—the more it will gyrate like an elevator with a lunatic at the controls. 

To get $1 of actual economic growth, they know that they have to print four, five, or six dollars of funny money.

We’re way beyond the silly notion of "fine-tuning" the economy at this point. Fine-tuning has given way to hitting the economy with a monkey wrench or a sledgehammer.

International Man: What do you think will happen with the US dollar over the next four years?

Doug Casey: The fact that they’re trying to go to a digital dollar is guaranteed to make it worse and to make the US dollar more of a hot potato than it has ever been.

It’s going to have huge international, as well as domestic, consequences. The dollar—not wheat, Boeings, or IBMs—has been the major US export for decades now. 

No one knows how many are held outside the US, but at some point, it will be replaced as the world’s currency. 

When that happens, they’ll start flooding back home, and domestic prices will explode. 

At the same time, real US wealth will be exported in exchange for those dollars. The domestic standard of living will fall dramatically.

The government’s response will likely be foreign exchange controls, which will just aggravate things. The US is looking more and more like Argentina.

International Man: Given everything we’ve just talked about, what can the average person do?

Doug Casey: Other than buying a lot of gold, silver, and the stocks of companies that mine them, now might be an excellent time to buy a house you like if you can do it with a 3% fixed-rate long-term mortgage.

Whether the house in question goes up in value or not, you can be pretty sure your mortgage is going to be inflated into insignificance. 

It's an excellent financial bet, a great way to get short the dollar.

In fact, a friend just recently bought a hundred-thousand-dollar car, which costs more than some houses. 

He could have paid cash, but since they offered financing at 1.9% over six years, it was like a gift. 

Of course, he bought the car—the way many will buy things if the crack-up boom arrives. The depreciation on the loan will offset the depreciation on the car.

As a result of all this currency printing, you're going to see more people becoming preppers as well—stocking up on food, shelter, and ammunition because of the government's inflation as well as increasing regulations.

Assuming that Biden, or Harris, will be president, this administration is likely to stretch the actual fabric of society to the breaking point. Being a prepper is smart. 

And that would include transferring any significant cash holdings that you have into gold and/or silver. That's what the average person can do.

If the average person wants to speculate, he can buy gold stocks, which are very cheap. I think they're going to go into a bubble in the next few years. 

Gold stocks and small oil stocks are the two things that I like best.

A China Strategy to Reunite America’s Allies

China’s autocratic ways and its strategic ambition are prompting the world’s democracies to band together against it. But, as the European Union’s recent decision to sign an investment accord with China makes clear, China’s geopolitical heft and the allure of Chinese trade and investment are tempting many to curry favor with it.

Charles A. Kupchan, Peter Trubowitz

WASHINGTON, DC/LONDON – America’s relationships with its core democratic partners are set to rebound dramatically after President-elect Joe Biden takes office. 

Allies in Europe and Asia relish the prospect of an American president committed to adhere to democratic traditions at home, honor strategic commitments abroad, and be a team player.

Broadly defined, intervention refers to actions that influence the domestic affairs of another sovereign state, and they can range from broadcasts, economic aid, and support for opposition parties to blockades, cyber attacks, drone strikes, and military invasion. Which ones will the US president-elect favor? 

Solidarity among the world’s democracies is especially important when it comes to standing up to China. But the European Union’s decision last week to sign an investment accord with that country underscores the potential for serious discord. 

Even though the Biden camp cautioned the EU against moving ahead with the agreement, it nonetheless sealed the deal (pending ratification).

To be sure, China’s headstrong ways motivate the world’s democracies to band together against it. Yet its growing geopolitical heft and the allure of Chinese trade and investment also tempt many countries, democracies included, to curry favor with its government. 

Accordingly, Biden should launch early in his presidency a concerted effort to forge a united democratic front on China, guided by the following three principles.

First, the United States should dial down the rhetoric and treat China as a formidable competitor, not an implacable foe. 

A US strategy of rigid containment or aggressive rollback would find few adherents in either Europe or Asia, implying that it would backfire strategically.

