In a multipolar system, Europe is becoming the clay pot between the two iron pots (United States and China).
The United States and China are heading towards substantial, though not quite complete, decoupling. But what exactly will decoupling entail and what will its consequences be?
In the US, national security concerns have led to a long list of restrictions on technology exports and investments in China. To enhance the impact of the strategy, the United States is trying to ensure - including through the threat of sanctions - that other countries join its efforts.
This approach might have met with resistance, even in Europe, were it not for the war in Ukraine. The conflict seems to have healed transatlantic relations, after a few years of tensions. And while China is officially neutral in the war, it is committed to its "limitless partnership" with Russia, which Chinese President Xi Jinping reaffirmed in his recent three-day visit to Moscow.
At the heart of Xi’s partnership with Russian President Vladimir Putin is a shared belief that the US-led West is determined to hinder their development, thwart their territorial ambitions and limit their international influence. This belief – seemingly confirmed by recent US policy – is also central to the latest evolution of China’s domestic economic agenda.
After concluding that the world economy will be less open and more hostile, and therefore a less reliable engine of growth, Chinese leaders are looking to reduce their dependence on export demand. So, despite continuing to tout multilateralism and economic openness, the top priority of Chinese leaders now is stability and self-sufficiency in trade, investment and technology. With an economy about 80% the size of the United States, China has a huge domestic market for goods and services. By improving the integration of its domestic market, China may be able to better exploit its growth-enhancing potential, thereby insulating itself to some extent from foreign pressures, including challenges to its centrality in global supply chains. Indeed, the diversification of supply chains - through so-called friend-shoring - is already well underway, and not just because of US-China competition. Frequent shocks – from extreme weather related to climate, pandemic and war – and the growing use of economic sanctions as a foreign policy tool have also given businesses and governments an incentive to build resilience.
For many countries, greater resilience would include less reliance on the US dollar. While the global dominance of the greenback is not in immediate danger, given the absence of a viable alternative, several Asian countries are creating mechanisms to regulate trade that avoid dependence on the dollar: this would make it more difficult for the United States to track transactions and identify sanctions violations.
As global supply chains become less elastic, less efficient and more expensive, their ability to counter inflationary pressures will diminish. Central banks will then be left alone to manage price growth by suppressing excess demand.
The combination of higher interest rates and heavy sovereign debt burdens will exacerbate fiscal pressures. While lower inflation could alleviate those pressures, interest rates are likely to remain elevated for a while, especially if suboptimal global economic trends and secular forces such as aging populations cause conditions on the offer side to deteriorate. Nor is the downward trend in productivity growth – which has become particularly pronounced over the past decade – likely to reverse in a fragmented global economy with obstacles to technology development and diffusion.
These barriers will also jeopardize progress on the sustainability agenda, which requires free and frictionless flows of existing and emerging technologies. Likewise, the green energy transition will require capital to flow to where it will have the greatest impact, even in low-income countries. The capital investment required for the global energy transition - estimated at approximately $3-3.5 trillion - it simply will not be mobilized without international coordination. International financial institutions need increased capitalization and support from all major shareholders, which is not likely in the current environment.
Many emerging and developing economies recognize that a fragmented global economy - let alone one where they have to choose between two competing blocs - is not in their best interest. But currently they have no power to change the course of events. India may be able to play that role one day, but not yet. As for multilateral institutions, they are too indebted to their major shareholders in the developed world to forcefully advocate cooperation, openness, and a rules-based system of adaptation that promotes efficiency, growth, and inclusiveness.
And while Europe is large enough to withstand the pressure of decoupling, it is not fully integrated and is hampered by its energy dependency. The Brussels policymakers are therefore materializing the worst scenario, i.e. having planned a future economy where there is a lack of resources (public finance, commodities) and the sharing of objectives capable of making it prosper: in a multipolar system, Europe is becoming the earthenware vase between the two iron vases (United States and China).
Original article published on Money.it Italy 2023-04-13 08:08:07. Original title: Come il decoupling manderà in frantumi l’agenda green dell’UE?
