Proportional Control
The US enters the New Year on the 1st of January 2023, but this year it is Chinese New Year and the post-covid re-opening that signal the new direction of the global economy
HAPPY NEW YEAR! The Long Mekong Daily is celebrating its first year of publication and what a year it has been. In this first edition of 2023 the Long Mekong Daily takes a macro view of global economic prospects and looks to the Chinese New Year as an even bigger event.
China’s Manufacturing Sector is Strong
China’s borders might have been closed to people for three years, but China significantly ramped up its trade with Southeast Asia to nearly RMB7 trillion during the pandemic. While the US has sought to persuade countries to reduce their dependence on China, trade ties between the world’s second-largest economy and the rest of Asia are deepening as economies grow and companies refashion supply chains.
The much repeated narrative that firms are fleeing China to Southeast Asia omits that a large portion of those relocations are Chinese companies expanding into the market as a new export platform. China is clearly outcompeting US, EU, Japanese and Korean players in the crucial electric vehicles (EVs) market in the region. In Phnom Penh, multiple Chinese EV manufactures have opened sales rooms over recent months and the demise of imported internal combustion engines (ICE) is clear to see.
Behind the trend are powerful economic forces that tend to bind smaller economies to bigger ones as well as China’s dominant role as a supplier of the kind of affordable goods that fast-growing countries need, such as cars and machinery. In many ways, Vietnam, Cambodia and Laos share the growth attributes of China’s dynamic provinces from over a decade ago.
The Belt and Road and Dual Circulation
The negative narratives about the Belt and Road Initiative (BRI), have proved to be hollow. In the last decade the BRI has largely achieved the construction of a substructure of connectivity to ASEAN, Central Asia, Europe, Africa and South America. China’s restructured internal circulations have also been significantly restructured and decentralised and are now linked to the external BRI circulation - a “Dual Circulation.” This Dual Circulation has established a significant new superstructure for cross border goods and services and cross-border financial transactions that are reconfiguring the proportional control of global supply chains to Asia and especially, ASEAN and China’s BRI partners.
The Indo-Pacific Overstretch
Meanwhile the US-led Indo-Pacific strategy is attempting to rally allies to pay for the maintenance of its offensive forward military posture. Moreover, the geo-economic tools and state subsidised reindustrialisation efforts of the US increasingly undermine the industrial strength of its allies’ economies, which are largely export led and partly dependent on the US market. While Washington hopes its allies can cooperatively substitute for China across a host of supply chain needs, China’s manufacturing ecosystem, which is built on innovation at speed and scale, is capable of producing both “good enough” products for G77 economies and premium products for G7 markets.
Global Supply Chains
The US strategy to reclaim proportional control over global supply chains is flawed in other aspects: (1) the cases of Huawei, DGI and Tik Tok demonstrate that China’s technological innovation capacities exceed and will continue to outpace those of the US; (2) The dollar “exorbitant privilege,” enjoyed by the US, which funds its massive trade deficits, is rapidly being undercut by the de-dollarisation efforts of the entire Global South; The top exporting industries of the US - oil & gas ($220.9B), petroleum refining ($164.0B), aircraft, engine & parts ($80.2B), natural gas liquid processing ($75.9B), brand name pharmaceuticals ($72.2B), organic chemicals ($53.9B), plastic & resins ($45.8B), cars & automobiles ($42.4B), navigational instruments ($41.3B), nonferrous metal refining ($31.4B) - are overly dependent on oil, gas and refining, which explains, in large part, why Russia, Iran and Venezuela are being squeezed and OPEC is turning to Asia and the Global South. Moreover, the US is being challenged in aerospace, automobiles, especially EVs and pharmaceuticals and chemicals.
The Indo-Pacific Economic mirage
The Indo-Pacific Economic Framework (IPEF) is not a free trade agreement and does not provide access to the US market. The IPEF is designed to exert control over rules and standards for trade and maintain fertile ground for the export of US services, which is almost US$900B. This includes finance, technology, ICT, software, entertainment, legal and accounting, travel, insurance etc. While the IPEF places human rights and labor standards first, this is nought but cover for the rules on the aforementioned services, renewable energy, ICT and semiconductors and a host of emerging advanced manufacturing sectors.
