With a hot war raging in Europe and a cold one escalating between the US and China, the rest of the world is under pressure to pick sides. Political leaders are imposing new economic priorities, as they battle to avert shortfalls of vital commodities — from natural gas to semiconductors — and use the ones they control as leverage.
For the titans of commerce gathering in Davos this week, all of this marks a shift away from the era of ever-closer global ties, when big business thought it had succeeded in making the world flat. Now it’s in for a bumpier ride.
BloombergDebate at the World Economic Forum will revolve around these emerging geo-economic risks. Some center on key goods or markets – like the worldwide focus on energy security since Russia’s invasion of Ukraine, or the US campaign to deprive China of cutting-edge technology. Others are geographic, above all the threat of conflict in Taiwan.
“We’re living in a more fragmented world that includes financial fragility, so one thing that is clearly on everyone’s mind is: Where to invest, and how to invest, in a more multi-polar world,” said Karen Harris, New York-based managing director of the Macro Trends Group at consulting firm Bain & Co., before flying out to Davos.
Here is an overview of some of the likely hotspots this year in the increasingly fraught world of economic statecraft.
Weaponised Energy
Energy is at the heart of the economic war that’s pitting the US and allies against Russia. Both sides have sought to weaponise it, and there’s potential for further turmoil in 2023.
Russia still has buyers, notably India, China and Turkey. It also has the option of shutting down supply altogether, which would wreak havoc in oil markets — threatening a repeat of last year’s crude-price spike that pushed inflation higher everywhere.
BloombergIt’s not all about crude oil. Similar curbs on refined Russian products like diesel are due to kick in next month, and some Western officials worry that they could trigger shortages.
And the shutdown of Russian natural-gas pipelines has left a big hole in global supply. So far, a warm European winter has helped make the shortfall less acute, and bring gas and power prices down. Still, this year will likely see nations scramble to lock in scarce shipments of liquefied fuel.
The Battle for Chips
Semiconductors, crucial components of everything from electric cars to ballistic missiles and new artificial intelligence technologies, are emerging as one of the global economy’s most important battlegrounds.
Over the past year, the Biden administration has wielded various tools including export controls to prevent China from buying or manufacturing the most advanced chips. It’s also launched a $52 billion subsidy program for the domestic chip industry, to bring manufacturing capabilities back home.
BloombergThe US says its blunt-force restrictions are aimed at Chinese military capabilities, while Beijing says they’re part of a wider effort to halt China’s economic advance. Whatever the case, American allies will need to be on board for the curbs to work. The Netherlands and Japan, which host some of the most advanced chip firms, have already agreed.
Compliance will come with a cost, as the firms that make chips or machinery to build them may lose out on the vast Chinese market. Meanwhile Beijing is ploughing cash into its own semiconductor industry — though cutting-edge technologies will likely be tough to replicate — and could seek to retaliate if restrictions are tightened.
War over Taiwan?
US and European leaders fear the next front in the new cold war — which could turn hot — will be Taiwan.
China has claimed Taiwan as its own since the ousted nationalist government in Beijing fled there after the communist revolution. The Pentagon said recently it sees no sign of an imminent attack. But it expects more of the aggressive behaviour that’s become a pattern since former House Speaker Nancy Pelosi triggered a furious reaction from Beijing by visiting the island in August, with an increase in military drills and intrusive actions by air and sea. President Joe Biden has promised to send American forces in the event of an invasion, something he’s ruled out doing in Ukraine.
On top of the obvious risks of a direct conflict between superpowers, there’s an economic dimension to the standoff. As home to the world’s largest chip maker, TSMC, Taiwan is critical to all kinds of global supply chains. Even an escalation short of war, like a Chinese blockade, could set off a colossal domino effect.
A Chinese move against Taiwan, and the likely Western response, “is a contingency that everyone is planning for,” says Tim Adams, chief executive of the Institute of International Finance. “Every single firm is gaming out what those sanctions would look like, and who would be an ally to the US.”
‘Friendshoring and Subsidies’
Governments are increasingly willing to use their economies as tools of statecraft. On offense, that might mean denying rivals access to goods or markets. On defense, it means only allies can be trusted to deliver strategic supplies, an idea known as friendshoring.
But friends can fall out, and the friendliest shore of all is at home. That’s why nations are ramping up subsidies for their domestic producers — a shift away from free-trade orthodoxy that’s already causing frictions.
The Biden administration is spending more than $50 billion to boost chipmakers at home, and also backing the electric-vehicle industry as part of a $437 billion plan to fight climate change. Europe reacted furiously, accusing its ally of unfair trade practices that incentivise companies to relocate to the US, and says it may roll out financial supports of its own.
The risk is a global subsidies race where the winners are the countries with the deepest pockets, and the losers are economies in the developing world already suffering from growing debt burdens.
The Dollar’s Reign
More and more countries — not all of them American adversaries — are seeking ways to conduct more business outside of the dollar, because they see the US turning its currency into a tool for advancing foreign-policy objectives.
The Biden administration froze some $7 billion of Afghanistan’s central bank reserves, to keep money out of the hands of the country’s new Taliban rulers. The US and European Union are seeking ways to legally confiscate some half-trillion dollars worth of Russian reserves and use them to rebuild Ukraine.
It will likely take many years to displace the dollar as the world’s reserve asset, if that happens at all. The greenback’s safe-haven status was evident last year when it soared in the turbulent early months of the Ukraine war. It’s entrenched in everything from central banking to commodity trade, and there’s no clear alternative.
BloombergStill, among countries like China, Russia and Iran — as well as India and the Gulf energy giants, which have more amicable relations with Washington — the search is on for ways to build trade links that eschew the dollar. Chinese President Xi Jinping’s visit to Saudi Arabia last month, which saw talk of energy deals priced in China’s currency with investment set to flow the other way, may be a sign of things to come.
The risk for the US and its allies is twofold. Their sanction weapon, which relies on dollar dominance to be effective, may lose some of its force. And they may face higher inflation, as trade deals between non-Western economies lock key commodities out of the market, pushing prices up for other buyers.
“The US dollar is a hex on all of us,” George Yeo, former foreign minister of Singapore, said at a conference last week. “If you weaponise the international financial system, alternatives will grow to replace it.”
