For much of the past few decades, globalization has been widely seen as an irreversible trend. Governments dismantled numerous trade barriers, anticipating that this deeper integration would yield prosperity and stability worldwide. However, Neil Shearing, the group chief economist at Capital Economics, challenges this perception in his latest book, The Fractured Age: How the Return of Geopolitics Will Splinter the Global Economy. He posits that we are transitioning into an era defined by fragmentation—primarily traced back to the intensifying rivalry between the United States and China.
The Context of Fragmentation
In an interview with bne IntelliNews, Shearing recounts the roots of his analysis, emphasizing a widespread sentiment that globalization is dead. He reflects on how current data concerning trade and capital flows often seems contradictory. By observing the historical landscape, he argues that it’s not merely a case of globalization versus de-globalization; instead, the reality is a fracturing process where the U.S. and China are vying for dominance across various sectors.
The landscape of globalization peaked in the early 2000s, characterized by accelerated growth in world trade and capital flows, supported by established entities like the World Trade Organization. Yet, this upward trend masked undercurrents of change. The inception of the Global Financial Crisis (GFC) between 2007 and 2008 acted as a turning point. The rise of Xi Jinping as China’s leader around 2012 marked an increasing acknowledgment of China as a formidable economic rival, undermining Western confidence in globalization.
Economic Implications
One of Shearing’s pivotal assertions is that the age of hyper-globalization—where interdependencies flourished—has concluded as China emerged as a significant challenger on the world stage. This raises questions about the structure and dynamics of international trade and investment.
Shearing does not envision a complete reversal of globalization akin to what occurred in the interwar period. Instead, he suggests a scenario of contained fracturing, particularly affecting sensitive sectors: semiconductors, dual-use items, and biotechnology. More common consumer goods like clothing and furniture may still be traded with China, as a total withdrawal isn’t feasible.
The financial implications of this controlled fragmentation could lead to a 4-5% dip in global GDP—larger than the fallout from the GFC—but far less catastrophic than the potential ramifications of a military conflict, especially concerning Taiwan. Such a conflict could result in a staggering 10% loss in global GDP.
Winners and Losers in a Fractured Economy
Economic shifts will inevitably produce both beneficiaries and those adversely affected. The U.S., sustaining its position as the largest economy, is poised to benefit significantly, particularly alongside allies in Europe, Japan, South Korea, Canada, and Australia. Countries that can emerge as reliable partners to the U.S.—like India, Vietnam, Mexico, and Poland—stand to gain from new supply chains relocating out of China for strategic purposes.
Evidence of these shifts is already apparent. Since 2018, Mexico and Vietnam have recorded surges in exports to the U.S., with Mexico emerging as a hub for electric vehicles and batteries, and Vietnam for consumer electronics. On the contrary, resource-rich nations in Africa and Latin America may find their growth strategies challenging, as reliance on a resource-driven model falls short of sustainable wealth generation.
China faces formidable hurdles in this evolving economic landscape. Relationships with allies predominantly comprised of autocracies or commodity-rich nations hinder the diversity needed for balanced global trade. The need for advanced semiconductors poses one of the most significant challenges, while the U.S. grapples with securing essential minerals for its automotive and renewable energy sectors.
The Tech Battlefield and Institutional Challenges
The technological competition between the U.S. and China is set to be a primary fault line in this fractured economy. Shearing highlights the urgency for governments to secure supplies of critical minerals, emphasizing that dependency on rivals could significantly weaken positions globally.
Moreover, multilateral institutions such as the International Monetary Fund (IMF), World Bank, and WTO face diminishing relevance. Shearing contends that these entities, products of post-World War II realities, may not adequately reflect the current geopolitical standoffs. With climate change being a vital area needing coordinated global action, the lack of effective multilateral mechanisms poses risks of suboptimal outcomes.
China is attempting to forge alternative institutional structures—mainly exemplified by its BRICS coalition. However, Shearing harbors skepticism regarding the cohesion and effectiveness of this bloc. The internal differences among member states could jeopardize its potential as a strong counter to Western dominance.
The Dollar and Economic Future
A significant question remains regarding the future of the U.S. dollar amid these changes. While Shearing acknowledges that the renminbi may see increased use, he firmly believes that the dollar will retain its status due to its foundational strength in global markets.
As Shearing paints multiple future scenarios, including a world splintering into competing blocs versus a contained form of economic fracturing, he emphasizes approaching these transitions with foresight. The extent of economic costs will depend on the decisions made regarding supply chains, international relations, and conflict resolution.
Conclusion
In The Fractured Age, Neil Shearing delivers a well-researched and balanced exploration of a transitioning world economy, urging readers to recognize the intertwined dynamics of geopolitics and economics. While recognizing the inherent costs of fragmentation, he maintains that some entities will flourish while others may falter. By acknowledging the new era characterized by strategic rivalries, governments, businesses, and investors can better prepare for the future.
In essence, globalization, as we understood it, may be fracturing, but the interconnected world remains in place, albeit under the new influence of power politics. The significance of adapting to this changing landscape cannot be overstated, as strategic decisions will shape the trajectories of economies and alliances in the coming years.
