The V-Shaped Recovery Marches On

Despite all of the doom and gloom of the past six months, much of the global economy continues to show signs of a sharp recovery from the pandemic-induced collapse this spring. And while nothing is guaranteed, a number of favorable structural factors make a further acceleration highly likely.

Jim O'Neill

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LONDON – Large swaths of the global economy are exhibiting traditional signs of a V-shaped recovery from the pandemic-induced collapse this spring. The monthly indicators for many countries show vigorous rebounds in June and July, with 10-15% projected growth in real (inflation-adjusted) GDP in the third quarter, all else being equal.

To be sure, there are reasons to question whether the perceived upturn is merely a technical bounce-back – an illusion caused by the sheer depth of the initial collapse. This could well be the case, especially if many countries suffer a strong second wave of COVID-19 infections, or if high hopes for an early vaccine turn out to be misplaced.

No one can know for sure. We will have to wait and see the evidence as countries try to strike a balance between managing the virus and getting their economies back to normal.

Though the United States has struggled more than other countries with the virus, its rate of new infections nonetheless has fallen, making it more likely that its summer economic rebound will accelerate. And in China, the latest indicators point to a high level of infection control and an accelerating recovery.

Given the dominant roles of the US and China in the global economy, such positive developments augur a major recovery for world trade, notwithstanding the two countries’ ongoing conflict over trade and technology.

As for Europe, many countries are showing signs of a second COVID-19 wave, with increased incidence posing a particular threat to Spain’s recovery. But this is not the case everywhere.

Other countries have stepped up their control measures, and if these prove sufficient, they can keep their recoveries on track.

That is what we know now as of mid-September. To be any more confident about the prospects for a sustained economic recovery in late 2020 and into 2021, we will need more evidence of progress toward improved treatments and safe, effective vaccines.

Whenever a vaccine is made widely available, a further acceleration in economic activity can be expected. Those sectors that have suffered the most from social-distancing protocols – including international travel, entertainment, and hospitality – will start to come back to life.

In fact, unless all of the promising vaccine candidates that have already reached Stage Three trials fail, we can anticipate a recovery in these hard-hit sectors sometime in the coming months, at which point hope for a cyclical recovery will become even more justified.

But there are a number of structural issues to consider. For starters, the most pressing question of this fall is whether the G20, currently chaired by Saudi Arabia, can resurrect itself and deliver genuine international cooperation, as it did after the 2008 global financial crisis.

According to the World Health Organization and other international health bodies, roughly $35 billion is needed to ensure that vaccines can be equitably distributed to the world’s 7.8 billion people.

This is a trivial sum compared to what many G20 countries have already spent to support their domestic economies. Yet funding the universal distribution of a vaccine is absolutely crucial for ensuring a global recovery, rather than one that is limited just to those countries where a vaccine is available.

Equally pertinent, though less discussed, is the balance of forces between domestic and external growth. Owing to the anxiety created by the pandemic, many governments, notably in the European Union, have demonstrated unprecedented levels of enthusiasm for fiscal stimulus, and these spending programs have been further supported by extraordinarily generous monetary policy.

Expansionary macroeconomic policies suggest that, barring a sudden and significant fiscal retrenchment, domestic demand will drive this recovery more strongly than it did in the aftermath of the 2008 crisis. This would likely translate into a recovery in world trade above what many commentators currently consider posible.

But that brings us to a third structural issue. When will all the current spending be paid for, and by whom? There already seems to be a reasonably strong consensus across advanced economies that early fiscal tightening should be avoided. I, for one, would welcome a tightening after the crisis has passed.

But, of course, much will depend not just on the scale and speed of the recovery but also on the size of fiscal deficits. Here, it is interesting to note that expectations for additional fiscal stimulus in the US have recently been downgraded as a result of better-than-expected employment data.

As for monetary policy, the US Federal Reserve’s announcement in late August that it will shift to an “average inflation targeting” regime has been greeted as an additional form of support.

