The global economic impact of a US-China bipolar world
|Summary
We have long argued that the world economy is the second era of deglobalization. This time, deglobalization is driven by a fragmenting of the global economy with tensions between the United States and China at the helm. We also hold the view that with the U.S. and China on opposite sides of the economic and geopolitical spectrum, countries around the world will have to pick a side: align with the U.S. or align with China. In this report, we update our fragmentation framework to get a sense of how countries could indeed align in the context of ongoing U.S.-China competition. We also update our work on how fragmentation can impact the global economy and result in downward pressure building on global growth.
The global economic impact of bipolar trade fragmentation
Our favorite theme—at least global theme—to discuss is the fragmenting of the global economy. Also known simply as "fragmentation." For clarity, when we say "fragmentation" we are referring to the global economy breaking into separate and independent blocs of nations. Rather than one cohesive and integrated global economy, countries with similar views on geopolitics, foreign policy and domestic economic policy—among other considerations—form distinct blocs of nations. Over time, nations look to sever relationships with countries in opposing blocs. Cross-bloc trade is diminished, or even eliminated, cross-bloc capital flows cease, while broader financial and geopolitical relationships are eventually ended. Our main approach to fragmentation is predicated on the fracturing of relations between the United States and China. The U.S.-China relationship has unquestionably worsened over the years, and despite more recent trade truce agreements and a lowering of tariff rates, cooperation, in the broadest sense of the term, between the world's largest economies has receded sharply. Going forward, we would expect the U.S. and China to reduce dependencies rather than pursue deeper integration. Taking fragmenting U.S.-China relations a step further, with the U.S. and China the largest economic powerhouses in the world, and also two of the most influential geopolitical actors, we have argued that countries around the world will likely have to choose a side. Does a nation want to be economically and geopolitical aligned with the United States? Or on the other hand, does a nation prefer strategic alignment with China? Select nations can pursue neutrality, but for the large majority of nations having a relationship with the U.S. and China might not be tenable. As nations determine their respective allegiances, the global economy can fragment into two blocs: a U.S.-led bloc and a second bloc led by China.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.