Archive for the ‘geoeconomics’ Category

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China to surpass US as largest economy; what does it mean?

May 1, 2014

According to new figures (and an alternate formula to typical GDP comparison) from the World Bank, China is expected to pass the United States as the world’s largest economy sometime later this year.   The World Bank is comparing Purchasing Power Partity (PPP), which is intended to standardize GDP across currencies and make direct comparisons of how economies work internally.  However, GDP is still the better measure of how economies compare in the globalized world because it takes differences in exchange rates into account.

In any case, China is going to pass the US sooner or later, but what that means remains to be seen.  In the two previous cycles of the world system, France’s GDP likely surpassed England’s in the late 18th/early 19th century and Germany surpassed the United Kingdom in the late 19th/early 20th centuries (see Angus Maddison for reconstruction of early GDP levels) , yet both still lost their challenge for hegemony.

The Six Cycles of the Modern Era copyright EnerGeoPolitics, 2010

copyright EnerGeoPolitics, 2010

Even after China becomes the world’s largest economy, it may not hold that position for very long.  China is facing a severe demographic crisis and, like Japan, will face an declining work force supporting an ever growing retiree population.  Indeed, it may fall off the demographic cliff even before the largest waves of retirees hit – last year, the working age population declined for the first time in history, a decline that will continue.  As the Financial Times notes:

Unless the country can keep lifting the labour force participation rate (for example by getting more women into the workforce or persuading older people not to retire), China will struggle to expand its labour force by even 1 per cent per year. To sustain economic growth of more than 7 per cent, productivity would need to grow by 6-7 per cent a year across the entire economy. This would be a tall order in any country. In China, where the labour-intensive services and agriculture sectors make up half the economy, it is well-nigh impossible.

Of course, a decelerating China does not mean the US will regain the top spot . . . India may well pass both nations.  And my analysis continues to be that India will be the next global hegemon, either in the next immediate cycle, or following one more term by the US.

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The Grand Geo-economic Coalition

August 15, 2013

The US is currently negotiating two massive free trade agreements – the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership.   If completed, the rules and regulations of the two will eventually be rationalized with each other and with existing trade groups such as NAFTA.   As these rules will define trade with the most developed nations on the planet, it will result in a much-streamlined alternative to the often sclerotic World Trade Organization.   Some see this as simply an attempt to re-invigorate the Washington Consensus against rising alternatives, but in the logic of Long Cycle Theory, it is a natural consequence of the Coalitioning sequence, and is easily recognized as an attempt by the US to organize the maritime world against the rising continental power of China.

Centrality

Centrality

We are in the coalitioning phase

We are in the coalitioning phase

 

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Confronted in the East by a US led coalition, #China marches West

June 5, 2013

While the US engages in it’s much-discussed “Asian Pivot,” China has responded by aggressively courting new markets and allies to the West.  The China Daily Mail has a long analysis of what they call “China’s Reverse Imperialism.”  I don’t entirely agree with their conclusion (and question some of their contents), but it is a provocative read.  An excerpt:

China is turning regional losses into strategic wins. As the CCP cannot approach their objectives directly, they probe for weaknesses and align themselves with US enemies or unstable partnerships.

To expand, they need to infiltrate and influence. To acquire entrance and influence, they must make an offering to others in order to solicit and forge better partnerships. After influence is secured, they expand their projective power-base. This upsets the US, throws them off balance, erodes their target goals, and stealthily captures their territories or partnerships of value.

While China infiltrates further into the West it has established beachheads not just through corporations and corporate takeovers but through diaspora communities and the establishment of whole cities.

Just recently, Bloomberg reported that China plans to build an entire city in Belarus for the price of $5 billion (USD). The author, Aliaksandr Kudrytski, noted that the Belarusian President laid out an area next to the capital that is over 40 percent larger than Manhattan that would give them the manufacturing capacity in a European country that they have desired for a long time, as well as a strategically sound march into Eastern Europe.

. . .

The two civilisations have little in common culturally, politically or strategically. The partnership is unfortunately based on mutual need and not a mutual understanding or respect. China needs an outlet for growth and wants eventually more influence into European affairs. Europe needs money.

China’s insistence of a “mutual respect” means that it expects to dodge European human rights intrusions and liberal reforms so rampant in the 1990s from European advocates with something akin to bribery of silence from the financially wounded player.

Nor is China playing by European rules. In the Wall Street Journal: European executives and officials say the Chinese government retaliates against companies that bring trade complaints, either by imposing tariffs on their imports or taking action against their investments in China.”

Michael Schuman, of Time Business, says “China’s SOEs are potentially poised to alter the rules of global economic competition.”

It is not the strict amount of China’s purchases into its West that are of concern, but rather it is the overall objectives: technology acquisition, key sector investments, political bargaining, etc. Among other problems, such as censorship of European journalists and restrictions of European charitable organisations working in China, there is also a clear lack of transparency in Chinese business practices. Hence, the “mutual respect” that is being solicited is a one-sided advantage in Beijing’s fortuitous international political future.

Wen Jiabao met with 16 Central and Eastern European countries last April. Of note is that these are all former Communist countries. Of particular interest is the Chinese pursuit of Poland. “Chinese companies are being urged to invest more in Poland,” states People’s Daily Online. Warsaw is a critical access point into the West and such a move is a factor of pressures in the West and vulnerabilities within it.

It is a long piece, but read the whole thing.