But a caveat is in order. Whether the policy change sticks will depend on how inflationary
pressures are actually developing. If financial markets were suddenly to become concerned about an unexpected increase in inflation, policymakers might have to shift their approach once again.

A remaining open question, one that I have raised in previous commentaries this year, is how policymakers will respond to the changes wrought by the COVID-19 crisis. Will they nurture a new business culture geared toward “profit with a purpose,” encouraging (or cajoling) more corporations to pursue decarbonization and solutions to societal challenges like antimicrobial resistance (AMR) and the threat of future pandemics? That would certainly be a welcome development, and it is hardly a step too far for our governments.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chair of Chatham House.

How Credit Ratings Are Shaping Governments’ Responses to Covid-19

To fund pandemic-related spending, governments around the world will need to take on more debt. If they can.

BY Efraim Benmelech

In 1995, after Moody’s downgraded the credit ratings of both Canada and Mexico, The New York Times columnist Thomas Friedman memorably quipped, “you could almost say that we live again in a two-superpower world. There is the U.S. and there is Moody’s.

The U.S. can destroy a country by leveling it with bombs; Moody’s can destroy a country by downgrading its bonds.”

Twenty-five years later, the quip would look a little different, with China joining the ranks of superpower. But as the world attempts to respond to a deadly—and costly—pandemic, it is clear that the power that ratings agencies such as Moody’s and S&P hold over cash-strapped governments hasn’t gone anywhere. In fact, in a new study with a colleague, I find that ratings have never been more important.

To understand why, consider that credit ratings are not determined arbitrarily by the credit-rating agencies. Rather, they are driven by a country’s economic prosperity, the quality and stability of its political institutions, and its public debt. And over the last few decades, that public debt has exploded.

Among advanced economies, debt to GDP has increased from about 50 percent in 2000 to more than 70 percent in 2019, with countries such as Japan (at 235 percent), Greece (179 percent), Italy (131 percent), and Portugal (123 percent) “leading the pack” in terms of government indebtedness.

Take, for example, France, which in 2000 had a debt-to-GDP ratio of 58.9 percent and now hovers around 100 percent, or the UK, which grew from 36.8 percent in 2000 to 85.9 percent in 2018. And let’s not forget about the U.S., which grew from 55.6 percent in 2000 to 106.9 percent in 2019.

Governments and central banks have responded to the COVID-19 pandemic and the resulting economic devastation using both fiscal and monetary tools on a scale that the world has not witnessed before.

For example, the U.S. fiscal policy response under the CARES Act is currently estimated at $2.3 trillion (about 11 percent of GDP). In Germany and Japan, the fiscal response has been even larger as a percentage of GDP, amounting to 32.9 percent and 22.0 percent of GDP respectively.

To pay for many of these programs, governments around the world will need to take on more debt—and their ability to do so will depend on their access to financial markets.

In a recent study with Nitzan Ben-Tzur of the Kellogg School of Management, I look into the factors shaping the fiscal and monetary policies that have been adopted by various nations. Our study finds that across the world, fiscal spending in response to the COVID-19 crisis is considerable: on average, fiscal spending (including loans guaranteed by the government) is 7.7 percent of GDP. For high-income countries—those with GDP per capita above the world’s median—spending is even higher.

And which factor can be most directly tied to spending?

To find out, we ran a statistical “horse race” between a number of macroeconomic variables such as GDP per capita, population size, debt to GDP, government expenditures to GDP, the number of COVID-19 cases, and the central government credit rating. Of all of the macro variables we considered, we found that one variable showed up consistently as the strongest determinant of fiscal policy—a stronger factor than GDP per capita or even the spread of the virus. And that factor was a country’s pre-crisis sovereign credit rating.

These findings demonstrate that a nation’s ability to deploy fiscal policies is limited by its access to credit markets.