Democrats and Republicans may be seeking to outdo each other when it comes to calls for getting tough with China. But if foreign partners see Biden as spoiling for a fight, the US will do more to divide than unite the world’s major democracies. 

China already has significant geopolitical and economic clout in Asia and beyond – especially through the Belt and Road Initiative, its massive investment program in global infrastructure and commercial development. The genie cannot be put back in the bottle.

Pragmatic realism, not bombast, should guide US strategy toward China. Of course, the US should make clear its red lines, especially when it comes to Taiwan’s autonomy and freedom of navigation in the Asia-Pacific. But the US and China should aim for shared leadership in the region – a strategic objective that would enjoy ample support among US allies already fearful of the escalating Sino-American rivalry.

Second, the US and its key allies need to link arms to confront China on trade and investment. Economic decoupling is not in the offing; China is far too integrated into the global economy. 

Nonetheless, import competition from China and its unfair trade practices have cost the developed democracies millions of jobs over the past two decades. Pressing China to level the playing field can work to their economic advantage.

America and its allies need to team up to maximize effectiveness. Acting unilaterally, as President Donald Trump did – and as the EU is now doing – only plays to China’s strength by diluting the collective bargaining power of the world’s democracies. Trump’s tariffs have done little to liberalize China’s market or bring down the US trade deficit.

Instead, global pressure will be required to push back against China’s harmful trade practices, including state subsidies and intellectual property theft. 

Though full-scale decoupling is not in the cards, the US should join with its democratic allies to pull back from China when it comes to sensitive technologies, such as semiconductors and artificial intelligence. 

The same holds for imposing new export controls, scrutinizing and regulating Chinese investment abroad, steering clear of Huawei when it comes to building 5G networks, and repatriating high-end production.

These steps would align well with the domestic measures that the Biden administration and the governments of many other democracies are poised to take to generate more jobs and better pay for blue-collar workers. 

The goal must be to ensure that economic growth and gains from trade are more inclusive. Spending on infrastructure, education and retraining, research and development, and renewable energy can help the major democracies maintain their competitive edge over China.

Finally, the US and its democratic partners should speak with a single voice when it comes to standing up for human rights. Resolute condemnation of China’s unwillingness to grant basic freedoms to its citizens will put China’s leadership on the defensive in the court of international opinion. And it will help repair the erosion of America’s moral authority under Trump.

Democratic leaders can further raise the costs to China’s rulers by imposing sanctions on those responsible for oppressing the Uighur minority in Xinjiang and cracking down on Hong Kong. 

When China resorts to economic coercion to punish countries for criticizing its human rights record, as it is doing with Australia, the world’s democracies should respond in kind.

Working to build a consensus around these three principles would not only signal the depth of the Biden administration’s commitment to work with its partners. It would also play to America’s strongest suit when it comes to handling China: its alliances.

China has only one ally – North Korea – while the US has loyal partners worldwide. China’s economy will be the world’s largest by the end of the decade, but its GDP will remain roughly one-third the collective size of the world’s major democracies. 

As long as they stand together and aggregate their geopolitical and economic heft, the main democracies will outclass China for the foreseeable future.

Biden will need to summon all of his persuasive skills to forge a coordinated approach toward China. But his task is made easier by the fact that even as they eye the benefits of more commerce with China, democracies in Europe and Asia are anxious about China’s intentions. 

They will welcome a US president who respects allies and appreciates the need for teamwork to deal with China.

US President-elect Joe Biden may have promised a “return to normalcy,” but the truth is that there is no going back. The world is changing in fundamental ways, and the actions the world takes in the next few years will be critical to lay the groundwork for a sustainable, secure, and prosperous future.

Charles Kupchan, a member of the National Security Council under President Bill Clinton and President Barack Obama, is Professor of International Affairs at Georgetown University, Senior Fellow at the Council on Foreign Relations, and the author of Isolationism: A History of America’s Efforts to Shield Itself from the World.

Peter Trubowitz, Professor of International Relations and Director of the US Centre at the London School of Economics, is Associate Fellow at Chatham House and the author of Politics and Strategy: Partisan Ambition and American Statecraft.