'Globofriction'
The succession of momentous events that were supposed to usher in a change of era is exhausting and frustrating. The financial crisis was supposed to act as a catalyst for shifting the economic paradigm. COVID-19 made us see the value of life in society and should have moved us away from individualism and materialism. The constant warnings about climate change were supposed to guide us toward a sustainable relationship with the Earth. And technological change was supposed to change everything. However, it seems that changes are rather scarce, except in one area. At the intersection of economics and geopolitics, there has indeed been a shift in the script that places us in a new era. The trade tensions of recent months are its most visible face.
The geographical distribution of productive capacity has changed radically in recent decades. In 2000, the European Union was the leading economic market (measured in terms of GDP at purchasing power parity), closely followed by the US. Then China and India were far behind. Today, just 25 years later, China far exceeds European and American production (by more than 30%). It won't take long for India to reach this goal if current trends continue.
In economics, size matters, but it's not all about size. China, in addition to increasing its productive capacity, has also transformed it to the point of being at the technological frontier. India is lagging behind. These economies no longer just stamp the logos of major Western brands on the chests of polo shirts and manufacture toothbrushes and cologne, to name a few examples of products that require limited technological capacity. China also leads the production of the most advanced virtual reality headsets and glasses. The most modern cars, the symbol to which the former Western middle class aspired, are no longer produced in either Europe or the US. The Chinese, like many Europeans and Americans, also feel that they can be driven into the future from their homes.
The change in the Chinese stock market reflects this transformation in its productive capacity. Companies related to sectors typical of a mature and advanced economy, such as technology, telecommunications, healthcare, and consumer goods, represented 19% of the value of China's benchmark CSI300 index in 2008. Today, they are close to 45%. The Economic Complexity Index developed by the Harvard Growth Lab offers a more precise view of the change taking place. This index measures the diversity of products that each economy exports and the technological capabilities required to produce them. In 2000, China was ranked 30th, while the US was in 6th place. By 2023—the latest data available—China had climbed to 16th place, just behind the US, which had fallen to 15th. China is competing.
China's rise has been accompanied by the strengthening of ties between different economies: globalization. The example usually used to illustrate this is the evolution of global trade. In 2000, it represented 50% of global GDP, and by 2008, it had increased to 61%. Since then, the weight of trade has remained close to 60%, growing at a similar rate to global GDP. It has not declined.
What has happened in recent years, as competition and friction have intensified, is a reorientation of trade flows through countries that are neutral or politically close to each economic power. For example, a significant portion of China's exports to the US, rather than directly, now travel through Vietnam or Mexico. But the ties between the two economies remain intense, and they continue to do so in other areas as well. Direct investment by American companies in China has continued to grow, with the Chinese being one of the main holders of American financial assets.
Thus, increased competition on a global scale makes friction between the different blocs recurrent. And the feeling that whoever leads this new economic cycle linked to new technologies will gain an advantage that could last for decades is likely to intensify them. But the ties that unite the different powers are intense and difficult to undo. The tension between both forces will probably increase. globofriction is insured.