The global balance of power is shifting from West to East
Tensions loom over Argentina, which plays host to the 2018 summit of the G20 which started on November 30. The G20 is an international forum of the EU and the heads of state of 19 major economies, which discusses global economic challenges. And the challenges are mounting.
Globalization is in reverse, as the US threatens to escalate its trade war with China and other trading partners; and xenophobia is rife in many Western countries. These challenges are a threat to global prosperity, but what will shape much of the long-term evolution of the global economy is the rise of China and other emerging economies.
Much of the focus at the G20 has been on Donald Trump and his series of sidebar meetings with other leaders, especially Xi Jinping. Trump has said that it is “highly unlikely” that he would postpone the planned increase in tariff levels from 10% to 25% on $200 billion of Chinese goods in January 2019.
Of course, this may be bluster and a frequent refrain from apologists for Trump is: “Take note of what the president does, not what he says.” But we may be on the cusp of a full-blown trade war, which will not be confined to the US and China and which will reverse and reconfigure globalization. Entering foreign markets will be more costly and global supply chains will be disrupted.
Globalization is not inevitable
The notion that globalization is a natural phenomenon, akin to the change in the seasons or the weather or gravity, is a frequent refrain. During his tenure as prime minister of the United Kingdom, Tony Blair opined: “I hear people say we have to stop and debate globalization. You might as well debate whether autumn should follow summer.” A pithy turn of phrase, but patently not true.
The configuration and extent of globalization are shaped by public policy and technological change. When this changes, it can, in turn, accelerate, slow, or reverse globalization. In periods of severe economic crisis, it has been common for countries to become inward looking -- blaming “others” for economic problems and resorting to protectionism and controls on immigration.
In the interwar period, for example, the response to the Great Depression was a trade war and competitive devaluations as the Gold Standard unraveled. Similarly, since the 2008-09 financial crisis and the Great Recession that followed, there has been a worldwide rise in protectionist measures and Trump’s interventions may lead to a new phase of “delocalization.”
An evolving global economic order
Major economic crises often reflect endemic flaws within the structure of the global economy and lead to major changes in global economic leadership. The crises and lessons of the interwar period led to the establishment of the Bretton Woods system, which managed the world economy during the post-war golden age of capitalism until the early 1970s. It was the system that created new international institutions (the IMF, World Bank, and GATT, which was the forerunner of the WTO) and this was underpinned by the dominance of the US economy.
But the relative strength of the US (and the dollar) declined and the system unraveled in the late 1960s and early 1970s. This collapse, and a series of oil crises, led to another major economic crisis which temporarily stalled globalization and led to shifting reliance on the power of unfettered market forces.
Liberal market capitalism may have been unleashed, but is still not ubiquitous in the world economy. The picture of a fully globalized world and the dominance of free markets is a partial distortion of a complex picture. The extent to which countries have embraced the global market agenda is highly variable.
Although many developed countries have deregulated financial markets, capital controls and managed currencies are still highly prevalent in developing countries. In terms of trade, tariffs have been reduced since World War II but they have not been eradicated.
Meanwhile, the use of non-tariff barriers has increased, with roughly 80% of all traded goods affected by these restrictive rules and regulations -- and these are prevalent in developed countries. The ongoing chaos of Brexit illustrates that “free trade” is not a natural state but is negotiated, complex, and dependent on a litany of regulations and agreements.
Deregulation, the hollowing out of the welfare state, and intensified global competition have led to rising income and wealth inequality in many Western countries. And many of those who have not benefited from globalization have also borne the brunt of the austerity policies that followed the financial crisis and the Great Recession. The resulting backlash against globalization helps explain the election of Trump and the vote for Brexit.
The rise of China
The G20 will focus on current instability but there are long-term structural shifts which are leading to a rebalancing of the global economy. The balance of power is shifting from West to East and we are in the early stages of transition to China as the dominant world economy.
China is already the largest economy in the world (measured in purchasing power parity) and PwC (using World Bank data) estimates that by 2050, the Chinese economy will be 72% larger than the US. Further, by 2050, six of the largest eight economies will be countries that are still emerging markets.
China is home to many of the world’s largest companies, including major tech companies like Alibaba and Tencent. It is investing rapidly in research and innovation and although the dollar remains the dominant world currency, the IMF has added the renminbi to its basket of global reserve currencies. It will only become more important as Trump’s policy of American isolationism continues.
This year’s G20 summit will focus on maintaining some semblance of international cooperation and preventing a global trade war. The short-term noise will probably come from Trump. But China can play a long-term game as its position in the global economy is on the rise. In the face of the gales of the long-term shifts in the global economy, Trump can blow hard now -- but as far as the future is concerned, he will be blowing in the wind.
Michael Kitson is University Senior Lecturer in International Macroeconomics, Cambridge Judge Business School. This article previously appeared in Reuters.