By Neville Bennett
There have been few periods in global economic history which are as dynamic as those presently shaking and formatting the world system. The rapid decline of the West is creating a vacuum which the BRICs especially are moving into.
The West in 2007 produced about 55% of global GDP - it now produces only about 45%. A telling fact is that for the first time emerging market IPOs have attracted more capital than those in industrialised country markets. Emerging markets will grow at about 6.5% while the “West” may reach 2.4%.
Usually a dominant but declining great power resists change by many pressures ranging from financial to political. Political pressures include building up allies and can involve conflict. The US presently seems too involved in the Middle East to confront China but there are signs of a trade war developing.
I think that globalisation is showing signs of wear and there could be rapid change into a world where each nation begins to take special measures to protect themselves. This is happening in currency markets and has hindered further progress on the reduction of tariffs, especially in agriculture.
Feeling vulnerable
There are signs that many societies feel that some protection is needed against the uninhibited capital flows which, among other things, bring great volatility to foreign exchange markets. Bernard Hickey’s opinion piece is a brilliant example of an intellectual’s dilemma: a nationalist struggling with the consequences of globalisation.
Globalisation has depended on a sense of security. With the US policing the world, as Britain did in the 19th century, nations and business could assume the continuation of peace, and the orderly working of institutions and markets. Markets were the most important institution in the sense that nations and business could be certain that they could access resources world-wide at the going price and sell their goods and services on the same basis as most other nations/businesses.
There were some anomalies but markets were improving and access was adequate for most nations’ needs. There were risks such as Russia closing its gas pipeline to Europe or renewed conflict in the Gulf disrupting oil supply. But these risks could be guarded against. But China is a student of history and it knows that the West is in a position to strangle it, just as Japan in 1941 was strangled by the West freezing accounts and denying the sale of strategic materials.
There is too, a shortage of materials, best expressed as “peak oil” or “peak water”. Commodity suppliers face rising costs as ore grades have declined. Food is also a problem as land for food is contracting as more industrial crops are grown for ethanol etc. More fertilizer is necessary, and climate change has increased the number of climate events which impact on food stocks and supply.
There are reports this week that the Amazon is running dry and stocks of soy bean and coffee are not assured. Russia’s wheat crop has been scorched by the worst drought in history. India is very worried about food supply, and South Korea and Taiwan are leasing foreign land to guarantee production.
History's perspective
While I do not see history repeating itself, I am reminded of the 19th century transition from informal to formal empires and the race for control of resources. Through the 1850-70’s the British and French tended to avoid colonies unless there was a pressing case.
Except for strategic harbours and the like, they preferred to benefit from an “informal empire” where they controlled client state’s foreign relations, got trade access, safety for missionaries etc, and then reaped the advantages of trade, banking, insurance and services without the cost of administering a state.
As allies in the 1850’s, they attacked both Russia and China to enforce their views. Britain tried to force low tariffs universally, but matters changed when Germany and the US resisted. Germany demanded colonies too. There were few African colonies, save coastal enclaves in 1870; by 1885 it had been pegged out, and any gain was deeply resented by competitors. Imperial owners placed huge tariffs on their possessions and claimed advantages for themselves. Some of that dog-eat-dog attitude is reviving.
Trade wars
Today, states are trying to lock up access to key resources.
The obvious push is by China which has made a vast number of contracts on oil and gas. The most significant move may be the construction of a pipeline from Russia to China. This is fascinating in geo-politics: old rivals are burying the hatchet and working to further self- interest by cooperation.
China provides the capital and Russia the gas at a contract price. It lessens the threat of the US cutting China’s energy supplies by a blockade in the Malacca Strait. It may be doing China an injustice to see all of its investments as strategic. A company which bought into Canterbury's Synlait also bought control of a British biscuit maker.
The problem is that China is accumulating vast amounts of foreign exchange. For a long time it recirculated that cash through US bonds. Then the yield fell. China has better opportunities elsewhere. So it competes for Canadian potash or Australian iron whenever the resource comes into play.
This is competitive; India is also trying to get long-term coking coal access, hence Adani investing US$4 billion in Queensland today. I have been following the lithium story for some time: it is a deadly battle in which both China and Japan are somewhat insecure about getting regular supply of this essential ingredient in many batteries. I suspect the rare earth minerals war will really hot up.
Japan is outraged that China has limited exports. Japan had made contract with Lynas for rare earth mineral supply, but it needs more. Where can it get it?
Can it risk not being able to produce cutting-edge goods because of shortfalls in mineral supply? I think not. Meanwhile, as I foreshadowed in my recent New Normal column, just about every country is trying to increase exports. The fact the not everyone can win, does not prevent states doing all they can in order to impress their electorates. The Wall Street Journal said in a piece entitled "A fight to be weaker":
At least half a dozen countries are actively trying to push down the value of their currencies, the most high-profile of which is Japan, which is attempting to halt the rise of the yen after a 14% rise since May. ...
To counter the yen's rise, Japan sold some $20 billion worth of its currency, which traders said was it’s biggest-ever effort in a single day. The US has also embarked on a dangerous road. Its House of Representatives enthusiastically passed legislation condemning China’s foreign exchange practices.
The measure allows the US to levy tariffs on China. The measures may not become law, but China has indignantly said the measures would breach World Trade Organisation rules.
Observers feel that a trade war would hurt US exporters. I think this reinforces a trend of US-China rivalry that could have serious implications.
* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR. neville@bennetteconomics.comwww.bennetteconomics.com
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