Governments’ credit ratings have been hit hard in this crisis. According to Marc Jones of the World Economic Forum, S&P has already made 19 sovereign downgrades, while Moody’s estimates that the virus will push up debt in the world’s richest nations by close to 20 percentage points.

But once this crisis is over, countries around the world should work hard to improve their creditworthiness. Because, as it turns out, countries with lower credit ratings are not able to use fiscal-policy tools effectively during economic crises. And, after all, you never know when the next crisis will hit.

A Weak Dollar Can Be Investors’ Friend

There are attractive entry points now in stocks that stand to benefit from the trend

By Aaron Back

A weak dollar favors Coca-Cola, which derived 68% of revenue outside North America in its last fiscal year. / PHOTO: ARND WIEGMANN/REUTERS

The era of the strong dollar is likely over. For U.S.-based investors, that needn’t be a bad thing.

There are attractive entry points now in stocks that could benefit from the trend.

The U.S. dollar has been heading lower over the past several months as it has become clear that the coronavirus crisis is hitting the U.S. harder than many other advanced economies, and as the crisis has been met with unprecedented fiscal and monetary loosening. The WSJ Dollar Index is down around 9% since late March, and 6% lower since mid-May.

There are many reasons to expect further weakness. Chief among them is the Federal Reserve’s new policy framework unveiled last month. The Fed has pledged to let inflation run above its 2% target for an extended period to make up for past periods of weak inflation and not to respond to falling unemployment with pre-emptive rate increases.

This is a clear recipe for a weaker dollar over the long term. As TS Lombard macro strategist Oliver Brennan put it in a recent note, this framework would break the traditional relationship between America’s growth and foreign exchange: Investors will no longer respond to better U.S. economic news by bidding up the dollar in anticipation of Fed tightening.

But don’t despair. According to strategists at Goldman Sachs, periods of dollar weakness tend to see better equity performance. They calculate that since 1980, the S&P 500 has on average risen by 2.6% during months when the U.S. dollar has depreciated in trade-weighted terms by at least 1.25%, compared with gains of just 0.7% in months when the dollar has risen by that much.

A weak dollar mostly benefits companies with revenue overseas because it raises the value of those sales in dollar terms. U.S.-based companies that compete abroad with global rivals also can gain a competitive advantage because their relative cost base is lower.

Goldman calculates that, in months of sharp U.S. dollar weakness, sectors with high global exposure such as technology and energy have outperformed, rising on average by 3.3% and 2.6%, respectively. More domestically focused sectors such as consumer discretionary have done less well, rising 0.8% on average.

Individual stocks can vary widely within sectors. Since 1980, during months in which the dollar was weak, Goldman’s sector-neutral basket of stocks with high international sales has outperformed a basket with high domestic sales by 1.4 percentage points.

Within consumer staples, for instance, this means a weak dollar favors Coca-Cola, KO +0.32% which derived 68% of revenue outside North America in its last fiscal year, over PepsiCo, PEP -0.34% at 39%.

In sweets and snacking, Oreo maker Mondelez MDLZ -0.18% earned 73% of revenue outside North America, compared with 11% at the rather provincial Hershey. HSY 0.08% The global colossus of the sector is Colgate Palmolive, with 78% of sales outside North America, while Clorox CLX -0.07% is more domestic, with 84% of sales within the U.S.

Intriguingly, some of these more globally exposed stocks have underperformed recently, largely because they have benefited less from the U.S.’s great pantry-stocking wave of 2020. Coca-Cola is down around 9% so far this year, while Mondelez has performed similarly to the S&P 500, gaining around 4%. Colgate Palmolive is up around 11%, but that is far less than Clorox’s 40% surge.

There is no need for investors to rush into crowded trades such as gold or exotic dollar hedges like bitcoin. Opportunities abound to pick up quality U.S. companies that will benefit handsomely from a weakening dollar.

