2019: a new order

The hegemonic shift from West and East and slowing global economic growth are probably some of the underlying issues that will shape 2019….these are new times.

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The IMF global economic outlook projection for 2019, is an economic slow down in which its expects global economic growth to hover at about 3.7%, 0.2% lower than its initial forecast of April 2018. Goldman Sachs isn’t as generous as their estimated growth for 2019 stands at 3.5%. Outlooks for 2019 appears pessimistic to a worrying degree, as some believe the world would slide back into a depression of the scale experienced in 2008.

I personally lean more towards the low growth scenario than the worse case. There are some seismic shifts that could disrupt the global economy no doubt, but I just cannot see these shift tipping the world to a recession…well, at least not yet. But that is not the focus of this article. There is a consensus that the world economy would slow down. The US economy has been growing for almost 10 straight years. Consistently growing like this should make its economy mature enough for diminishing returns to set in. The Chinese economy also is experiencing a downturn amongst other things, dwindling consumer spending and a real estate bubble. Disruption follows a slowing global growth and it is the economy with the right things in place that will take charge once that phase is over. And that is what interests me: the current rumble that could usher in the move of the global hegemony from West to East. In 2019, this will become evident.

Cracks in the Western Hegemony: The EU

Something that’s becoming more apparent is, Western economies are losing relevance in the global scheme of things. Anti-immigration sentiments saw ‘leave’ as the result of the 2016 Brexit referendum and the emergence of the right-wing Presidential candidate Donald Trump as the President of the United States of America. A fallout of this populist rhetorics is the weakening of the soft power Western economies enjoyed.

Let’s start by looking at the European Union (E.U.). The Brexit referendum revealed fault lines in the construction of the EU. In the need to coordinate economies, it revealed how much sovereignty has to be abdicated to the European Union and the fragility of this arrangement.

A simple way I view the EU and its relationship with the United Kingdom is like this. The primary economic zone of the EU is the Schengen zone. This zone contains economic powerhouses like Germany, France, and Spain. Resources move freely across the 27 countries that make up the zone and are geared towards efficient production of goods and services that meet certain predefined standards. In my simplified view, lot of these countries survive on intra-regional trade and trade with former colonies, but trading relationships with larger economic blocs like the United States, Japan, China, India remains primarily managed from the United Kingdom. The United Kingdom (London in particular) presents an ideal environment for these countries to interact because of historically established trade routes, availability of required human resources to execute transactions and most importantly, the prevalence of the most widely dispersed international language, which is English. Though agreements and regulations of trade are framed in Brussels, London remains the melting pot for all in Europe.

With Brexit, the European Union would need to replicate London within its larger cities in other to maintain its global influence at current momentum, and that will be extremely difficult. Estimates believe it will take more than a decade (or two) for any other city to evolve its infrastructure into what London can currently provide to the international market. And this is not helped with increasing anti-immigrant sentiments brewing all over Europe. London, on the other hand, will need the support of economic powerhouses like it had within the EU to retain its standing. The UK is trying to reconnect with the commonwealth or create new trading relationships. But times have changed. With Brexit, the magic behind the city of London might begin to disperse and it could lose a significant share of its economy and global relevance.

March 29, 2019 is when the United Kingdom officially leaves the EU. This dissolution would impact both parties and dampen economic growth as the existing pieces attempt to reassert themselves in the scheme of global politics.

Cracks in the Western Hegemony: Beyond the Atlantic lives Uncle Sam

The election of President Donald Trump has not exactly increased America’s popularity across the globe, especially amongst developing economies in Africa and South America. Beyond his dirty past, his agenda seems riddled with inconsistencies, lies and a far-right agenda beyond what is expected of the president of the world’s most influential country. And what makes this worse is, the president has not been exactly good with the economy.

He signed into law a tax reform plan, effective December 2017. In summary, this reform aims to increase the post-tax earning for economic players, but it is mostly geared to benefit the super-rich and big businesses. The argument is more money in the hands of the economic agents should stimulate growth and boost the economy. Experts believe that this plan should stimulate growth in the short term generating only about 0.35% in 2018. The effect should diminish in later years. Bipartisan criticism forsee this to further sink America into debt. As of September 2018, the United States national debt stood at $21.5 trillion. The tax is expected to increase the national debt by as much as $1.5 trillion over the next 10 years.

In 2018, President Trump imposed tariffs on specific goods imported from the EU, Canada, Mexico, and China. All parties retaliated imposing similar tariffs on US imports into their respective countries. On China, however, the president had a tougher stance that initiated a trade war. He claimed the increasing tariffs were to address China’s “longtime abuse of the broken international system and unfair practices”. To ‘fix’ this, the US imposed a 10% tariff hike on imports from China, an amount that should increase to 25% early 2019. China retaliated by the imposing of tariffs to an equal magnitude on American imports.

China America trade accounts for around 0.1% of global trade. Ancillary services that support this trade relationship will feel the impact on a higher scale. Stock markets indexes like the NASDAQ and DOW already recorded plunges in values on the 2nd day in 2019, and this will have a reverberating effect across the globe. Though China stands to lose from the trade, I feel the US will be more affected as the drop in trade that will follow could signal a reduction in the influence its wield in the region.

