(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/3cDGhkr
By John Kemp
LONDON, March 5 (Reuters) - Most western policymakers and journalists view the world economy through a framework that is 10-15 years out of date, failing to account fully for the enormous shift in activity towards China and the rest of Asia.
Most economic commentators and policy analysts cling to a world view that puts the United States and the North Atlantic countries at the core of the global economy, with Latin America, Africa and Asia on the periphery.
In this simplified framework, the economic cycle begins in the western core and is transmitted to countries on the periphery via changes in interest rates, capital flows, trade and investment.
The United States and its traditional allies in western Europe are the active members of this system, while emerging markets on the periphery play a role that is essentially passive and reactive.
That might have been a useful representation of the global economy in the 1980s and early 1990s, but it has become increasingly inaccurate in the 2000s and 2010s.
Rather than economic and financial changes originating in the United States and Western Europe and radiating out to the periphery, shock transmission has become bi-directional.
China’s coronavirus epidemic has highlighted the potential for a shock originating on what was once the periphery to destabilise financial markets in the former core.
Researchers have attempted to define a centre of gravity for the world economy in an effort to identify the average location of economic activity and track how it has changed over time.
Defining a world economic centre of gravity (WECG) poses some tough methodological problems, including how to represent a centre of gravity from a three-dimensional globe on a two-dimensional map.
Most calculations locate the centre of gravity somewhere in the planet’s interior and have to decide how to represent that on the surface (“Is the world’s economic centre of gravity already in Asia?” Grether and Mathys, 2006).
The assumptions made and the choice of methods result in wildly varying estimates for the current surface location, from somewhere over northern Russia to the eastern Mediterranean.
But all methods show the centre of gravity shifting progressively eastwards from just inside the western hemisphere in the 1980s to well inside the eastern hemisphere by the 2010s.
Intuitively, in the 1980s and early 1990s, global economic activity was concentrated in North America and Western Europe, with outposts in Japan and the Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore).
But since then, Asia’s economies, especially China, have grown much faster than their western counterparts, pulling the centre of gravity steadily deeper into the eastern hemisphere and Eurasia.
Most calculations indicate the centre of gravity is marching eastwards towards Asia at the rate of about 100 kilometres or more per year (“The global economy’s shifting centre of gravity”, Quah, 2011).
My own very simplified calculations, based on national income data from the World Bank, indicate the centre of gravity has shifted east every year since 1995, interrupted only briefly by the Asian financial crisis of 1997/98 (tmsnrt.rs/3cDGhkr).
The eastward shift was gradual during the 1990s, perhaps just a few tens of kilometres per year on average, accelerating to around 100 kilometres per year since the mid-2000s.
In recent years, India’s economy has also started to become a major source of global growth, which will ensure the centre of gravity continues to move more deeply into Asia over the next 50 years.
The eastward shift had barely started in the late 1990s and early 2000s, so its consequences were barely perceptible, but has become much more pronounced two decades later, and its impact is now too large to ignore.
China’s share of the global economy has quadrupled to 16% in 2018 from 4% in 2002, according to the International Air Transport Association (“Updated impact assessment of the novel coronavirus”, IATA, March 5).
The country’s share of global manufacturing has also quadrupled to 39% from 10%, while its share of global travel and tourism has surged to 18% from 5% over the same period.
In 2018, China’s share of the global market for new vehicles was 30%, up from less than 10% in the early 2000s, making it larger than the combined shares of the United States and the European Union.
As a result, economic shocks originating in China now have far greater spillovers to the rest of the world than 20 years ago (“China’s internal not export market matters more for world economy”, Reuters, March 3).
The trade war of 2018/19 demonstrated it was not possible to damage China without inflicting widespread collateral damage on other countries (“Trade war rebounds on the United States”, China, July 9, 2019).
Medium-sized economies with a high share of imports and exports in their gross domestic product, including Germany and South Korea, were hit especially hard as they became caught in the cross-fire.
But even the United States, a continent-sized economy that is much more closed to international trade, was hit by the international blowback from the global slowdown.
In an effort to increase negotiating leverage by inflicting economic damage on China, the Trump administration pursued tariff and other policies that brought the world economy to the brink of recession.
In 2020, coronavirus has reinforced the point that an economic shock originating in China can and will propagate throughout the international economic system, impacting on businesses and financial markets worldwide.
Coronavirus is set to inflict much greater financial damage than severe acute respiratory syndrome (SARS) did in 2003 because China’s economic size is so much greater, according to presentation by the airline association.
For some western policymakers and international relations specialists, China’s increasing influence and potential for economic disruption is a reason to try to reduce linkages and achieve more separation from it.
But they are almost certainly underestimating the immense costs involved in trying to slow or reverse the shift in economic activity to Asia in general and China in particular.
China’s rapid urbanisation, industrialisation and emerging middle class have been the principal drivers of world economic growth in recent years (“China has replaced U.S. as locomotive of global economy”, Reuters, Nov. 5).
China accounted for 28% of all global output growth in 2013-2018, more than twice the share of the United States or India, and dwarfing other countries, according to data from the International Monetary Fund.
If China’s economic growth is to be restrained, somehow, it is not clear what would replace it as a driver of rising global incomes.
Prolonged economic conflict between the United States and China threatens to become an extended dampener of global growth.
For many countries, China has become an essential export market and source of their own prosperity, which would be at risk in any decoupling.
China is critical for exporters of raw materials, capital goods, high-value branded consumer products, and international services such as tourism.
China’s market is therefore crucial for countries as diverse as Saudi Arabia (oil), Australia (gas), Brazil (farm products), Taiwan (semiconductors) and Germany (capital goods).
Some western-based international relations specialists are promoting the idea of (partial) separation of the global economy into U.S.-centred and China-centred economic systems for security reasons.
The model is based on the containment strategy employed by the United States towards the Soviet Union during the Cold War between 1945 and 1989 (“Long telegram to the U.S. State Department”, Kennan, 1946).
But the analogy is a poor one for several reasons. China’s economy is far larger than the Soviet Union’s and much more deeply integrated into the global economy as both a producer-exporter and consumer-importer.
For most countries in Europe, Latin America, Africa, the Middle East and Asia, prosperity depends on growing exports to China and maintaining good relations with the United States.
Forcing them to choose is forcing them to become poorer. (Editing by Barbara Lewis)