The red front-line

China’s Communist Party is splurging on new local drop-in centres

Filling them can be a challenge

In shenzhen’s glistening tech district, opposite the headquarters of Tencent, a giant digital conglomerate, the Communist Party vies for attention. “Follow the party, start your business” is etched into a futuristic-looking cube at the entrance to a two-storey building, its walls sprayed with paintings of giant robots.

In the lobby stands a life-size statue of Mao Zedong, flanked by other Communist leaders. But most visitors bypass the exhibit on the party’s history and head directly upstairs.

Xi Jinping Thought is not as appealing as the free classes on offer: calligraphy, kick-boxing, Pilates and Zumba. There are lectures on career-building and buying property in Shenzhen, a city bordering on Hong Kong that is one of the world’s most expensive property markets. At lunchtime, workers can enjoy free massages.

“Most people find study sessions about the history of the Communist Party too dry,” says one of the centre’s staff. “They prefer attending yoga or lectures about blockchain. We even held a speed-dating event recently where we matched 15 couples.”

The building is known as a “party-masses service centre”. In recent years they have proliferated in cities, towns and villages across the country. It has been the biggest effort by the party to develop its physical infrastructure at the grassroots in decades. They are partly intended to be “one-stop shops” at which locals can get access to a wide variety of bureaucratic services that hitherto may have required visits to distant government offices.

In Shenzhen, where they are called “community service centres” in English (perhaps to obscure their Communist links to politically sensitive foreigners), there are more than 1,000 of them. One is at the city’s airport. It offers karaoke, a flight simulator and a library of more than 3,500 books.

Providing entertainment and helping with government paperwork, however, are secondary functions of these centres. Their main purpose is to give ordinary party members space to meet and discuss such matters as Xi Jinping Thought and the party’s latest directives.

The dismantling of many state-owned firms in the 1980s and 1990s stripped the party of much of its grassroots presence. In recent years it has been scrambling to rebuild this by setting up party organisations within private businesses and ngos. But these often consist of just a few people who lack regular contact with higher-level party committees.

The service centres help to bring disparate party bodies under one roof and make it easier to mobilise them when needed, such as to help the public during covid-related lockdowns. The one in the airport describes itself as a “red home” for nearly 10,000 party members working in more than 30 airport-related businesses. It has a dance hall that doubles as a meeting room.

Building and decking out these facilities has not been cheap. In the past two years a district of Dongguan, a city near Shenzhen, has spent more than 190m yuan (about $28m) on them.

Jiayuguan, a far less affluent city about 3,000km to the north-east on the edge of the Gobi desert, has forked out a similar amount in the past five years. Nor has it been optional. Progress made in building them is used to evaluate officials’ performance.

Cities have specified minimum areas for their floor space. In Shenzhen it is 650 square metres for neighbourhood ones, or more than half the size of an Olympic swimming pool. But some officials like to go larger. Shenzhen boasts the biggest neighbourhood-level party-masses centre in Guangdong province, at 8,000 square metres.

Officials have good reason to show enthusiasm. Rebuilding the party at the grassroots has been a priority for Mr Xi since he took over as China’s leader in 2012. On trips outside the capital he has paid several visits to party-masses centres.

During one such in July, in the north-eastern city of Changchun, he paraphrased Mao, saying that effective work at the grassroots was essential for ensuring that the party can “sit tight on the fishing terrace despite the rising wind and waves”—in other words, maintain its grip on power.

In cosmopolitan cities such as Shenzhen, it involves appealing to a young tech-savvy elite that has little time for earnest study of party ideology. Hence the effort to entice people with services such as free advice on starting up a business.

Ryan Manuel of Official China, a research firm, compares the new centres to churches in Western cities that provide busy professionals with a sense of community by arranging sports activities and night classes. In both cases the main aim remains to inspire a belief—in God at the churches, or in the party at the centres.

Even by the party’s admission, the new centres—despite being hailed as the “red front-line”—do not always perform as hoped. An article published in 2018 by the website of the People’s Daily, the party’s main mouthpiece, said many centres were “empty shells”.

