US maintains economic advantage in rivalry with China – 11/28/2023 – Martin Wolf

Not long ago, “most governments believed that closer economic integration would promote long-term prosperity. Now, integration is seen as a source of risk and insecurity.”

So London-based Capital Economics introduces an intriguing analysis of “the shape of the fragmented world economy in 2024.”

Economy and politics always interact. Today, however, politics has become more important. His concept, then, is of a global economy being reshaped by tense relations between the US and China.

Capital Economics argues that countries can be divided into five groups: the US and its close allies; countries that tend towards the USA; the non-aligned; those who tend towards China; and China and its close allies.

The first group is made up of the USA and Canada, Europe (except Hungary), Japan, Australia and New Zealand. The second group includes, above all, India, but also Colombia, Mexico, Morocco, Turkey and South Korea.

The non-aligned group significantly includes Brazil, Indonesia and Nigeria. The group of countries trending toward China includes Argentina (true, until a few days ago!), much of Africa (including South Africa), Iraq, Kazakhstan and, Capital Economics suggests, Saudi Arabia. Finally, China’s strong allies include Russia, Iran and Pakistan.

There is a fundamental distinction between the first group and all the others. High-income democracies share fundamental values ​​(whether they continue to do so will depend on the results of the 2024 US presidential elections).

The other groups are defined much more by what they are against than by what they are for. Russia and Iran are allies of convenience for China, and vice versa. They share an enemy. But they are still very different from each other.

However, such alliances of convenience can shape both economic and political relations. The enemy of my enemy may, for a time, actually be a good friend.

The China bloc represents half of the world’s land mass (excluding Antarctica), compared to 35% for the US bloc. It is also home to slightly more people in the world (46%, compared to 43%).

But it still generates just 27% of the world’s GDP, almost all of it in China itself, compared to 67% in the US bloc. This is because, crucially, most of the world’s high-income countries are in the latter.

Ways the balance could shift are for the US bloc to disintegrate, likely under Donald Trump, or for the Chinese economy to grow faster than Capital Economics now expects.

The latter’s pessimism about China’s prospects may be excessive, but it is far from absurd. China, in fact, faces strong headwinds to high growth over the next twenty-five years.

It is not surprising that the China bloc is more important in industry than in GDP. Thus, its share in world industrial production was 38% in 2022, against 55% for the US bloc.

Whether the China bloc achieves manufacturing parity over the next 25 years depends primarily on the performance of Indian manufacturing relative to China. In agriculture, the China bloc generates 49% of production, compared to 38% for the US bloc, because it contains many commodity producers.

In 2022, 144 countries traded more goods with China than with the US. The US was the largest trading partner for only 60 countries. But half of global merchandise trade was between countries classified as belonging to the US bloc.

This broader perspective is really helpful. Germany, for example, is widely considered the U.S. ally with the closest trade ties to China. But only 11% of its merchandise trade was with the China bloc in the second quarter of 2023, while 86% was with other countries in the US bloc, mainly its European partners.

In financial activities and capital flows, the US bloc remains dominant. Although its place in foreign direct investment (FDI) has declined over the past twenty-five years, it still represented 84% of the total stock of FDI per investing country and 87% per receiving country in 2021.

This is because the world’s dominant companies and most attractive destinations remain within it. This gap will not close under Xi Jinping.

Around 86% of global portfolio investment is also within the US bloc and just 2% within the China bloc. FDI between the US and China blocs is three times greater than FDI within the China bloc: Russia and Iran may be China’s allies of convenience, but only fools would put much of their capital into economically disadvantaged petrostates. Chinese investors are not fools like that.

Foreign exchange reserves still consist predominantly of assets denominated in the currency of the United States and its allies. In the second half of 2023, these assets represented 87% of foreign currency reserves, just slightly below the 89% three years earlier.

This is because only these countries provide long-term liquid financial assets. They may not be as safe as they used to be due to the use of sanctions. But there are no good alternatives.

It is very unlikely that China would want to provide them, as this would require the liberalization and opening of its financial markets, including Chinese public debt markets.

Many countries want to see the United States and its allies, the dominant powers of the past two centuries, taken down by more than just a notch or two. But they are more united and economically powerful than China’s group of malcontents.

The event that would likely quickly shift this balance would be a decision by the United States to dissolve its alliances. This would be one of the most dramatically damaging acts to one’s own nation in global history. It would take much longer for the China bloc to surpass the United States bloc in all relevant aspects of economic weight. Maybe I never will.