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Qatar, not Turkey or Iran, is the power broker in Syria

May 21, 2013

Great report from the Financial Times on how Qatar has come to dominate the Syrian uprising.  Qatar has rapidly become a major power broker across the MENA (Middle East/North Africa) region.  Meanwhile, the FT also reports that the massive Qatari sovereign wealth fund is engaged in a new round of buying stakes in global banks – this time purchasing shares of Germany’s largest and Russia’s second largest banks.  Since the beginning of the global financial crisis in 2008, Qatar has purchased large stakes in British, Swiss, Brazilian and Chinese banks, as well.  This is the third post I have had that mentions Qatar’s increasingly aggressive foreign policy – one last fall and one last winter.

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The Geopolitics of International Finance

February 11, 2013

Long Cycle Theory divides modern (post 1500) history into six cycles of roughly a century apiece.  Each cycle has a leading power, or hegemon.  There are many qualities that each hegemon has had in common – they have all been maritime powers, they have all had relatively open societies, and they have all dominated international finance.  As these qualities fade, the alternate powers who wish to challenge the hegemon’s rule setting power begin to make their move (new readers can find a discussion of Long Cycle Theory and how it influences energy geopolitics  in this piece). The United States is the reigning hegemon, and remains  by far the world’s leading naval power.  Although it still has an open society, it is not the most open in the world.  It’s hold on international finance has been gradually slipping for decades, but that process has begun to speed up in recent years.  Bloomberg has an analysis today that graphically demonstrates how much the US banking presence has slipped in several key regional markets:

regional banking shares

Correlation, of course, is not causation, and this decay is not an indication that a global contest for hegemony is imminent, but it is a canary in the coal mine that policy makers should not ignore.

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US Intelligence Estimate predicts imminent end of US hegemony

December 13, 2012

The National Intelligence Council’s annual Global Trends report is out.  It is a disappointing product, weighted down with faddish themes and, in my opinion, insufficient recognition of the historical world economic system.  Focusing on anticipated changes to the economic and geopolitical environment over the next two decades, the report comes to the non-controversial conclusion that China will overtake the US as the world’s largest economy and that the US will cede its role as global hegemon in favor of a multi-polar system of shared power.

As I noted, the statement that China will become the world’s largest economy is non-controversial . . . but that does not mean the outcome is inevitable.  True, China has been the world’s largest economy for most of recorded history; the last century and a half are anomalous.   In some instances, though, size is not definitive. The term “largest economy” does not equate to “leading economy.”  The size of a nation’s economy is an aggregate measure of economic activity and not a measure of economic influence.  For example, throughout its nearly two centuries of global hegemony, England never had the world’s largest economy (indeed, China was the world’s largest economy until late in the 19th century).  According to estimates, France probably exceeded England in total economy just prior to the Napoleonic Wars, and Germany certainly exceeded England just prior to World War One, the last two global contests for hegemony (see chart below).  In both cases, the larger economies failed in their bid for hegemony.

copyright EnerGeoPolitics, 2010

copyright EnerGeoPolitics, 2010

It is also far from clear that China will actually ascend to the top position.  A continuing theme of this blog has been that of “Peak China” – the belief that China’s ascent has neared or reached its peak.  I think it is possible (likely even) that India surpasses China in the next two decades and becomes the world’s largest economy.

The report also predicts that the US will achieve energy independence over the same period (welcome to the party – I have been predicting as much since 2007).  And this is why I believe the US will maintain hegemony for the rest of the century.  The US will be not only energy independent, but has the capacity to become the worlds greatest producer, consumer and exporter of energy.  Additionally, the US will remain the supermarket to the world – the top producer of food in an increasingly hungry world.  The ability to fuel and feed ourselves and our allies, combined with the geographic reality of a two-ocean buffer, are the most profound geopolitical advantages of any nation on the globe for the foreseeable future.

Consciously or not, Chinese leadership is making a bid for global hegemony.  I believe that these variables mean that the Chinese bid will crest short of that goal, and that the US will remain not simply the “important” nation that the NIC envisions, but the continued world hegemon that it has been since the end of World War Two.  Of course, decline can be deliberately chosen by a series of feckless leaders, but I find it unlikely that the American people and the leaders they choose going forward will be as comfortable with that choice as the current occupants apparently are.

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Australia in the Asian Century: Gov’t releases new White Paper

October 30, 2012

The Australian Government has released an optimistic new White Paper assessing the ongoing economic rise of East Asia and the ability of Australia to benefit from it.  The paper almost reads like a product from the neo-liberal hey day of the early 1990s, extolling the virtues of free market and trade to enhance everything from economic growth to democratic reform to expansion of human rights.   At the same time, the paper downplays the security threats in the region.  Now, this may be well justified, as most of the nations in the region certainly prize economic prosperity over territorial gains.  However, the overlapping claims of sovereignty in the South China and East China seas cannot be overlooked and will remain possible flashpoints for conflict in both the near and medium terms.

Conflicting territorial claims in the East China (above) and South China (below) Seas

Christian Le Miere of the International Institute for Strategic Studies sees reason for optimism in the recent dispute over the Senkaku Islands – the fact that China deliberately sent fishing vessels rather than armed naval craft indicates to him that the preference is for a peaceful, negotiated settlement.  Counter to this analysis, however, is today’s report that China is refusing to join its South China Seas neighbors in negotiations for a multi-lateral “code of conduct” in the waters.   China does not want to be bound by a group treaty, preferring to negotiate separate deals with each individual nation.   In one-on-one negotiations, China can overawe each of her negotiating partners, something that is much harder to achieve when they band together.