International Monetary Fund managing director Kristalina Georgieva speaks at the World Economic Forum Annual Meeting in Davos, Switzerland, on January 17. Photo: DPA
Opinion
Macroscope
by Anthony Rowley
Macroscope
by Anthony Rowley
No one wins with a world split into two rival political-economic blocs
It’s safe to say US-led democracies will be on one side, and China and Russia leading the other. But how many others will join the second camp as economic conditions deteriorate?
Beijing is in a relatively strong position to consolidate and strengthen its position while the US and its allies struggle with long-standing economic problems
There is widespread and resigned acceptance now of the idea that the world is fated to split into two rival political-economic blocs, one led by the United States and the other by China. But there could be surprises and shocks when it comes to who opts to join which bloc and which will emerge as the most successful.
It will not be a simple matter of US-led democracies on one side and China-led autocracies on the other. Trade, finance, currency and other economic developments will influence the shape of the world to a much greater extent than is often realised.
In fact, the determination of the Trump administration to “make America great again” and the Biden administration to go one better by ensuring the US remains the world’s top economic, technological and financial power has already provoked responses aimed at changing the status quo.
It’s safe to assume that the US, Canada, Japan, the UK and some continental European countries will be in Bloc 1, while China and Russia will be leaders of Bloc 2. How many others will join the second camp as economic conditions deteriorate is an open question.
Things are happening – if not behind the scenes exactly, then certainly out of the glare of daily headlines on Russia’s invasion of Ukraine, Taiwan tensions, and gyrations on Wall Street – which show that bifurcation of the global economy is a dynamic process rather than a passive reaction to events.
When International Monetary Fund managing director Kristalina Georgieva wrote during the recent World Economic Forum in Davos that “we are facing the spectre of a new Cold War that could see the world fragment into rival economic blocs”, she was only hinting at the many complexities and subtleties of the situation.
For example, the China-led camp does not comprise simply of what some refer to as the “Asian hegemons”, meaning China and Russia. It could potentially include others within the BRICS grouping, the Shanghai Cooperation Organisation and the Eurasian Economic Union, among others.
Russian President Vladimir Putin has said BRICS “has already proven its effectiveness. Brazil, Russia, India, China, and South Africa are coordinating their policies on key international issues more closely, and are playing an active part in shaping a multipolar world.”
Some might argue that Putin is not the most objective observer on this issue. However, the fact that Saudi Arabia and the United Arab Emirates have reportedly expressed interest in joining the grouping, while Saudi-China energy cooperation is also growing, points to the bloc’s growing importance.
Strengthening rapport between Saudi and China and UAE overtures to the BRICS group come at the expense of the oil kingdom’s relations with Washington. That suggests it is not only economic lightweights and peripheral players that are interested in cementing ties with the China camp.
01:30
Saudi Arabia signs Huawei deal during Chinese leader Xi’s visit despite US security concerns
Saudi Arabia signs Huawei deal during Chinese leader Xi’s visit despite US security concerns
Putin has also suggested that the BRICS grouping is “developing modern models for the world’s financial and trading systems”. This is a prospect the US does not appear to take seriously, in the same way that former US president Donald Trump pulled his country out of the Trans-Pacific Partnership, thus cutting off his nose to spite his face.
Russia and China added heavily to their central bank gold reserves last year, thereby providing partial gold backing for their currencies and making them more credible internationally. China’s pilot schemes with the digital yuan also point to the emergence of a non-US-dollar currency bloc over time.
Russia and China could choose to declare financial war on the major Western powers in Bloc 1 by selling US dollar assets and investing the proceeds not only in gold but in other precious metals and industrial commodities, forcing the dollar and other key currencies down further.
The Asian hegemons have already begun doing this, according to Alasdair Macleod, broker, banker, economist and head of research at London-based precious metals network Goldmoney. He has claimed in various recent commentaries that the world’s major fiat currencies are failing.
What all this illustrates is the danger that economic sanctions levied by the US and its allies against China and Russia could backfire by triggering rival actions on the part of sanctioned countries, encouraging others in turn to take pre-emptive action.
Beijing is in a relatively strong position to consolidate and strengthen its position and that of others within a rival economic grouping. Despite setbacks such as the Covid-19 pandemic and property-sector problems, China’s fiscal and financial health is basically sounder than that of Western nations.
02:24
China records second-lowest economic growth figure in almost 50 years after Covid-ravaged 2022
China records second-lowest economic growth figure in almost 50 years after Covid-ravaged 2022
It has a savings rate far higher than those of other major economic powers and a lower inflation rate. It thus has the ability to invest heavily in the economies of other Bloc 2 countries, in the same way that Beijing invested in Belt and Road Initiative projects while others looked on.
The US, by contrast, has continuing problems with fiscal deficits and debt ceilings. While it has long been able to import capital to finance these, that will not continue indefinitely amid US dollar weakness. Europe has economic problems of its own.
None of this is to suggest that the China-led group will emerge triumphant from a splitting of the world into rival blocs. Everyone will be poorer for the contraction of overall trade and investment, and international cooperation. The zero-sum game of West versus East means losses all round.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