In some places, “the hardware is classy but the service doesn’t match and footfall is low,” lamented a county official near Kunming in another online article. In places where the buildings were empty, she wrote, citizens were also devoid of “satisfaction and happiness”.

But the party does not have to worry about attracting recruits, whose swearing-in ceremonies are often held in the new centres. In 2018 only about 10% of applicants were accepted to join the party, which has over 90m members.

“Despite the party trying to be more inclusive and reach out to more people, the party itself remains highly selective in recruitment of members,” says Feng Chucheng of Plenum, a research firm. The party wants the bright tech workers of Shenzhen, but only those who will comply with its orders without question. Karaoke skills confer no advantage.

What’s Biden’s New China Policy? It Looks a Lot Like Trump’s

Even with an administration change in January, China would face continued heightened friction with the U.S.

By Jacob M. Schlesinger

China’s Xi Jinping, left, and Joe Biden, both of whom were vice presidents at the time, walk together in Dujiangyan outside Chengdu in China’s southwest province of Sichuan in 2011. PETER PARKS/AGENCE FRANCE-PRESSE/GETTY IMAGES

Whoever wins the presidential election, one thing is clear: The U.S. has turned a corner in its relations with China and is likely to maintain a harder line.

In the past four years, President Trump, a longtime trade hawk, broke with decades of policy that broadly fostered closer ties between the two giants. Seeing China as a growing and often dishonest competitor, his administration has imposed tariffs on two-thirds of Chinese imports, moved to curb Chinese investments in the U.S. and pressured allies to shun Chinese technology.

Advisers to Democratic presidential candidate Joe Biden say they share the Trump administration’s assessment that China is a disruptive competitor. This suggests that even with an administration change in January, friction between China and the U.S. would remain high.

Continued tension between the world’s two largest economies portends big shifts for global businesses as they rethink supply chains and technological systems in an increasingly divided world. It also would push allies into choosing between the two poles.

“I think there is a broad recognition in the Democratic Party that Trump was largely accurate in diagnosing China’s predatory practices,” says Kurt Campbell, the top Asia official in the Obama State Department, now a senior adviser to the Biden campaign.
Biden aides say they would expand the American-government-backed campaign to compete in strategic high-tech sectors such as artificial intelligence, quantum computing and the next-generation 5G wireless standard. These policies are meant to curb Chinese economic power and influence, and reduce interdependence.

Mr. Trump’s tariffs also could remain under a President Biden. While Mr. Biden has criticized the Trump trade war as self-destructive, the campaign has refused to pledge removing the levies, saying only they would be re-evaluated. Democrats in Congress say they would pressure him to keep some tariffs in place to protect American workers.

But the two candidates are sending different signals on tactics and messaging. Biden advisers dismiss as unrealistic the rhetoric of some Trump backers about a new Cold War along the lines of the standoff between the U.S. and Soviet Union. They note more than $500 billion in goods crossed the Pacific between the two countries last year, even during the trade war. Apple Inc., for instance, still relies heavily on Chinese producers for key components of its iPhones.

Mr. Biden, right, listens as Mr. Xi speaks during a meeting in Los Angeles in 2012.

They also criticize the way that President Trump has gone about confronting China. “The application of his strategy to negotiate and contend with them has just been a mess,” said Mr. Campbell.

The Trump team argues that Mr. Biden represents the longtime establishment that encouraged China’s rise in the first place, including fostering a global free-trade system that many Americans now blame for hurting U.S. factory jobs. In 2000, as one of the most influential lawmakers on international policy, Mr. Biden used his clout to back Bill Clinton’s deal letting China into the World Trade Organization.
“Donald Trump has been fearless in…cleaning up the mess made by career politicians like Biden,” said Michigan Republican Rep. Jack Bergman during a Trump campaign call Wednesday on the escalating China debate. He said Mr. Biden, despite his new rhetoric, can’t break from the old mind-set.