European Errors
For the European Union, the grave error it made in allowing Washington to leverage NATO to destroy the nexus between clean, cheap and reliable pipeline Russian energy for reliance on fracked, expensive, unreliable and shipped US energy, has only further undermined its economies and their industrial bases and threaten both political unity and the Euro. Likewise in ASEAN, the US is attempting to construct centrality in ASEAN while it gives lip service to ASEAN centrality. However, China, India and Russia are to be rejoined by a Lula-led government in Brazil and the BRICS is becoming a more powerful grouping than the G7. Inside the G20, the BRICS and its dialogue partners are setting the agenda.
Interest Rates
Importantly, the increase of exports to both the US and Europe from the Global South, and in particular China and Asean, is a supply side adjustment that reduces both the cost of goods and overall inflation, but increases their debt to GDP ratio’s. In 2021, inflation rates in the United States and Europe started to rise. In 2022, the inflation rate showed signs of escaping fiscal and monetary controls. In the middle of 2022, the monthly inflation rate in the United States passed 8%, and in Europe exceeded 9%. In the midst of public protests, central banks around the world responded with rapid interest rates rises. The US Federal Reserve successively raised interest rates by 0.75% three times, signalling that other markets should also raise interest rates aggressively.
However, the "Volcker moment” did not occur in the United States, and the Federal Reserve began to release "dovish" information on the issue of continuous interest rate hikes. Thus, it seemed that the Federal Reserve would not continue to raise interest rates aggressively in the future. However, the economic growth rates of the US and Europe have stagnated. According to the forecasts of various international institutions, over the next two years, the average growth rate in developed countries such as the United States and Europe will be under 1%, inspiring the Financial Times to coin the term "shrinkflation".
Shrinkflation and Stagflation
Both "shrinkflation" and "stagflation" create a dilemma for government macroeconomic policies. To curb inflation, economic contraction ensues; to stimulate economic growth, control of inflation is lost. In the 1970s, after many years of stagflation, the United States and Europe finally began to focus on controlling inflation, ruthlessly tightening monetary policies and vigorously raising interest rates; inflation was suppressed, but at the cost of economic recession. To deal with the new onslaught of "shrinkflation," the developed countries have begun to adopt extreme monetary tightening policies to quash inflation and cause another round of economic recession.
The large amount of external funds that flowed to the United States, in the wake of its rate hikes, was not good news for the US either. For example, when the Federal Reserve raises interest rates, U.S. Treasury bond interest rates rise accordingly, and US government interest payments on treasury bonds also rise sharply. When US government debt is low, rises in interest payments pose no threat to government finances. However, since the 2008 GFC, the fiscal and financial situation in the United States has continued to deteriorate. In 2000, the US federal debt level accounted for just over 50% of GDP; by early 2022, the U.S. government’s debt of over $30 trillion had reached more than 120% of GDP. As the interest rate on the U.S. national debt rises, the fiscal expenditure of the US government also increases significantly. The U.S. Congressional Budget Office has predicted that debt interest payments will soon become the largest expenditure item of the US government, surpassing military spending. If so, the United States, and the world, is on the precipice of another US-led debt crisis.
The Last Word
In stark contrast to the dire warnings of recession in the United States and Europe, Asia is predicted by the World bank to achieve over 5% average GDP growth and fuel 30% of global growth. However, the Global North is a spectator to the continuing rise of the Global South. China’s Dual circulation of the Global value Chain, which is a direct response to the changing international environment, maintains China’s ability to engage globally in trade, finance, and technology, while simultaneously strengthening domestic demand, production, and technological capabilities to protect against further disruptions in the global marketplace. Under this policy, focus is placed on advances to China’s self-reliance while trade with the rest of the world is rebalanced toward sustainability and leveraging BRI infrastructure gains.
For the first time in over 300 years it is the Global South that is controlling the world economy. The entirety of the Global North is in recession and proportional control of global supply chains is now centred in Asia. Nowhere is this more evident than in the partnership between China and ASEAN, Central Asia, West Asia, the center-left governments in South America, Africa’s increasingly confident and unified economic development focused governments, and the leading role of the BRICS within the G20. De-dollarisation has gained considerable momentum and global supply chains from commodities to brands are responding to the changing demand dynamics of the Global South’s markets. China is now at the center of both east-west and north south trade. It is an open question as to whether the United States will move beyond geo-economic tools in its quest for continuing hegemony and towards increasing military belligerence and the use of force to maintain what is left of its empire or whether the globalists in the US will agree to participate in the peaceful pursuit of a multiplex global order in which the US is not the central pillar.
The Editor
新年快樂 ! (Happy New Year)