Geopolitics is reshaping the global economy, and will do some for the foreseeable future. We have indeed entered an era of “geo-economics.”
The growing geopolitical tensions between China, The United States and Europe have given rise to a whole new vocabulary: National security, decoupling, de-risking, onshoring, friend-shoring, near-shoring, and Cold War II are now the talk of the town...
Depending how the balance of national security and economy is struck in the end, the damage can be considerable, and even catastrophic.
Not your grandfather’s cold war
A new cold war, if it ends that way, will be very different from the last one. The Soviet Union and its COMECON allies hardly had any interaction with the west, and even that was focused on commodities, such as the grain-for-oil deals between the USSR and the United States. Trade with the USSR never amounted to more than 2 percent of the OECD’s total trade.
In contrast, China today is a key note in global supply chains, supplies some 20 percent of imports of advanced economies, and is increasingly a supplier of intermediaries to other countries, notably in South East Asia. This means that global supply chains increasingly depend on inputs from China, from rare earths to batteries to machine tools.
Furthermore, China is becoming more and more a source new technologies, innovation and ideas, produced by the millions of STEM students graduating every year, and the hundreds of thousands of PhDs, many of them studying and working at universities in the west. In peaceful times, this is a source of great benefits to the world, but in times of tension it is seen as a worrisome gain in capacity of a potential adversary.
The end of the first cold war also meant a large “peace dividend” of reduced spending on the military. According to numbers of Stockholm-based SIPRI, military spending as a share of global GDP fell from 6 percent of global output in the 1960s at the peak of the cold war to 2.1 percent in 20221. The same national security concerns that are reshaping global value chains could lead to increased military spending. (.....)
All of this still leaves aside a possible upturn in military spending. In the wake of Russia’s invasion of Ukraine, many European NATO members are now considering upping their spending to the NATO norm of 2 percent of GDP, and in addition, Germany has announced a special allocation of EUR100bn. to refurbish their military. Japan has committed to increase its spending to 2 percent of GDP by 2027, an increase of 60 percent. World military spending overall grew by 3.7 percent in real terms in 2022, the highest level ever recorded by SIPRI, which has numbers dating back to 1949.
Irrespective how long green lists are, or how small the yards with high fences without a restoration of some level of trust between the US and Europe on the one hand, and China on the other, as I argued almost 3 years ago. If a country cannot be certain of supplies of critical goods from one country, it will seek to diversify away from the most efficient supplier, and choose an ally to supply it, or reshore production altogether, irrespective of the efficiency losses. If a country cannot be assured of access to critical technologies, it will choose to invent it itself, irrespective of the duplication involved.
Strategic Trust as Vivian Balakrishnan called it recently in a speech at the ANU is the glue that keeps the global order from disintegrating. If a country cannot be reasonably certain that it can import the critical goods and technology it needs, that country will strive to make it itself.
This classic prisoners’ dilemma will result in a world of trade blocks, and all will be worse off than today.
https://berthofman.substack.com/p/the-economic-consequences-of-a-new
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