Globalization is breaking down and a new world order is forming, says economist Noah Smith in this thought-provoking essay. He posits that China and America once benefited from a mutually advantageous trade relationship: The former grew its economy while the latter profited from technology and expanded production. Yet China now recognizes that its openness to the West keeps it from economic self-sufficiency. Smith convincingly argues that a shift in great-power alliances centered on trade is ushering in a new configuration of geopolitical alliances.
- After the Cold War, world leaders believed that political harmony would result from close commercial ties.
- Sino-American commercial symbiosis gave way to increasing tension between the two countries.
- The great-power trade alliances will shift.
After the Cold War, world leaders believed that political harmony would result from close commercial ties.
The United States shaped the new world order in the years following the Cold War, believing that globalization would mitigate conflicts and lead to greater geopolitical freedom. To this end, America and Europe supported China’s entry into the World Trade Organization, turning a blind eye to China’s currency manipulation and its shoddy labor and environmental policies. By 2017, China had become the dominant global manufacturer and supply chain hub.
“The global economy underwent a titanic shift. Whereas global manufacturing, trading networks and supply chains had once been dominated by the US, Japan and Germany, China now came to occupy the central place in all of these.”
The new state of affairs appeared to benefit almost everyone. American manufacturers increased their profitability by offshoring production to China, while US retailers and consumers took advantage of low-cost imports. US financial services firms gained from Chinese purchases of US assets. America and its allies became a research park for Chinese products, while US manufacturing employees lost their jobs. In turn, China’s rulers focused on growth and eased their domestic social control by opening the economy to foreign investment, tourism, labor and ideas.
Sino-American commercial symbiosis gave way to increasing tension between the two countries.
Some observers termed the mutually beneficial US–China relationship “Chimerica.” Then, in the 2010s, fissures began to appear on both sides. China’s trade and manufacturing hegemony came with a cost, as its leadership recognized the trade-off between globalization and internal control: Foreign direct investment meant that economic sway could go to overseas firms, and China risked becoming a mid-level player in the global supply chain. In the United States, workers were angry about the low-wage occupations that replaced better paying manufacturing jobs. US elites’ support of globalization gave way to nativism: The Trump administration put steep tariffs on Chinese imports as well as restrictions on Chinese investment.
“Now Xi seemed to feel that China had extracted all it could from the Chimerica system, and that the benefits no longer outweighed the costs.”
China began to onshore higher value intermediate-goods production. Foreign direct investment in China declined, and trade as a share of the Chinese economy fell. China’s economy soared in 2020 and 2021, as its initial response to the COVID-19 pandemic appeared superior to that of the United States. China also saw US racial strife as further evidence of a declining America. Chinese president Xi Jinping felt the time was right to turn inward, restrict Western cultural trends and move ahead on his plans for China to become a world hegemon.
The great-power trade alliances will shift.
The uncoupling of the United States and China signals the end of one economic world order and the slow and unsure beginnings of another. The shift will set in motion a reshuffling of international alliances.
“In any case, this vision – a largely but not completely bifurcated global system of production and trade, with two technologically advanced high-output blocs competing head-to-head – seems like the most likely replacement for the Chimerica system that dominated the global economy over the past two decades.”
Offshoring and supply chains will persist, because the system is too entrenched, but trade will split into blocs. America could form its own group of allies among democratic countries like India and Vietnam. Economic ties between the United States and China won’t be severed, but, given the inevitable fragmentation, less symbiosis and more sclerosis will ensue, as geopolitical competition heats up.
About the Author
Noah Smith blogs at Noahpinion. He is a former assistant professor of finance at Stony Brook University and Bloomberg columnist.