(Yicai) Sept. 30 -- Zhou Xin, Deputy Secretary-General of the International Finance Forum (IFF) and Director of the IFF Hong Kong Center, addressed a conference held in Kazakhstan’s capital of Astana on September 17. Zhou’s speech to the First Kazakhstan Economic Freedom High-Level Conference, themed as ‘The International Financial System in a New World,’ focused on the free trade and economic integration that had so restructured the global economy in recent decades, and the destructive geopolitical frictions and conflicts that are now unraveling this progress, driving geoeconomic fragmentation (GEF), and leaving struggling governments to retool policies, tariffs, and industrial strategies to hone national competitiveness and spur development.

The implications of this GEF will require China and the larger world to rise to these challenges so as to maintain global integration, while gearing up for the pitfalls of GEF, Zhou advised.

He pointed to trade, migration, capital flows, tech diffusion, and the provision of global public goods as the historical channels of globalization, arguing that GEF affects all of these, overturning established patterns and forging new ones. The global financial crisis, Brexit, COVID-19, and frictions between the US and China have all spawned GEF, which results in higher and more volatile food and energy prices that complicate developing nations’ attempts to prioritize environmental concerns and implement sustainable development initiatives, Zhou said. The International Monetary Fund (IMF) characterizes GEF as a “policy-driven reversal of global economic integration” that stifles capital flows, hampers innovation, and discourages cooperation on international crises. Zhou then quoted the Atlantic Council, which similarly lists “higher import prices, segmented markets, diminished access to technology and labor, reduced productivity, and lower living standards” as the negative effects of GEF.

GEF further poses risks to the international monetary system, fracturing trade relations, and impacting exchange rates, currency reserves, and financial stability, Zhou added. One IMF scenario of a strategic decoupling he referenced would bring permanent GDP losses of 0.3 percent globally, roughly equal to Norway’s annual output, while the Bretton Woods Institution also posited “a more severe scenario, geoeconomic fragmentation,” in which all countries must choose between either the US-EU or the China-Russia blocs, with no trade between these two, the impact of which to global output would be 2.3 percent of worldwide gross domestic product (GDP) - about that of the French economy. “Permanent losses for advanced economies and emerging markets would be… 2 to 3 percent,” the IMF warned, while “global GDP losses would be [similar to] the 2020 output losses due to COVID. However, these losses would be permanent.”

Zhou also posed the question as to how China can ensure its financial safety net remains effective as new economic blocs emerge. The role of international institutions, regional arrangements, and contingency plans will prove instrumental here, he explained, then asked whether a balance can be struck between national and regional interests, but noted that the trade clash between the US and China has sparked tariff hikes on a large portion of their respective exports since its 2018 inception. The US had boosted tariffs on Chinese goods and services to 19 percent by 2020 from 3.1 percent in early 2018, Zhou said, affecting some 66 percent of Chinese exports. China in turn jacked up its tariffs on US products to 21 percent by 2020 from 8 percent at the start of 2018, targeting almost 60 percent of American exports, he continued.

These barriers have permanently marked trade patterns, Zhou observed. The US has long been China’s top importer, but this has greatly changed since the start of the trade clash, in a spiral that has trended downward since 2021. China’s US-bound exports have shed more than three percentage points from 2018 to 2022, a value of about USD102 billion, or 0.57 percent of China’s 2022 GDP. Rising imports from ASEAN have offset this drop, he stated, and made ASEAN China’s main source of imports, with a rise in Chinese foreign direct investment into ASEAN.

The three main coordinators of the global economy - the IMF, the World Bank, and the World Trade Organization (WTO) - have all been hamstrung by fractious trade policies under the former Trump administration in the US, and are now in disarray in consequence, he added. “[T]he WTO became nonfunctional after years of US government demands for reforms and blocking new judges’ appointments. The WTO has been severely challenged by a resurgence in industrial policy - this time pursued not only by poorer countries but also by richer ones,” Zhou said, quoting the Carnegie Endowment for International Peace.

Central Bank Pacts

Globalization is likewise stalling due to US policies, so China is now seeking regionalization with Russia, Latin America, Southeast Asia, and other current and potential trade partners. China must continue to build central bank agreements for cross-border trade settlements in yuan to counteract the US dollar’s sanctioning power, Zhou urged.

Through supply chain outsourcing from its shores, China has adapted in a manner that benefits other countries as the US-China trade imbroglio compels China to seek new US-friendly partners for outsourcing, with even Chinese companies moving their supply chains and production abroad, Zhou explained. Vietnam, Mexico, and India are among the top beneficiaries of this shift, which is slamming the consumer electronics, automotive, and textile industries.

Artificial intelligence, cryptocurrency and blockchain will also exert a transformative effect on geopolitical and geoeconomics issues in future, with the legacy order of finance, trade and monetary policy becoming ever-less impactful, Zhou predicted. “The US and China… technology competition will see geopolitical priorities drive economic decision-making, including through export controls, sanctions, tariffs, industrial policy, investment screening, and other measures deployed to increase absolute and relative advantages,” he said, quoting Goldman Sachs.

Cryptocurrency is a dark horse with the potential to upset the current apple cart, Zhou said, adding China may be better positioned to leverage crypto to raise its status than the US as crypto dethrones the dollar in trade settlements. Zhou cited Forbes, which reported this month that “Bitcoin and crypto have rocketed… helped by fears the US dollar is on ‘the verge of a total collapse,’ setting up the bitcoin price for ‘a critical tipping point.’ Economists are calling for China to unleash USD1.4 trillion worth of a ‘shock and awe’ stimulus that could kick start the economy and trigger a ‘glorious’ bitcoin price boom.”

Zhou summed up by suggesting that buffering against the many perils that beset US-China trade relations will necessitate redrawing trade routes, cultivating new trading partners, establishing offshore manufacturing and supply chains, concluding regional financing arrangements, making greater investments in AI and blockchain, and moving en mass into cryptocurrency, which will all be optimum means for China to absorb the shocks of trade tensions from geopolitical events and thus preserve both its and the world’s financial safety nets in this novel world order.