‘Countering’ China would pave the way for global depression
In its pursuit of unipolar primacy, the Biden administration is risking the economic stability of China, the West, emerging Asia and the futures of the Global South, including the Philippines.
BEFORE the global pandemic, the International Monetary Fund (IMF) reported China had replaced the United States as the engine of the global economy. In parallel, Reuters market analyst Jack Kemp warned that since early 2018, “the United States has pursued a deliberate policy of attempting to hurt China’s economy in response to concerns about the shifting balance of economic power and unfair trade practices.”
As economist Anne O. Krueger saw it, Trump’s trade war was “a failure that harmed both China and the US.” Many hoped that Biden’s victory would come with a bilateral reset. But the reverse happened. Building on Trump’s flawed policies, the Biden White House began to weaponize those policies while diversifying risks to US allies from the EU and Japan to Ukraine and Taiwan — and the Philippines.
This purposeful effort to force American primacy in the 21st century, when it is no longer supported by fundamentals, has potential not only to push the world economy into a stagflationary recession, but into a severe global depression.
This is also why Malaysia’s former prime minister Mahathir Mohamad last week blamed Washington for ratcheting up tensions in the region. Mahathir urged the Asean members to shun divide-and-rule geopolitics, and to focus on economic development in cooperation with China.
How China replaced US
Until the 1990s, poor economies had been dependent mainly on the West. After centuries of devastating colonialism, the divergence between the two had only deepened in the postwar era, due to the inherently unequal exchange.
By the early 2010s, China’s growth impact on the low- and middle-income countries had increased significantly, as the OECD then reported. Meanwhile, the impact of the OECD economies had significantly decreased for low-income economies and stagnated for middle-income countries.
These trends intensified with the rise of Chinese investment abroad and the launch of the Belt and Road Initiative in 2013, which has boosted modernization in many emerging and developing economies.
Before the Trump trade wars, China replaced the US as the engine of the world economy. Between 2013 and 2018, it accounted for 28 percent of all growth worldwide on average. The IMF data suggested that China would account for a similar share of growth over the next five years. Most importantly, China was pulling along many of the world’s middle- and smaller-size economies in its train.
Today, this great project is threatened. By turning its frictions with China into still another unwarranted Cold War, the Biden administration is pushing the world economy at the edge of the abyss. It’s time to quantify the magnitude of these risks.
The $25T global risk
China’s rise as a global growth engine is reflected by the expansion of its economy relative to other major global growth engines: the United States, the largest European economies (Germany, France, the UK and Italy), and Japan. In terms of market exchange rates, China passed Japan as a global growth engine around 2010, Europe-4 in the mid-2010s, and is positioned to surpass the US at the end of the 2020s (see figure 1a). However, the purchasing power scenario is useful to illustrate secular trends. As the relative shares of the US, Europe-4 and Japan continue to decline in the world economy, that of China has potential to rise (see figure 1b).
FIGURE 1. CHINA AS GLOBAL GROWTH ENGINE
At the end of 2022, China is likely to account for $20 trillion or about a fifth of the estimated $104 trillion world economy. These trillions of dollars are not just China’s gain, or the advantage of rich economies that benefit from the mainland’s expansion. They offer critical support to middle- and low-income countries that the West’s colonialism derailed into longstanding dependency.
Due to these global inter-dependencies, any effort to destabilize China has the potential to undermine living standards in the West for decades, while turning the world’s most fragile economies into failed states.
$6.1 trillion risk to world trade
The role of global growth engines is reflected by trade and investment, and the countries these pillar economies partner with. Two-thirds of China’s exports goes to a handful of major economies in North America (US, Mexico), Western Europe (Germany, the Netherlands, the UK), East Asia (Japan, South Korea, Taiwan), Southeast Asia (Vietnam, Malaysia, Thailand), Russia and Australia.
Yet, the real impact of Chinese exports is far greater. Even if small- and medium-size economies import less in absolute terms, they often import significantly in relative terms, as evidenced by China’s 100 export partners. In 2021, the total value exported by China amounted to almost $3.4 trillion (see figure 2a). Conversely, that year the total value imported by China soared to almost $2.7 trillion (see figure 2b).
FIGURE 2. CHINA’S TRADING PARTNERS WORLDWIDE
A. CHINA EXP PARTNERS
B. CHINA IMP PARTNERS
For decades, Chinese imports and cheaper prices contributed to low costs and low inflation worldwide. In modern history, that’s an anomaly. Until the early 2000s, the West dominated world trade and the high-income economies’ products and services were priced largely according to their purchasing power, which was significantly higher relative to those in middle- and low-income countries.
Even worse, the Global South was exploited in imported proxy conflicts to keep Western growth undisrupted, somewhat like today. Emerging markets became more useful to the West only in the 1980s, when neoliberal policies permitted offshoring in the race to the bottom.
Today any major threat to undermine Chinese trade poses a $6.1 trillion threat to China, the US, its allies and the Global South.
$311 billion risk to world investment
Last year, global merger and acquisition activities soared to $5.9 trillion. China’s outward foreign direct investment (OFDI), aligned with the post-pandemic upswing, displayed an uptick in growth, totaling $138 billion.
China’s inward FDI hit $173 billion, up 20.2 percent year on year. The robust double-digit growth is remarkable, due to the relatively high base in 2020. China registered positive growth of 5.7 percent, even as global FDI plunged 34.7 percent. In the process, Chinese engagement in the144 countries of the Belt and Road Initiative amounted to $59.5 billion (see figure 3).
FIGURE 3. BELT AND ROAD INITIATIVE
Efforts remain to derail these investments as “debt-trap diplomacy,” by those who have a vested interest in anti-China geopolitics. Yet, reports by Johns Hopkins (US) and the Chatham House (UK) have debunked such claims.
So, when major economies in the West seek to destabilize or contain China’s economic rise for largely geopolitical reasons, they risk derailing over $311 billion in annual investment and trillions of dollars over time. That threatens the poorer economies’ historical opportunity — however slim and fleeting — to raise living standards after centuries of colonial plunder by the West.
Stagflationary debt crisis
With the US/EU proxy war against Russia in Ukraine, it was clear early on that all key participants in this unwarranted war would face a recession in a matter of months.
Worse, the runaway inflation that the West is struggling with has potential to worsen into a stagflationary debt crisis. In the next recession, as Nouriel Roubini has suggested, “the crash in equity markets could be closer to 50 percent.” The assumption is the crisis will prove both stagflationary and be accompanied by a financial crisis.
In this dire landscape, a major destabilization of China could drastically compound downside risks worldwide, by accelerating secular stagnation, which continues to spread in the West, and by decimating opportunities for higher living standards in many emerging and developing economies.
Given free rein, these unwarranted proxy conflicts and new Cold Wars will pave the way for a global depression.
Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net