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.

Download The Full International Commentary