June 13, 2024
World Economy

World splits into three economic blocs: a deep dive into economic realignments

The latest reports from the International Monetary Fund (IMF), along with statements from its leaders, highlight the institution’s significant concern about the global economy’s trajectory. The IMF’s warnings are particularly notable as the world moves away from an integrated economy and begins to split into distinct blocs. Recently, the IMF announced that the global economy is now segmented into three categories: countries aligned with the United States, those aligned with China, and non-aligned states. The IMF attributes this fragmentation to geopolitical differences, which have disrupted the once cohesive global economy.

According to the IMF report, escalating international tensions have resulted in a surge of trade restrictions, surpassing three thousand by 2023. Between 2017 and 2023, China’s share of US imports declined by 8% due to deteriorating relations between the two nations. Ironically, the reduction in trade between the world’s two largest economies is not due to a slowdown in economic activity but rather the numerous barriers imposed by both countries. Such competition is clearly detrimental. Additionally, the direct trade between Russia and the West has sharply decreased due to the war in Ukraine, compounded by trade and logistical issues from the conflict in the Middle East.

The IMF has outlined two potential scenarios for the world economy over the next century. In a “low ambition scenario”, global GDP would triple, and living standards would double. In a “high ambition scenario”, global GDP could increase thirteenfold, and living standards could rise ninefold. However, the biggest threat to global growth prospects is geoeconomic fragmentation. The structure of trade relations is rapidly evolving, causing significant challenges for some countries while benefiting others. For instance, Europe’s shift away from Russian gas has boosted American liquefied natural gas (LNG) supplies to the continent. Additionally, restrictions on cargo transportation through Russia or the Red Sea have heightened interest in the Middle Corridor and the North-South ITC, with Azerbaijan at the centre of this development.

News.Az presents an exclusive interview with the research director of the analytical company Future Risk, political economist Tristan Kenderdine.

– What are the main factors that, in your opinion, contributed to the fragmentation of the global economy into three blocs?

– China’s domestic economic and political activity is the single biggest reason for global fragmentation. This is the result of China’s central leadership, nobody else’s. Similar-minded states have demonstrated opportunism in enthusiastically following China – Russia, Iran and to a lesser extent, Brazil.

There seems to be an attitude in the post-Soviet world that ‘back to blocs’ is a good thing. Because the Soviet Union was ‘powerful’ so back to blocs is a return to power days. But blocs are bad for consumers, and good for the powerful states within them that dominate them. Trading blocs like the EU or a proposed Turkic trade bloc to negotiate BRI deals are good for the collective power of the states within them though, because they are built on the basis of the existing global trade order. Removing both the existing order and simply creating regional blocs, well that just leads directly back to regional hegemony, which benefits China and Russia the most.

Truly open markets like those that exist within customs unions are best of all, so if a state could choose to trade, it would choose to be inside the United States or the European Union. Trading one by one between small and large countries means the larger economy always has more power, whether that’s China or the US. So, it makes sense for small economies to want to organise themselves into larger blocs. For a large economy, to be pushing for trading blocs though just means expanding and formalising the client-state economic model, where Russia wants to maintain and restrengthen its ability to rent-seek on small states in its current economic periphery, its former exclusive economic sphere.

Though I think the idea that three major economic blocs are forming is correct, but not simply China, the United States and ‘everyone else’, but rather China, the United States and the European Union. Discounting the role of the EU here would be a mistake, I think. And while the US and EU align in many ways, they are clearly already distinct economic blocs. The idea of Russia coming into this world as an equal in any way comparable to China is impossible.

For the IMF to be proposing 100-year scenarios is a bit silly, neither economic nor political history could possibly match such enthusiastic projections.

– What are the main challenges and opportunities that arise for the global economy as a result of the strengthening of regional blocs focused on the United States and China?

