Geopolitical tensions in recent years have brought about new tariffs and nationalistic industrial policies, setting in motion the process of deglobalization, which quietly but noticeably makes economies less and less efficient.
According to data from the World Trade Organization thanks to the expansion of free trade in the last seven decades the world economy grew 14 times.
Everyone gained from this process. Developing countries have increased their share of global output from 24% in the 1980s to 43% in 2020. The developed world has secured an extremely low cost of production for many consumer goods that has rewarded it with a very low rate of inflation.
As they all stand to lose from the deconstruction of globalization and the growth of free trade, a trend increasingly at the mercy of rising geopolitical tensions.
The beginning was made by the rift in relations between the United States and China with the tariff war that began in 2018.
Bilateral trade flows may have reached an all-time high of $691 billion last year, but as Francesco Guerrera aptly observes in a recent Reuters analysis, if we remove the effect of inflation from the picture, US imports from China fell from 21.6% to 16.5% of the total between 2017 and 2022, while they have now returned to 2007 levels. Ruta).
The shake-up of trade relations combined with the shock to supply chains due to the Covid-19 pandemic brought to the fore the need to bring production back “Home” to avoid over-reliance on cross-border suppliers.
So new industrial policies, like the US$430 billion Deflation Act, have spawned a new culture of subsidies to make it possible to attract new technology investment, finance the green transition, and so on. within national borders.
China in turn has greatly increased state aid for the production of electric vehicles, which has not left Europe unmoved, which launched an investigation into Chinese practices last month.
In fact, according to an ECB study, a total withdrawal from globalization would lead to a drop in global imports of up to 30%.
Although these processes clearly take place over a reasonable period of time, nevertheless as we are reminded from time to time, the restructuring of supply chains is a process par excellence inflationary.
Therefore, their redesign is one of the main factors that inflation will hardly return to its previous extremely low levels and the cost of money will remain high for a long time. And this is something that will “hurt” us all.
A meeting that could become a station
Through the above visual prism, the meeting between Joe Biden and Xi Jinping on the sidelines of the summit of the Asia-Pacific Economic Cooperation – APEC – in San Francisco, which begins on November 11, has more than special weight.
It is no coincidence that both White House Press Secretary Karine Jean-Pierre and Chinese Foreign Minister Wang Yi, although they admitted that it will be a difficult meeting, nevertheless characterized it as an extremely important opportunity for the two countries to overcome obstacles and come to some sort of agreement.
More specifically, White House press secretary Karine Jean-Pierre prefaced the meeting between the two leaders as follows: “Intense competition means intense diplomacy. That’s what you’re going to see,” adding that a “tough” but “important” conversation between them is expected, as “US policy and the way it’s going with China has not changed.”
Chinese Foreign Minister Wang Yi in turn said that the planned meeting will not be “smooth” but notice the addition at the end: “… both countries must eliminate interference, overcome obstacles, strengthen consensus and accumulate results’.
The truth is that long-strained relations between China and the US over their disagreements over the human rights of the Uyghur minority, tariffs, trade policy and Taiwan have been further strained since Russia’s invasion of Ukraine, the pandemic travel restrictions and the war between Israel and Hamas.
The fact that the meeting will take place as the White House works to send humanitarian aid to Israel amid the escalating conflict with Hamas is sure to add additional pressure to the bilateral talks. A pressure added to the already tense climate by the US choosing to continue supporting Ukraine defending its territory from Russia.
You see, Xi is Russian President Vladimir Putin’s most powerful economic ally, and Beijing’s support is vital to Russia’s military operation in Ukraine.
One will of course wonder how it is possible under these circumstances that the leaders of the world’s two largest economies will have a constructive dialogue in mid-November.
As we mentioned above, the restriction of free trade and deglobalization are two conditions that hurt us all.
US imports from China are now back to 2007 levels which is undoubtedly “hurting” China. At the same time, inflation and the cost of money continue to “hurt” all economies, including the US, while they are separated by exactly one year before the presidential elections.
Considering that former President Donald Trump is ahead of Joe Biden in five of six key states, according to a new poll by the New York Times and Siena College, the poll results reflect deep dissatisfaction with his handling of the economy and in many other issues.
This alone is an extra lever of pressure for Joe Biden.
So let’s see.
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