Countries enacting economic sanctions and counter-sanctions, regional trading blocs emerging, supply chains disrupted, and international institutions such as the World Trade Organization under pressure; the world economy is not what it used to be. The happy days of an open global trading system are over, as the economic order undergoes a profound transformation. Several factors lie at the heart of this change: the rise of China, the “securitisation” of the economy, the pandemic, the need to rein in climate change, and a long-overdue social rebalancing.

China’s economic success story has reshaped the global power constellation. After all, the economy is the fundamental basis of power, as well as military and geopolitical strength. Countries with successful economies have greater means to invest in technologies and infrastructure and more capabilities and resources at their disposal. It was America’s economic and technological superiority that gave it the edge in the Cold War. Now that China has become an economic giant, it naturally also challenges the United States in hegemonic terms.

For several decades, the world economy had a clear division of labour. The United States was the world’s unassailable economic leader, while China was the workshop of the world, producing cheap products for Western markets. But it was illusionary to think that China would remain content in that role. The People’s Republic has become an economic magnet that is slowly displacing the US. While in the 1980s, China’s share of world trade amounted to a meagre 1 per cent, that figure has risen to about 15 per cent.[1] China is the largest producer of hundreds of industrial goods and a key exporter of important natural resources. Expected to drive a third of worldwide growth and with its share of global GDP increasing to 18 per cent. China is once again becoming the economic centre of gravity.[2]

Economic success also leads to technological progress. Beijing is investing in emerging technologies from artificial intelligence to quantum computing. The aim is to dominate the industries of the future, the very areas from which the US and Europe derive their economic competitiveness. Numerous Chinese strategies, ranging from the Made in China 2025 strategy to the 2021-2025 Five-Year Plan, highlight the need to achieve technological leadership. China aims to become a technological leader by 2035 and the world’s leader in science and innovation by 2050.[3] Technological leadership will also bring military advantages.

China’s geopolitical rise

Beijing needs a strong, high-tech economy to provide its citizens with prosperity and assure Communist Party rule, but also to become a great power and win influence. The Chinese Communist Party believes that the Middle Kingdom is facing a once-in-a-lifetime chance to surpass the US and become the world’s hegemon. It considers China to be in a “period of strategic opportunity”, the ideal time to take a more central role in the international arena.[4]

China’s economic influence translates into geopolitical leverage. China is the largest trading partner for more than 130 countries as well as the EU, where it has recently surpassed the US in terms of total trade. Numerous trade deals and its Belt and Road Initiative are cementing this shift, contributing to the establishment of a Chinese sphere of economic influence. The strategy is to marginalise the US in the broader struggle for geopolitical hegemony but also to enter regions where the US is leaving a vacuum, such as Afghanistan and central Asia more broadly. North America is the only continent not included in China’s Belt and Road Initiative. China is following the principles of Sun Tzu’s Art of War: avoid the main power, penetrate the open spaces. It is playing Wei qi, the board game better known as Go, in which the strategy is to encircle territory and control empty spaces, rather than attack your opponent head-on as in chess.

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China uses its economic leverage to influence and punish countries for behaviour it considers harmful to its interests. Norway was frozen out for awarding the Nobel Prize to Chinese dissident Liu Xiaobo in 2010. Mongolia suffered after a visit of the Dalai Lama in 2016. The Philippines faced consequences following tensions in the South China Sea in 2014, as did Australia after demanding an independent investigation into the origins of Covid-19.

China is making a run for the commanding heights of the world economy. It represents a challenge to Western and particularly American dominance of the existing economic order. Ideologically, it is also a clash between two different systems of political economy – the Chinese authoritarian state capitalist system and the Western liberal, democratic free-market economy.

The world economy has become more Sino-centric. The centre of economic gravity has moved away from the transatlantic basin back towards Asia. The US-China trade war is therefore not just a trade war. Nor was it a Trumpian obsession. President Joe Biden, after all, has not touched Donald Trump’s China tariffs. Instead, it is one theatre in the grander competition for hegemony. US sanctions are meant to halt China’s economic expansion. Likewise, US export controls on key technologies are intended to constrain China’s development and cut it off from high-tech supply chains.

