In its pursuit of unipolar primacy, the Biden administration is jeopardizing the economic stability of China, the West, emerging Asia, and the future of the Global South.
Before the global pandemic, the International Monetary Fund (IMF) announced that China had replaced the United States as the engine of the world economy. Meanwhile, Reuters market analyst Jack Kemp warned that since early 2018, “the United States has pursued a deliberate policy of trying to harm China’s economy in response to concerns about the evolving global economy. ‘balance of economic power and unfair trade practices’.
As economist Anne O. Krueger has seen, Trump’s trade war was “a failure that hurt both China and the United States.” Therefore, many hoped that Biden’s victory would come with a bilateral reset. But the reverse happened.
Leaning more heavily on Trump’s flawed policies, the Biden White House has begun to weaponize those policies while diversifying risk to US allies – from the EU and Japan to Ukraine and Taiwan.
This deliberate effort to force American primacy in the 21st century, when no longer supported by fundamentals, has the potential to push the world economy not only into a stagflationary recession, but into a severe global depression.
How China replaced the United States as the engine of global growth
Until the 1990s, poor economies depended mainly on the West. After centuries of devastating colonialism, the divergence between the two had only deepened in the post-war period, due to the inherently unequal exchange.
By the early 2010s, the impact of China’s growth on low- and middle-income countries had increased significantly, while the impact of OECD economies had declined significantly for low-income economies and stagnated for middle-income countries.
These trends intensified with the rise of Chinese overseas investment and the launch of the Belt and Road Initiative in 2013, which spurred modernization in many emerging and developing economies.
Before Trump’s trade wars, China replaced the United States as the engine of the global economy. Between 2013 and 2018, it accounted for an average of 28% of global growth. IMF data suggests that China would account for a similar share of growth over the next 5 years.
More importantly, China was also dragging many medium and small global economies on its train. Today, this great project is threatened.
By turning its friction with China into another unwarranted Cold War, the Biden administration has brought the global economy to the brink.
The $25 trillion global risk
China’s rise as an engine of global growth is reflected in the expansion of its economy relative to other major engines of global growth; i.e. the United States, the largest European economies (Germany, France, United Kingdom and Italy) and Japan. There are two basic ways to assess this contribution. Market exchange rates are more realistic in international transactions. With this in mind, China overtook Japan as the engine of global growth around 2010, Europe-4 in the mid-2010s, and is positioned to overtake the United States in the late 2020s (Figure 1a).
However, the purchasing power scenario is useful for illustrating secular trends. While the relative shares of the United States, Europe-4 and Japan continue to decline in the global economy, that of China has the potential to increase (Figure 1b).
Figure 1 China as an engine of global growth
a. GDP, current prices ($ billions) b. GDP, PPP share of world total (%)
By the end of 2022, China is expected to account for $20 trillion, about one-fifth of the estimated $104 trillion global economy. These trillions of dollars are not just China’s gain or the benefit of rich economies that benefit from the continent’s expansion. They offer essential support to middle- and low-income countries that Western colonialism has derailed into long-standing dependency.
Thanks to these global interdependencies, any effort to destabilize China has the potential to undermine living standards in the West for decades, while turning the most fragile economies into failed states.
The $6.1 trillion risk to global trade
The role of the engines of global growth is reflected in trade and investment, as well as in the countries with which these pillar economies associate. Two-thirds of Chinese exports go to a handful of major economies in North America (US, Mexico), Western Europe (Germany, Netherlands, UK), East Asia (Japan, South Korea, Taiwan), Southeast Asia (Vietnam, Malaysia, Thailand), Russia and Australia.
The real impact of Chinese exports is much greater. Even though small and medium economies import less in absolute terms, they often import a lot in relative terms, as evidenced by China’s 100 export partners. In 2021, the total value exported by China was nearly $3.4 trillion (Figure 2a). Conversely, that year, the total value imported by China soared to nearly $2.7 trillion (Figure 2b).
Figure 2 China’s Global Trading Partners
For decades, Chinese imports and cheaper prices have contributed to low costs and low inflation. In modern history, this is an anomaly. Until the early 2000s, the high-income West dominated global trade. Their products and services were priced largely on the basis of their purchasing power, significantly higher than that of middle-income and low-income economies.
Worse, the Global South has been exploited in imported proxy conflicts to keep Western growth undisturbed, just as it is today. Emerging markets only became more useful to the West in the 1980s, when neoliberal policies allowed offshoring in the race to the bottom.
Today, any major threat aimed at undermining Chinese trade represents a $6.1 trillion threat to China, the United States, its allies, and countries in the Global South.
The $311 billion risk for global investing
Last year, global merger and acquisition activity soared to $5.9 trillion. China’s outward foreign direct investment (FDI), aligned with the post-pandemic recovery, showed slight growth, totaling $138 billion.
China’s inward FDI reached $173 billion, up 20.2% year-on-year. The robust double-digit growth is remarkable, due to the relatively high base in 2020. China recorded positive growth of 5.7%, even as global FDI fell by 34.7%. In the process, the Chinese engagement in the144 countries of the Belt and Road Initiative was $59.5 billion (picture 3).
Figure 3 Belt and Road Initiative
When major Western economies seek to destabilize or contain China’s economic rise for largely geopolitical reasons, they risk derailing more than $311 billion in annual investment. Worse still, it threatens the historic opportunity of poorer economies – however slim and fleeting – to raise living standards after centuries of colonial plunder by the West.
From stagflationary debt crisis to global depression?
With the US-EU proxy war against Russia in Ukraine, it was clear early on that all key players in this unwarranted war would face a recession in a few months.
Worse still, the runaway inflation the West is grappling with has the potential to escalate into a stagflationary debt crisis. In the next recession, as Nouriel Roubini suggested, “the stock market crash could be closer to 50%”. The assumption is that the crisis will turn out to be both stagflationary and accompanied by a financial crisis.
In this dire landscape, a major destabilization of China could dramatically accelerate the secular stagnation, which continues to spread in the West, and decimate opportunities for improving living standards in many emerging and developing economies.
Ironically, there is little or no reason for these unwarranted proxy conflicts and new cold wars which, if unleashed, set the stage for a global, geopolitically-induced depression.
The original version was published by China-US Focus on August 26, 2022