– The opportunities for China are key, as China’s own ability to fumble the ball and turn countries against it is the main driving agent. The real opportunity lies in that transference of geoeconomic power into geopolitical power, Singapore is a key point for China in any split into economic blocs. China has already forcefully asserted total CCP control over Hong Kong, removing one classical node in the historical global capitalist system. If China were able to coerce Singapore into the same New Era sphere of influence, it would be a huge win. But watching a country like Hong Kong fall like this though heightened global fears of China, I cannot see Singapore willingly giving in to the same fate, though the political leadership in Singapore is quite weak. So, there is always a possibility for influence operations to expand into actual power there.

For the US, I think the global geoeconomic transition strengthens its position and that it will emerge from the 2020s as the only viable economic system, opening the way for a 2030s even more dominated by United States influence than even the 1990s. There will be a lot of short-term pain in the United States and economies like Japan and Australia. Ending China’s cheap manufacturing run pushes up inflation in advanced economies, and these economies have a series of exposed political economy liabilities due to economic policy choices made over the past twenty years. However, once the losses of inflation are absorbed (which is basically just the increased cost of living and less purchasing power as money supply is expanded), the net results should be either a reshoring of manufacturing production capacity or an opening of new manufacturing markets in places that will create a new US-led geoeconomic order . Thailand, India, Vietnam are obvious choices for moving manufacturing capacity to. And with the China model largely contracting, if not totally collapsing, then if the US, Korea, Japan reshore some of the manufacturing that was in Asia, it will rebuild the American middle class, and if they offshore some of that manufacturing to new markets, it will create new pockets of productivity for host and investor countries alike. So far, there has been a weak response from the US on how to strategize this geoeconomic policy, but those countries that jumped eagerly towards China seem to be finding themselves without much resource when China contracts and begins to pull away.

For everyone else. Overall, everyone else should be split into two camps – developed economies and less developed economies. For the already developed economies, like Australia, Japan, Korea, Singapore, the future is difficult, but survivable. For less developed economies, the future looks bleak. A global economy with a stable foundation and extra-regional blocs on top of it would have helped smaller states. But a retraction of the global economy leaving only empty space to rebuild again as solely regional blocs, that is no good for anyone involved except for regional hegemons. For small states like those in the South Caucasus, going backwards to having fewer trading partners and descending into regional trade dependencies will ensure weaker economic performance, worse outcomes for people, and a greater likelihood of further descents into violence.

– What long-term impacts might trade fragmentation have on global output?

Trade relations are sticky. So some trade will stay completely unaffected, the strategic trade or the long-term trade that is stable between countries should not be affected too badly, I’m thinking here of what is essentially country-to-country trade, not business-to-business trade, like agricultural commodities or energy. Mineral commodities will become a mess, as the exporting world had become overly dependent on China imports, and will likely struggle to replace those export markets. China, though, will also likely struggle to replace those imports, as all policy evidence points to China going back to a Soviet peripheral extraction system of political patronage over capital efficiency in seeking to secure resource exports markets in places like Kazakhstan, Angola and Brazil. Companies are better at making long-term cost-benefit decisions, and companies are better allocators of capital in mining and resource extraction projects than states are. If China tries to replicate the benefits it had from international trade by returning to a Soviet model of state-driven resource extraction in external states, it will run into a variety of efficiency and structural problems of its own making. The results will be a less efficient system. Sure, China will have more political control over the outcomes, but it will give up economic gains to achieve this. I doubt that the benefits will outweigh the costs.