The same holds for new initiatives, such as Biden’s Build Back Better World and the EU’s Global Gateway. These connectivity proposals, designed to increase the ties between the US, EU, and countries in regions such as southeast Asia and Africa, are meant to push back against the influence of China’s Belt and Road Initiative.

China’s rise is therefore leading to a battle over the future world economic order. Simultaneously, there has been a wider trend towards the securitisation of the economy.

Weaponising interdependence

Economic relations and interdependence have been weaponised. In the energy sphere, Russia has used natural gas as a means to exert pressure on Ukraine, as well as to strongarm Europe into issuing a permit for the Nord Stream 2 pipeline. China has used its monopoly on critical raw materials, such as rare earth minerals, in the same way. In a diplomatic conflict with Tokyo, Beijing banned rare earth exports to Japan.

When it comes to finance, the US has used the dollar as a weapon against Iran, shutting Tehran out of the world’s most important financial network, and barred Americans from investing in companies with links to the Chinese military. Several firms on the New York Stock Exchange have ended up de-listed. The US even forced a Chinese company to sell its stake in the gay community dating app Grindr, arguing that potential Chinese government access to sensitive user information was a national security risk.

Trade wars, sanctions, and technology blockades – a new economic order is emerging. 

This is what decoupling between the US and China is all about. Neither wants the other to control economic choke points. As part of its “dual circulation” strategy, China wants to decrease its reliance on foreign economic materials and markets, such as semiconductors and Wall Street, while increasing other countries’ economic reliance on China. Beijing, for example, does not want Chinese companies listed on US stock exchanges for fear of new disclosure requirements. So, it is discouraging Chinese firms from listing on Wall Street, while opening the door to foreign direct investment.

Both the US and China have acknowledged that the economy is an essential element of their security. While Washington has stressed that “economic security is national security”, China has put forth its concept of “comprehensive national security”, which frames economic affairs in security terms.

Trade wars, sanctions, and technology blockades – a new economic order is emerging. To paraphrase Clausewitz: the economy has become the continuation of war by other means. This is what Edward Luttwak, the father of geoeconomics, called “the logic of conflict, translated in the grammar of commerce”.[5] In Europe, French president Emmanuel Macron in particular has understood this new reality, stating in a speech on defence policy that we must “confront the direct and indirect effects of globalisation on our sovereignty and security”, that the “control of material and immaterial resources and flows is key to new power strategies”, and that the line between competition and confrontation is now “completely blurred”.[6]

Covid-19, the climate crisis, and social rebalancing

Three more factors have emerged that are restructuring the world economy.

The first is Covid-19. The pandemic has highlighted the vulnerability of a purely efficiency-driven globalisation based on just-in-time production. When assembly lines grind to a halt in China, it has repercussions all around the world. “The kind of globalization of putting everything where production is most efficient is over,” Jörg Wuttke, president of the European Chamber of Commerce in China, has stressed.

Resilience has therefore become a key concept. Companies are looking for new production models that are more resistant to disruptions and stress. The current situation, in which many countries face supply-chain disruptions because of surging post-lockdown demand, highlights how the current system lacks the resilience to withstand sudden shocks and swings. Given geopolitical tensions and weaponised interdependence, as well as the rise in dangerous climate events and other accidents such as the blockage of the Ever Given container ship in the Suez Canal, the likelihood of more regular disruption is increasing.

Simultaneously, the pandemic has shown European countries’ extreme dependencies on many essential goods, particularly medical products. France, for example, relied on China and other Asian countries for 80 per cent of pharmaceutical precursors.[7] Governments are therefore asking themselves how they can diversify their supply chains to ensure the security of essential products for their citizens. Japan, for instance, has launched reshoring programmes hoping to entice its companies to shift their production back to Japan, or at least away from China to other countries.

The last five years have seen a steady swing towards a greater role for the state. 

Second, the global economic order is facing up to the climate challenge. The necessary restructuring ranges from making industrial production processes climate-friendly and decarbonising the global transport system, for example by using green hydrogen in air transport, to enabling more localised production and reshoring some industries to reduce shipping routes. Advances in robotics, automated systems, and new technologies, such as additive manufacturing and 3D printing, are making reshoring more feasible.