A more bare-knuckled China policy also would represent a notable shift for Mr. Biden and his foreign-policy team. Most of them served in the Obama administration, which some say in retrospect was too soft on China and too slow to recognize President Xi Jinping’s nationalist and authoritarian bent.

Mr. Biden says he would work more closely than Mr. Trump has to rally allies in a coordinated global campaign to pressure Beijing. He says Mr. Trump’s efforts would be far more effective if he worked with other countries, rather than simultaneously engaging in trade fights with Europe, Canada, Mexico, South Korea and Japan.

“We make up 25% of the world’s economy but we poked our finger in the eyes of all of our allies out there,” Mr. Biden said recently. “The way China will respond is when we gather the rest of the world.”

Mr. Biden also says he would place a higher emphasis than Mr. Trump on cooperating with China on global challenges he considers as vital to American interests as confronting Beijing.

Where Mr. Trump has this year tried to isolate China over the pandemic—and the World Health Organization over its ties to China—Mr. Biden would likely take a more global approach to containing the virus. Where Mr. Trump plays down concerns over climate change, Mr. Biden calls it “an existential threat.” Mr. Biden can’t address his climate agenda without help from China, the world’s largest carbon emitter.

That could complicate any attempts to strike a harder line against Beijing. “Should there be an easing up of competition if there’s a prospect of cooperation? What if China links those two?” asks Thomas Wright, a foreign-policy fellow at the Brookings Institution.

The candidates’ contrasting diplomatic approaches reflect their clashing governing philosophies.

Mr. Biden spent much of his four decades in government working with world leaders to help shape the modern American-led global order. Mr. Trump’s late-life entry into politics was animated by his opposition to that order. He has at times questioned the value of longtime military and trade relations with Japan and South Korea, two American allies in China’s orbit.

For more than four decades, presidents from both parties, joined by executives of multinational corporations, sought to encourage China’s integration with the U.S. and the world. They argued that would benefit the U.S. and would lead to greater openness as Beijing followed global rules.

President Trump and President Xi leave an event in Beijing in 2017.

President Obama began his term seeking closer ties with Beijing and asked his vice president to develop a relationship with Mr. Xi. Mr. Biden boasts about having spent more time with the Chinese leader than any other foreign official, saying the two had 25 hours of private meals and logged 24,000 miles of travel together.

“It is in our self-interest that China continue to prosper,” Mr. Biden said during a 2011 visit to the country, a quote cited often by the Trump campaign. Biden supporters say Mr. Trump has made similar comments as president.

The Obama-Biden administration’s early views on China had been based on assumptions that Mr. Xi would continue the market-liberalizing policies of his predecessors. As the Chinese leader consolidated power and reversed many of those measures, officials say, their views on China changed.

Biden aides say he observed firsthand the increasingly autocratic tendencies of Mr. Xi and other Chinese leaders. In a 2013 meeting, aides say, he told Mr. Xi the U.S. would ignore Beijing’s attempt to expand its air defense zone, and would back allies doing the same. Some critics at the time said Mr. Biden should have publicly demanded China remove the zone, which he didn’t do on that trip.

Near the end of Mr. Obama’s term, the U.S. began to crack down on cyber-theft, challenged Chinese territorial claims in the South China Sea and tightened scrutiny of Chinese investment in U.S. technology. Mr. Biden took the lead in criticizing Chinese trade practices—though the administration’s actions consisted mainly of filing complaints with the World Trade Organization in Geneva.

President Trump accelerated the turn against China. He blasted the WTO as too slow and weak, and launched a trade war that imposed tariffs on $370 billion of Chinese imports. He has curbed Chinese tech companies including Huawei Technologies Co. and ByteDance Ltd.’s TikTok.

     Huawei's first directly managed flagship store in Shenzhen. / PHOTO: MAO SIQIAN/XINHUA/ZUMA PRESS

The pressure campaign expanded in the Covid-19 pandemic, which Mr. Trump blames on China. The U.S. has closed the Chinese consulate in Houston for alleged economic espionage, ramped up military exercises in the South China Sea and imposed sanctions on senior Chinese officials.

