China’s Year of the Dragon Faces Challenging Economic Headwinds; The US Faces the Return of Trump

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As we edge slowly towards the Chinese year of the Wood Dragon, the world has manoeuvred itself into a strange and dangerous place. 2024 is unlikely to reflect what the people of the “Middle Kingdom” believe the Dragon year may bring: power, nobility, honour, luck, and success. As we enter the final days of 2023, there is little sign of any of these qualities, though we will need all the luck we can get .

While the media turns its pages over to Christmas cheer, and even the quality press focuses on menus for over-bloated meals and dubious forecasts for 2024, I ponder one widely held expectation for this year that was far off its mark: that the economy of China would catch up with that of the United States. China’s failure to achieve global economic dominance, which was seen as president Xi Jinping’s primary goal, has been pushed backwards by economists, and may even fail to reach parity with the United States. Although this is of great concern to the Chinese leadership, this failure is unlikely to lead to any significant changes in Chinese policy.

The United States remains the greatest world power financially, with the dollar by far the most significant global trading currency, with 87 percent of foreign exchange reserves denominated in US dollars and the currencies of its allies. Driven by increased consumer and government spending, private investment, and exports, US gross domestic product grew at a robust rate of 5.2 percent in the third quarter of 2023, according to Commerce Department estimates, though economists anticipate a slower rate of growth in the current quarter, the cumulative effect of higher borrowing rates.

The year has also witnessed the completion of a decade-long transition to a multi-polar world. Long gone are the days of the Cold War between nuclear-powers – on one hand the United States and its Western allies (including some countries in the southern hemisphere and in Asia) and, on the other hand, the Soviet Union and its communist party satellites. Though some commentators still refer to a Cold War in present-day geopolitics, no such thing exists. Russia is no longer a “great power,” though it remains a formidable force in terms of nuclear weaponry and the size of its armed forces, as noted by AIIA Victoria at a recent meeting on the growth and strength of the Russian navy in the Pacific. As an economic power, the Kremlin presides over a relatively small economy propped up by huge revenues from oil and gas. The dissolution of the Union of Soviet Socialist Republics (USSR), better known as the Soviet Union, meant that Moscow lost not only the considerable heft of its satellite states — East Germany, Poland, Czechoslovakia, Romania, Hungary, and Bulgaria – within what was called the Iron Curtain, but also the attention and support of many nations in the Global South who had taken their political lead from the Kremlin.  Now, all the European nations, except Albania, have become members of the European Union and most are strong supporters of Ukraine, once an important part of the USSR but now in an existential fight for autonomy following Russia’s invasion of February 2022.

The world today comprises multiple alliances and groupings, but they are ill-defined, fragile, and likely to shift, despite the existence of many treaties and formal associations. Capital Economics, a London-based think-tank, recently published an interesting analysis of the way it sees the world’s geopolitical groupings. The United States leads the largest group with support from Canada, Australia, New Zealand, all the countries of the European Union except Hungary, and Japan. The second largest group are the unaligned nations that include India, Brazil, Colombia, Mexico, Morocco, Turkiye, and South Korea. There is a further group of countries that lean towards China but are not in its direct orbit, such as South Africa, Iraq, Kazakhstan, and Nigeria. China and its close allies including Russia, Iran, and Pakistan, make up another grouping.  Finally, an odd couple: the United Arab Emirates and Saudi Arabia, both key oil producers and significant members of OPEC but certainly not always the cartel’s strongest supporters.

What are the chances of the China-led group of nations catching up with the US-led group in 2024? Based on the available data, this prospect is very thin indeed. Though their populations are similar, the China bloc only generates 27 percent of the world’s GDP compared with 67 percent in the US bloc. Moreover, in terms of trade, foreign exchange reserves, and direct foreign investment, the US bloc predominates and is likely to retain its lead. The US and its allies accounted for 84 percent of total foreign direct investment (FDI) stock by investor country and 87 percent by recipient country in 2022. 86 percent of global portfolio investment lies within the US bloc. Meanwhile, this number is only 2 percent in China and among its close allies. In short, it will take a long time for China to surpass the US in economic terms; indeed, it may never do so.

There is a certain geopolitical logic to Capital Economics’ groupings, but it has flaws, and it would be a brave forecaster that predicts they will remain in place throughout 2024.  If, as the current opinion polls now strongly indicate, Donald Trump were to win the 2024 US presidential election in November, the United States is likely to lose considerable support in the European Union, which may join the non-aligned group, potentially as its leader. One of the first acts of a second Trump White House may be to significantly reduce or cease support for Ukraine, bringing victory to president Vladimir Putin, the collapse of Kiev, and the return of Ukraine to the Kremlin’s control – in other words, very bad news indeed. Equally, the balance between the two blocs could shift significantly if the Chinese economy were to grow faster than anticipated, though this seems unlikely given the strong headwinds against high growth in China over the next 25 years.

Curiously, America’s economic strength is not being regarded in Washington or in the United States generally as a triumph for the octogenarian president Joe Biden, who faces a presidential election in less than 12 months and, based on polls, continues to fall behind the vigorous challenge of his Republican rival, Donald Trump. Trump appears to grow in confidence every day, despite facing a series of criminal charges. He and his advisers have publicly declared that, should he be found guilty of any or all the allegations, he would use his presidential powers to pardon himself.

In the next few weeks all of us who follow geopolitics will be bombarded with forecasts and predictions for 2024. I am going to be cautious. We can be reasonably optimistic about the world economy, but I fear the chances of China realising its dreams of the year of the Dragon will not be fulfilled. What I hope is that the American people in the end defy the polls and do not offer another term to the odious and dangerous Trump.

Source : International Affairs