Weaponized trade polices leading to a fragmented world
The World Economic Forum feels that deepening geopolitical tensions are leading to more assertive industrial policies and a dramatic reduction in cooperation
We have entered a new world order. Two major geopolitical and economic blocs – one Western-led and one led by China and Russia – are firming up and are increasingly in competition with each other. The fragmentation that’s ensued has led to a dramatic reduction in geopolitical cooperation and the rise of a group of more assertive and important multi-aligned countries. BlackRock, a US investment banking company, now see geopolitics as structural market risks, with direct and long-lasting effects.
This is a view supported by the World Economic Forum report which feels thatdeepening geopolitical tensions are leading to more assertive industrial policies, with “the world’s largest powers seeking to maintain or develop their strategic autonomy and limit their dependence on rivals for crucial goods and services.”
It ranks the US-China strategic competition risk rating at a high-level following Beijing’s Two Sessions, President Xi Jinping’s trip to Moscow and the Taiwanese president’s US visit. The trajectory of US-China relations as decidedly negative and presents significant risks for investors.
US-China trade wars to increase
Strategic competition between the US and China is driving global fragmentation as both aim to boost self-reliance, reduce vulnerabilities and decouple their tech sectors. TheUS semiconductor export restrictions against China speeding up targeted decoupling. Japan and the Netherlands are rolling out similar measures. The US is weighing additional controls on key technologies including quantum and AI, and will likely implement a mechanism to review outbound investment in Chinese technologies. The US has enacted the CHIPS and Science Act to bolster its competitiveness in critical technologies and is enabling significant domestic investment. Beijing reinforced the importance of technological self-sufficiency during the recent Two Sessions meetings.
Meanwhile, China’s recovery, the slowing pace of US interest rate hikes and the weaker US dollar have eased some pressures on emerging markets (EMs). Yet the slowdown in global economic activity continues to be a significant challenge. Some middle-income EMs, like Brazil and Mexico, may be able to ease policies and offset downward growth pressures. Others will engage with the IMF and be able to absorb global shocks. EMs with elevated debt levels could be challenged. The major worry is about a lack of global cooperation on debt relief – particularly between the international financial institutions, including the International Monetary Fund, and China.
Asia to lead economic recovery
The World Economic Forum argues that Asia is expected to experience the most buoyant economic activity, with 93% of economists surveyed for the report predicting at least moderate growth in the region. China is leading the charge, with its reopening after lockdowns prompting 97% of respondents to forecast moderate, strong or very strong growth in the country.
Weak economic growth for Europe
Things look very different for Europe, however, with three-quarters of those surveyed expecting weak or very weak economic growth in 2023. But this actually marks a major improvement from previous predictions – just 6% now expect very weak growth, compared with 68% in the January 2023 edition of the WEF Chief Economists Outlook.
The change is down to Europe’s energy markets holding up better than expected during the winter, although weak business and consumer sentiment and tight financial conditions continue to weigh on the region’s prospects. Europe is consequently seen as having the highest risk of stagflation – a combination of high inflation and economic stagnation.
Fragmented & fragile supply chains
This apart, national pushes to boost green industries – notably through the US Inflation Reduction Act and the EU’s Green Deal Industrial Plan – have led to increased political influence over key economic decisions, and to free-market policy frameworks being “discredited” in many countries, the report says. All of this is likely to lead to more fragmented – and potentially fragile – economic activity, the chief economists surveyed say. A third expect “significant changes” to global supply chains in the coming three years, and just 13% think global economic resilience is going to improve.
No end of Russia-Ukraine war
The Russia’s invasion of Ukraine is the largest, most dangerous military conflict in Europe since WWII. BlackRock’s analysts did not see a diplomatic solution in the near term. Russia and Ukraine are both pursuing spring offensives, likely leading to an extended war of attrition. There are resource and personnel constraints on both sides, but it is expected that Western support for Ukraine to hold through 2023. Alongside an extended conflict inside Ukraine, one sees a long-term political, economic and military standoff between the West and Russia. Intentional or accidental escalation between NATO and Russia remains a risk.
The Ukraine war has brought energy security to the fore. The world will need more non-Russian fossil fuels, but it is believed that the crisis will also accelerate the transition to a lower-carbon world in the long run. The energy shock will likely boost decarbonization plans in Europe amid a race for clean energy leadership, as the continent responds to the Inflation Reduction Act (IRA) that is driving investment in the US Though the IRA’s provisions are stoking tensions between the US and its allies, the legislation will ultimately be catalytic for increasing global investment in clean energy. A divided US Congress means the Biden administration will focus on implementation of the IRA and regulatory actions. Further US legislative action is unlikely in the short term per BlackRock.
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