China — the new centre of gravity
ECONOMIC activity at the world level has been drifting towards Asia in recent years. In particular, many would agree with the assertion that the growth performance of China has pulled the globe’s economic centre of gravity decidedly towards Asia.
But by how much? And how fast? Although the concept is very popular, there is a surprising lack of formal measurement of the world’s economic centre of gravity (WECG).
Defining a world economic centre of gravity (WECG) poses some tough methodological problems, including how to represent a centre of gravity from a three-dimensional globe on a two-dimensional map.
Most calculations locate the centre of gravity somewhere in the planet’s interior.
But all methods show the centre of gravity shifting progressively eastwards from just inside the western hemisphere in the 1980s to well inside the eastern hemisphere by the 2010s.
Intuitively, in the 1980s and early 1990s, global economic activity was concentrated in North America and Western Europe, with outposts in Japan and the Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore).
But since then, Asia’s economies, especially China, have grown much faster than their western counterparts, pulling the centre of gravity steadily deeper into the eastern hemisphere and Eurasia.
Most economic commentators and policy analysts cling to a world view that puts the United States and the North Atlantic countries at the core of the global economy, with Latin America, Africa and Asia on the periphery.
In this simplified framework, the economic cycle begins in the western core and is transmitted to countries on the periphery via changes in interest rates, capital flows, trade and investment.
The United States and its traditional allies in western Europe are the active members of this system, while emerging markets on the periphery play a role that is essentially passive and reactive.
That might have been a useful representation of the global economy in the 1980s and early 1990s but it became inaccurate in the 2000s and 2010s.
Rather than economic and financial changes originating in the United States and Western Europe and radiating out to the periphery, shock transmission has become bi-directional.
China’s corona virus epidemic has highlighted the potential for a shock originating on what was once the periphery to destabilize financial markets in the former core.
The consequences of eastward shift which started in the late 1990s and early 2000s were barely perceptible, but it became much more pronounced two decades later and its impact is now too large to ignore.
China’s share of the global economy has quadrupled to 16% in 2018 from 4% in 2002, according to the International Air Transport Association.
The country’s share of global manufacturing has also quadrupled to 39% from 10%, while its share of global travel and tourism has surged to 18% from 5% over the same period.
In 2018, China’s share of the global market for new vehicles was 30%, up from less than 10% in the early 2000s, making it larger than the combined shares of the United States and the European Union.
As a result, economic shocks originating in China now have far greater spillovers to the rest of the world than 20 years ago.
The trade war of 2018/19 demonstrated it was not possible damage China without inflicting widespread collateral damage on other countries.
Medium-sized economies with a high share of imports and exports in their gross domestic product, including Germany and South Korea, were hit especially hard as they became caught in the cross-fire.
But even the United States, a continent-sized economy that is much more closed to international trade, was hit by the international blowback from the global slowdown.
In an effort to increase negotiating leverage by inflicting economic damage on China, the Trump Administration pursued tariff and other policies that brought the world economy to the brink of recession.
In 2020, coronavirus reinforced the point that an economic shock originating in China can and will propagate throughout the international economic system, impacting on businesses and financial markets worldwide.
Coronavirus is set to inflict much greater financial damage than severe acute respiratory syndrome (SARS) did in 2003 because China’s economic size is so much greater now.
For some western policymakers and international relations specialists, China’s increasing influence and potential for economic disruption is a reason to try to reduce linkages and achieve more separation from it.
But they are almost certainly underestimating the immense costs involved in trying to slow or reverse the shift in economic activity to Asia in general and China in particular.
China’s rapid urbanisation, industrialisation and emerging middle class have been the principal drivers of world economic growth in recent years.
China has replaced U.S. as locomotive of global economy. China accounted for 28% of all global output growth in 2013-2018, more than twice the share of the United States or India, and dwarfing other countries, according to data from the International Monetary Fund.
If China’s economic growth is to be restrained, somehow, it is not clear what would replace it as a driver of rising global incomes.
Prolonged economic conflict between the United States and China threatens to become an extended dampener of global growth.
For many countries, China has become an essential export market and source of their own prosperity, which would be at risk in any decoupling.
China is critical for exporters of raw material, capital goods, high-value branded consumer products and international services such as tourism.
China’s market is therefore crucial for countries as diverse as Saudi Arabia (oil), Australia (gas), Brazil (farm products), Taiwan (semiconductors) and Germany (capital goods).
Some western-based international relations specialists are promoting the idea of (partial) separation of the global economy into U.S-centred and China-centred economic systems for security reasons.
According to John Kemp, Reuters Market Analyst, for most countries in Europe, Latin America, Africa, the Middle East and Asia, prosperity depends on growing exports to China and maintaining good relations with the United States. Forcing them to choose is forcing them to become poorer.
There are widespread (and very strong) perceptions that China is poised to take over USA as the No 1 economy of the world in next two decades.
The waning US global influence and colossal accumulated debt point towards this turning into reality.
As for now, China has surpassed US in manufacturing, trade, exports and has successfully implemented its OBOR initiative, connecting countries in Asia by investing billions of dollars thereby accelerating economic growth in the region.
— The writer is former DG (Emigration) and consultant ILO, IOM.