Climate-proofing the international trading system comes with its own challenges. The EU’s plan to put into place a carbon border adjustment mechanism would add a tariff on products coming into the EU from countries that lack adequate climate policies such as carbon pricing. Many countries, particularly China, have criticised the plans as green protectionism and it is uncertain whether the system will conform with World Trade Organization rules. In this context, the EU’s plans to add a climate dimension to trade are increasing tensions and putting more strain on the overall system.

Last but certainly not least, we are seeing a social rebalancing of the world economy. Over the years, income inequality has widened in many countries. Digital giants such as Amazon have achieved quasi-monopoly status, stifling and buying out the competition. Increasingly, government leaders have realised that it has swung too far, and that they need to pivot away from neoliberal economics by tackling inequality and reining in big business. In Japan, Prime Minister Fumio Kishida, in office since October 2021, has promised a “new Japanese capitalism” based on a “virtuous circle of growth and distribution of wealth”.[7] In the US, President Biden has put forth a 1.75-trillion-dollar spending plan, called for a “worker-centred trade policy”, and signed an executive order reshaping antitrust laws to fight anti-competitive practices in Big Tech. In China, Xi Jinping’s new narrative is centred on “common prosperity”, cracking down on business (and internal opposition within the party) and aiming to lessen inequality. In the United Kingdom, even Conservative Prime Minister Boris Johnson has increased taxes to pay for social care.

Europe in a brave new economic world

The world economic order is in the grips of a great transformation. It is, on the one hand, becoming more geopolitical and a battleground of the US-China hegemonic conflict. On the other, it needs to become more resilient to supply shocks, climate-friendly, and fair. Both of these points recalibrate the interplay between government and market forces. The last five years have seen a steady swing towards a greater role for the state. It went full tilt with the pandemic, as states stepped in to save health systems, social security, and the economy. Post-pandemic, the question is what the future role of the state in the economy will be. Such is the fear of China beating the West at the economic game, there have been calls for Western economies to copy

Chinese methods and take on a greater role in the economy. However, the West’s economic success was built on a balance between an open economy in which companies can compete freely and a state that promotes technology and innovation, provides social safety nets, and puts in place rules to nudge the economy in certain directions.

While this balance has been lost over the last decades, Greens have a chance to revive this approach by promoting an economic strategy that recognises the transformations the world’s economic order is undergoing. Every policy should ideally be considered from the viewpoint of geopolitics, economic resilience, social balance, and climate. For Greens, who have long thought of issues transversally, the current moment is an ideal opportunity. They bring extensive experience with the Green Deal and the promotion of new technologies and innovation. They have also fought for social issues and pushed for reshoring policies to bring back industry and make Europe’s economy more resilient.

The German Greens have a particularly important role to play. As likely partners in a three-party coalition, Europe’s largest economy, together with the Liberals and the Social Democrats, they will have to develop an economic transformation strategy that is green, free-market-oriented, and socially balanced (as well as resilient and geopolitical).

Achieving this will not be easy. Discussions between the three parties will be tough, particularly when it comes to investment. The Greens favour a loosening of Germany’s debt brake to promote investments in green infrastructure, while the Liberals want to keep it firmly in place. But out of this friction, innovative proposals could be developed that find new ways to deal with the challenges our economies are facing. That is, after all, what is needed. The economy is in the grips of a great transformation; managing it will require new thinking.

[1] Alessandro Nicita and Carlos Razo (2020). “China: The rise of a trade titan”. UNCTAD, 27 April 2021.

[2] Wang Tianyu (2020). “OECD: Global GDP projected to rise by 4.2 per cent in 2021, China to account for over a third of that growth”. CGTN. 2 December 2020.

[3] Robert Lawrence Kuhn (2021). “Technology and innovation in China’s path to 2035.” CGNT. 27 September 2021.

[4] Helena Legarda (2021). “China’s new international paradigm: security first”. Mercator Institute for China Studies. 15 June 2021.

[5] Edward Luttwak (1990). “From Geopolitics to Geoeconomics: Logic of Conflict, Grammar of Commerce”. The National Interest. 20. pp. 17-23.

[6] Catherine Abou El Khair (2020). “Coronavirus : Bruno Le Maire veut réduire la dépendance de la France aux approvisionnements chinois, mais le peut-il ?”. 20 Minutes. 21 February 2020.

[7] Daisuke Akimoto and Larissa Stünkel (2021). “What is Kishidanomics”. The Diplomat. 14 October 2021.

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