I think the cumulative impact of these tariffs could drive up consumptions cost and also the cost of manufacturing for Americans. A higher cost of manufacturing would mean a drop in global exports as potential consumers switch to cheaper alternatives. Apple already announced it is expecting to lose $9 billion in the first quarter of 2019 as sales dip in response to factors that include macroeconomic challenges and dwindling global sales.

With emerging cracks in the Western hegemony, China is stepping up to fill the gap.

The Dragon from the East

China has been very busy in recent years particularly in pushing forward its Belt and Road Initiative, a network of rail and shipping routes to deepen the connection with the country and its trading partners. To support this expansion, and guarantee the safety of their exports, the country has increasingly militarised the South China Sea.

It is easy to see the correlation with the silk road trading route that connected China (during the Han Dynasty) to Europe. Amongst other things, the euphoric feeling that evokes earns the country the buy-in from its citizens. Such buy-in, provide legitimacy of leadership, something that is seriously lacking in the current political climate of the West. As the United States retreats in global dominance, and the EU attempts to reassert itself, China has been working. And knowing China, they play long games.

Tacts moves made by China could include:

• Investment into the Hambantota Port of Sir Lanka (a port conveniently located very close to a major trading route between Asia and Europe). This action has been supported by the increasing militarisation of the South China Sea. By this, China is positioning to secure the transportation of its export to their various destinations. Such actions are usually followed by the establishment of military bases along trade routes, thereby expanding influence in said regions;
• China is constructing the largest airport in the world, which should be commissioned in 2019. Supporting such initiatives will be an increase in flights and the opening of new routes that flights directly to Beijing, further connecting China to its trading partners;
• China has been rather generous with its disbursement of loans, even to high-risk countries. This article that examines the relationship between China’s Road Belt policy and Chinese loan issuing strategy stressed concerns on how “debt problems will create an unfavourable degree of dependency on China as a creditor”. China has been known to use such dependencies to their advantage;
• On the border to the North, China has been nurturing its Sino-Russian relationship. This article notes that “ Moscow and Beijing share a common interest in weakening U.S. global influence and are actively cooperating in that regard”. Global influence could be exerted by manipulating allies. With the establishment of Nord Stream 2, a pipeline that will take natural gas from Russia to Germany, the EU’s leading economy, deepens dependencies on Russia as a source of Natural Gas. A tighter Russia/Germany relationship could mean a silent Germany (and invariably the EU) on issues they otherwise would have ethically stood against, especially with the current leadership of the United States.

With the adequate tact in place, changes of success are enhanced when tools are available for your trading partners to relate in familiar mediums. Analyse these:

• Increased establishment of Chinese centres around the world to encourage the learning of Chinese and its culture in the targetted regions;
• Testing payment of oil with the yuan;
• The growing use of the Chinese yuan as an international foreign reserve.

China invariably is building power both (of the soft and hard forms) from the bottom up. And in the event that China sinks into recession (which experts predict is eminent in the next three years), the economic framework in place will prevent a total economic collapse. Unless the recession threatens the political power in place, the country possesses enough buffer to bounce back in a very short time.

I even feel that the China-US trade wars could be a blessing in disguise that further extends China’s influence in global politics. With the reduction in US trade, the country could deepen relationships with existing trading partners and with reliance on its expansive infrastructure to do so. Deepening relationship could serve as a survival strategy and with the 68 countries within its Belt Road Initiative, there is extensive breath to cover. There is also the dark option of converting debt into strategic assets. However you look it, the cards for 2019 seem to favour the People’s Republic of China.

The New Order

I believe 2019 will be the year China’s global dominance will be firmly established especially as the Western hegemony dismantles. This tectonic shift in the global order will create a new set of winners and losers. I expect a global economic shift eastwards, even as China solidify its grip on global manufacturing (to include high tech electronics and mobile phones) and e-commerce.

The trade war with the US will, however, dampen current efforts in areas like Artificial Intelligence. But with time, home-grown solutions supported by an increasing eastward flow of investment would provide a more rewarding return on investment, especially in industrial applications of Artificial Intelligence.

A Chinese global dominance means a world where countries are free to pursue a variety of political and developmental options that they believe better serves their mould. As long as a mutually beneficial pact can be achieved, no umpire would stand to question the ethics behind a trade relationship. This serves its purpose sometimes. By definition, Rwanda is under authoritarian leadership and its leader is considered guilty of human right abuses. But the country is progressing, partially aided by a technical relationship with the Chinese who do not meddle in their national affairs.

A downside to the Chinese dominance might be the increasing appeal of authoritarian leadership in emerging democratic nations and systemic undermining of the rule of law, to degrees not previously possible. Things might be a little bit different in established democracies, as the China dominance machinery moves to deepen relationships with powers behind the scenes and institutionalize them. There is also the threat of a country falling into a debt trap with China and opening up the country for possession of asset strategic to the Chinese vision. Sri Lanka’s port acquisition is a good example of how China can use a non-performing debt to its advantage.

The global order is changing. We are entering a new world that will be defined by new political rules. National/selfish interests will trump negotiation objectives as there will no longer be umpires to ensure other ethical concerns are considered in the trade.

To wade these times, players must be ready to deploy the best of their resources in identifying opportunities and ensuring terms of engagement are favourable. The former rules are losing their sting. We must begin to look at the world, differently.