In the six months since Mr. Biden effectively sealed the Democratic nomination, the incumbent and challenger have traded barbs on China. Each campaign has produced video ads featuring footage of the opposing candidate meeting with Mr. Xi. “Biden stands up for China,” the Trump ad says. “Trump rolled over for the Chinese,” counters the Biden spot.

The new Washington consensus no longer sees China on a path to adopting Western political and economic systems, but rather as an authoritarian rival. The hostility isn’t just over trade, but also stems from the crackdown in Hong Kong and repression of Uighur Muslims.

“Regardless of who wins, U.S. policy toward China is going to be tougher over the next five years than the last five years,” says Richard Haass, a State Department official in the George W. Bush administration, now president of the Council on Foreign Relations. “China has changed, and U.S. thinking on China has changed.”

Lawmakers have introduced more than 200 bills addressing China in the current congressional session, double the number in the previous one. In a summer Pew Research Center poll, 73% of Americans said they had an unfavorable view of China, just 22% a favorable one. In 2011, 51% had a positive view, 36% a negative one.

“The Chinese people…feel very disappointed about what is happening in this country towards China, there’s a rising anger among the Chinese public,” Cui Tiankai, China’s ambassador to the U.S., told the annual Aspen Security Forum last month. He said leaders need to “not allow any miscalculation or misperceptions to hijack the relations.”

One Biden critique of the Trump China policy is that it has inflicted economic damage on the U.S. without triggering the Chinese economic reforms Mr. Trump has demanded. The fallout to the U.S. has included a plunge in agricultural exports, as well as higher costs and supply disruptions for U.S. companies dependent on Chinese imports.

A Moody’s Analytics study late last year estimated the China trade war cost the U.S. economy about 300,000 jobs and shaved 0.3% off U.S. gross domestic product.

Trump officials say much of the lost sales will ultimately be made up with China purchase pledges made in a January trade agreement.

President Obama meets with President Xi at the Nuclear Security Summit in Washington in 2016. / PHOTO: DENNIS BRACK/GETTY IMAGES

Biden advisers see China policy as just as much about rebuilding the U.S. economy as containing China’s. “The debate should be about who’s going to make America more competitive,” says Ely Ratner, a Biden national security aide in the Obama administration now at the Center for a New American Security.

America policy makers have long tried to coax Beijing to move toward American-style capitalism. If elected, Mr. Biden’s plans to bolster growth include a nod to Chinese-style state intervention. He has an ambitious “Buy American” proposal that would earmark more federal funds for U.S. companies.

Mr. Biden says his China policy would include a heavy emphasis on promoting democracy and human rights. He sees this as enabling the U.S. to compete with Beijing globally on values, not just commerce, a traditional American foreign-policy framework that Mr. Trump has played down.

That would also inform Mr. Biden’s technology policies. “As the vice president sees it, there’s a division in the world between techno-democracies and techno-autocracies,” said Antony Blinken, the campaign’s senior foreign-policy adviser. The democracies see technology as a tool for fostering greater freedom, the autocracies sell dictators enhanced surveillance and censorship tools.

A President Biden would have to manage divisions among Democrats over how to confront China. One battle within the party is over the military. One side wants big Pentagon budget cuts and the other hopes for more military support for Asian allies.

Another fight looms over trade. Many Democrats oppose new free-trade agreements. Others say those pacts are vital to bolstering alliances to counter China.

At the end of his term, Mr. Obama negotiated the 12-nation Trans Pacific Partnership with that goal in mind. At the time, Mr. Biden supported it. Mr. Trump ran against TPP in his 2016 campaign and pulled the U.S. out. Now the Biden campaign says rejoining the bloc isn’t a top priority.

Then Vice President Biden walks the red carpet at a welcome ceremony in Beijing in 2011.