The global economy is undergoing reconfiguration. Will the tension between the United States and China result in the establishment of new alliances?
 |
| World economic recession 2023 |
The earth trembles as tectonic plates shift. Tsunamis travel over the world like shock waves. Three such earthquakes have struck the global economy in recent years. The Covid-19 outbreak has shown the fragility of a globalized economy. When critical components are quarantined in China, production lines in Germany come to a halt. In the future, resilience ("just in case") will be more crucial in structuring global supply networks that have been cut for decades for efficiency ("just in time").
Following the demise of the unipolar era, big and minor states compete for the greatest places in the new international order. Although the US administration, led by Vice President Joe Biden, has tacitly disarmed the hegemonic struggle between China and the US, its export limits in the high-tech sector have gained traction. This politicizes the context for investment decisions. Market access, infrastructure projects, trade agreements, energy supply, and technology transfers are all seen through a geopolitical lens. Companies are being forced to choose between one IT infrastructure, one market, and one currency system or the other.
The large national economies may not decouple from each other across the board, but diversification (“not all eggs in one basket”), especially in the high-tech sector, is picking up speed. It cannot be ruled out that this development will result in the formation of economic blocs.
The pandemic's encounters with the "human unpredictability factor" are also hastening digital automation. Robots and algorithms also make geopolitical risk mitigation simpler. To address these risks, the old industrialized nations are revamping their supply networks. It is unclear if this is solely for economic or logistical reasons (re-shoring or near-shoring), or if geopolitical considerations are also at play ( friend-shoring ).
These difficulties must be met by China. The fate of the People's Republic will be determined by its ability to storm the international technical elite without relying on foreign technology and know-how. Anyone who believes Beijing has no countermeasures in the works will soon be proven wrong. To compensate for the closing of existing export markets, the Silk Road Initiative has been opening up new sales markets and raw material sources for years. The Chinese Communist Party formally endorsed a shift in its development plan at its most recent party conference. The massive home market will now be the motor of the "dual recycling economy" from now on. Earnings from exports are still wanted, but are strategically dropping to a supporting level.
China initially relied on a globally networked world economy because it profits more than anybody else from open global marketplaces. Alternatively, Beijing may be enticed to form its own economic bloc. The Regional Comprehensive Economic Partnership (RCEP), the BRICS Development Bank (NDB), the Asian Infrastructure Investment Bank (AIIB), the Silk Road Initiative (BRI), and bilateral collaboration in Africa, Latin America, and the Middle East have already provided the groundwork for this. Western firms' struggles in the Chinese market should serve as a warning of what is to come if China makes market membership into such a bloc contingent on political goodwill.
However, these geoeconomic disturbances are tsunami-like for all of Asia as the new hub of the world economy. Geoeconomic upheavals might be especially damaging to underdeveloped nations. Whether they are removed from global supply networks for resilience or geopolitical reasons, the consequences are the same. Of fact, some economies are seeking to gain from wealthy nations' diversification plans ("China plus one"). However, digital automation negates what is frequently their one comparative advantage, low labor costs. Why should a medium-sized European firm bother with corruption and power outages, quality issues, and weeks-long shipping routes when robots can create better and cheaper at home?
Algorithms and artificial intelligence are also on the verge of replacing millions of service providers in outsourced back offices and contact centers. How are developing nations meant to feed their (often explosively) increasing populations if simple work in developed countries will be undertaken by robots in the future? And what do these geoeconomic upheavals signify for these nations' social and political stability? What if basic tasks in developed countries be performed by machines in the future? And what do these geoeconomic upheavals signify for these nations' social and political stability? What if basic tasks in developed countries be performed by machines in the future? And what do these geoeconomic shifts signify for the social and political landscape?
Like Europe, most Asian countries rely on China's dynamism for economic progress and on the United States' promises for security. As a result, people resist pressure to take sides to varied degrees. It remains to be seen, however, whether it will be feasible to avoid the pull of geoeconomic bipolarization in the long run. If the separation of IT infrastructures continues, it may become too expensive to operate in both technological realms. Products containing specific Chinese components are prohibited from entering the American market; but, if you want to play in the Chinese market, you will be unable to escape a gradually rising share of Chinese components. But even countries that opt for critical infrastructure such as communication networks or energy supply cannot switch providers overnight.
As an export nation, Germany would face an existential threat from such a global economy. Even shutting off Russian energy in the short term is a Herculean job. It's hard to foresee detaching from China at the same time. However, burying your head in the sand will not suffice. States and corporations will both under pressure from Washington and Beijing. Important economic, technical, and infrastructure choices will increasingly be influenced by geopolitical factors in the future. Diversification is thus appropriate for reducing one-sided weaknesses. On the other hand, some of the lessons learnt through over-reliance on Russian energy before to the conflict appear naive.
The German economy – which for decades has integrated itself more deeply than many others into the world economy with the goal of avoiding violent conflicts through interdependence – cannot be broken out of these interdependencies overnight. Reducing economic vulnerabilities through diversification is therefore correct, but decoupling for ideological reasons is wrong. Germany should therefore beware of sacrificing its economic future to an overly ambitious foreign policy based on values. Loss of prosperity translates into fears of the future and social decline at home – a fertile breeding ground for right-wing populists and conspiracy theorists.
The geopolitical race, digital automation, and supply chain restructuring based on resilience requirements are all mutually reinforcing. Not only must businesses rethink their business models, but whole national economies must change their development patterns in order to thrive in a quickly changing global market. The special challenge is having to make investment decisions today without knowing exactly what the world of tomorrow will look like. Some believe they can glimpse a de-globalization era in their crystal ball. Indeed, the apex of globalization has already been reached, as judged by the volume of global commerce and capital exports since the 2008 financial crisis. De-globalization, however, does not imply a return to self-sufficient national economies. More likely is a stronger regionalization of the more networked global economy. In view of the political, social and cultural upheavals of turbo globalization, this need not be the worst.
Because one thing is certain: a geoeconomic tsunami will rip through the world, destroying ancient infrastructure along the way. According to Joseph Schumpeter, the goal is that creative destruction would result in a more robust, sustainable, and diverse global economy. However, if the new international economic system is not political shaped, the reverse might occur. Politically, this entails modifying the rule-based international order to ensure that it maintains a stable foundation for a global economy. Because even a regionalized international economy need global laws that everyone follows. With a few exceptions, practically all governments are thus keenly interested in the operation of rules-based multilateralism.
However, there is also a lot of distrust in the Global South towards the existing world order. In reality, one often hears, this is the creation of the old and new colonial powers, whose supposedly universal norms do not apply to everyone, but are instead violated at will by the permanent members of the UN Security Council. In order to break through current blockages, such as those of the World Trade Organization (WTO), the emerging powers must be given representation and a say in the multilateral institutions that are commensurate with their new importance. Europe will have to accept a relative loss of influence because, as a rule-based supranational entity, its survival and prosperity depend on an open, rule-based world (economic) order.
Rather than lifting itself morally above others, Europe must focus all of its efforts on preserving the conditions for success in its economic and social models. To avoid the international economy from regionalizing into competing blocs with substantial losses in prosperity for everybody, new equal-footing alliances that go beyond the already popular comparisons of democracies and autocracies are required. To foster new trust, global concerns (climate change, pandemics, famine, migration), which disproportionately affect the Global South, must be confronted head on.
The author Marc Saxer heads the FES regional office for Asia based in Bangkok. Previously, he was FES country representative in India and Thailand, head of the Asia department at the Friedrich-Ebert-Stiftung Berlin and coordinator of the Economy of Tomorrow in Asia project .