Global output. I would hope that it would J-curve back towards productivity within three to five years. Globalization has been failing for many countries for many years. Advanced economies had hollowed out middle class jobs and wages, poorer countries were not developing and only a handful of countries that were able to politically use the global trade system to their advantage were benefiting. China was clearly manipulating global trade to its development advantage, while economies like Thailand, Vietnam, Kazakhstan, Kenya have all stayed undeveloped over the past quarter century since China’s WTO accession . If China were playing according to the rules it has benefited from, then right now the value of China’s currency should be rising, and China should be trying to offshore industry to third countries, thereby bringing in capital and know-how to middle-income countries, and continuing the cascade effect of newly-industrialized countries. This isn’t happening, and it’s been clear for a while that this isn’t happening. So, it means a rethink of the entire global economic model, which is a good thing. Globalization 1.0 was poorly thought through, with weak institutions, and poor outcomes for many players. There was no indication that things were going to get any better under a Globalization 2.0 model. Simply because there wasn’t any model, no rules, no obligations to social, labour, education, health structures. Nation states were hollowed out, but nothing came in to replace the empty institutional space. Some states remained stubbornly nationalist and closed, thus remaining poor. The more developed economies that opened up mostly opened to outbound capital and inbound labour, but without any institutional mechanisms for the inbound effects on society. So we see this now in Europe with the migration crisis, the huge amounts of anger in the working class and middle class communities that see themselves as being replaced, and without any recourse to national institutional systems. While elites from these countries offshore capital quite happily. Who benefits from such a Globalization system? Undoubtedly China, and some owners of capital from the US, EU, Japan and Korea. But most people’s lives are worse off after this 20-year Globalization experiment.

Coming back to regional trading blocs, breaking the world up into smaller regional economic blocs could make the total factor productivity of each unit of capital less efficient than a truly global trading system, but this also provides opportunities for institution-construction, which could help to create systems that are both more productive and more beneficial for smaller people (labour), smaller enterprises and smaller countries. East Asia and Southeast Asia hold the keys here, as particularly Southeast Asia is at the perfect crossroads to benefit from a new manufacturing system, which could bring capital and wages back into greater alignment with each other. The ones to lose the most will be those cut off from the global system and forced back into 19th and 20th century regional systems. Land-locked Mongolia and Kazakhstan, for example, stuck with China and Russia, could regress, and will never expand out into the equivalent trading success of land-locked Switzerland or Austria, which benefit from the regional economic bloc they inhabit. The EU shows what is possible in non-United States customs integration and the benefits of economic regionalism. If Southeast Asia and Northeast Asia could create similar structures, then that would determine the future of the global economy.

– How did changes in trade relations between China and the United States from 2017 to 2023 affect the global economy?

Of course, this is the main story, but without the need to look at any details, the structure tells the story. It is in the US ideological and practical interest to promote open trade and freer markets in the global economy. So where would the US interest lie in going the other way? The United States spent decades trying to develop NAFTA, which has not been a huge success. The huge success has been trade with Pacific economies, the largely abandoned APEC project. The United States already is a continental customs union like the European Union regional economic bloc, and also has a huge interest in maintaining global partnerships, bilateral and multilateral trade agreements that connect its domestic economic to most of the world. China exports to most of the world, but has struggled to develop viable import agreements outside raw resources. A big part of the Belt and Road was trying to develop a range of consumer-focused product imports. So, the United States trades with everyone, the European Union trades internally with itself, China trades only on the export side, and Russia trades with no one. So why would anyone start a trade war between China and the United States for economic reasons? There aren’t any, there were only political reasons, through which China hurt its own economy, and the United States was able to take the losses and continue onwards.

The curious thing about the rhetoric surrounding the trade war is that in 2016, business and government communities that were exposed to China through the global economy were talking about decoupling. China seized on this expression and began to use it as its own policy tool, as if it were desirable for China to decouple from anything. China’s clear political economic game has been to stay in the global trade system for as long as possible, while maintaining an isolationist economic policy in reality – trade, but only so far; liberalise, but only so far. A China fully decoupled is a return to North Korea, and the Chinese people do not deserve that.

China is its own story, and it has ruined its own economy. So, without any input from the United States, China’s insistence on returning to a state-controlled economy, belligerent geoeconomic policy, and commitment to keeping its capital account closed while trying to offshore industry through the Belt and Road, while still relying on its old China model of production, expecting this benefit to last forever, has hurt China and has hurt the Chinese people. So, even if the United States did nothing through the trade war, I think what we saw in the Chinese economy in the post-Covid period has seen an internal implosion on the scale that has hurt China and the global economy.


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