Where Geopolitics Can Take the Global Economy

As India prepares to go to the polls tomorrow in the largest democratic exercise in the world, it might be time to also think of elections that have already taken place this year and the others yet to come. I am looking at it from the point of view of the larger political shifts that are likely and how they might exacerbate current geopolitical tensions, in ways that will impact the global economy.

The biggest elections yet to take place are the ones in the US, UK and Europe and these are likely to change economic policies, not just domestically but internationally. While many of the elections that I wrote about on my blog recently threw up results that only affirm the status quo – which is different from saying stability – the ones yet to happen are where the changes could be significant.

The polls ahead of the US elections still show Trump with a significant lead over Biden, despite all his legal battles, and that can only mean that he will double down on most of the policies of his previous term in office. I think it would be safe to expect greater protectionism and a ratcheting up of the tariff war with China, which Biden did nothing to reset and instead escalated to what I call an eco-tech war with the Middle Kingdom. I think we can expect America’s anti-immigration policies to also harden – not merely on millions of people from Latin America trying to enter America through Mexico, but on millions from all over the world going there for further studies or for work. This will certainly undermine America’s own innovation engine as well as its productivity, for there is ample evidence now, say experts, that America’s growth has largely come through its immigrant population. Including in the recent post-pandemic period.

America’s trade war with China will also get tougher under Trump, even though Janet Yellen too pointed out China’s overcapacity problem leading to dumping of cheaper EVs, EV batteries and solar panels, etc. on her recent visit to the country. The economic problem China is facing needs a different solution, but if America raises tariffs yet again on a different set of products this time, we could see the worsening of the trade war and deeper fragmentation of the global economy.

The other important election to watch is the one in the UK, where polls suggest a strong Labour Party victory, ushering their return to office after 14 years in opposition. They will have plenty on their economic agenda, fixing the state of their public services, especially the NHS, and also reviving economic growth. Britain has recently been called stagnation nation (in a study by Resolution Foundation which The Economist also wrote about), and its economic growth has stalled for all practical purposes. Many believe it began to stagnate after the 2008 Financial Crisis, but I am not entirely convinced that this is the main reason. I think Britain has lost its competitiveness even in the few industries where it was dominant such as automobile manufacturing, pharmaceuticals, defence and aerospace as well as professional services such as finance, legal and accounting. Brexit has surely dealt it a big blow on top of all the weakness already, and I am not sure all the Brexiteer chatter of “Global Britain” is going anywhere at the moment.

A new Labour-led government in London could mean the resetting of economic ties beyond Britain’s shores. I would think that a strengthening of ties with Europe can be expected even in a post-Brexit order, and perhaps a push-back against Trump’s America. Any attempt by Trump and America to dangle the free-trade carrot again in front of UK -in the hope of wresting its ultimate prize, the NHS for US big Pharma – will be snubbed and met with resistance. The new government in UK has an uphill task when it takes over, of reviving a moribund economy.

If the UK suffers from a lack of competitiveness, the EU economy is not faring very much better as I have been writing on my blog. There, the problem is one of different countries growing at different speeds, and feeling the impact of the China slowdown. It is also the lack of an innovation ecosystem that hampers Europe as well as a still-weak banking system. European companies still largely depend on bank lending for their investments and working capital and other financial needs unlike the US where a large and deep corporate bond market fulfils corporate requirements for the greater part.

Besides, US banks recovered strongly from the 2008 Financial Crisis, while their European counterparts lagged behind. That said, US suffered a few small-banks crises in 2023 and Europe saw Credit Suisse go under until it was acquired by UBS. These are signs of fragility in the financial system, which has weathered the storm slightly better in recent months, thanks to the higher interest rate regime. As central banks begin to cut rates in an effort to normalize costs of borrowing and to boost growth, banks need to ensure there is enough demand for credit to be had.

Europe too has elections in the form of the European Parliament Elections in June of 2024. There is an increase in the rise of populist right parties in many countries across Europe, which threatens the very idea of the EU and its unity. As I wrote in a blog post on Europe recently, the four largest European economies need to work together to boost the region’s competitiveness and innovation framework. European countries also need to diversify their export markets, even as they step up engagement with China and other emerging economies such as India.??????????

The ongoing war in Ukraine doesn’t help matters and the need to increase defence spending and assistance will take the attention away from more pressing economic matters. Trump’s return to office in the US could be awkward for Europe in the Ukraine conflict, as it could mean the weakening of pro-Ukrainian unity between all western allies. Indeed, it could mean the weakening of NATO itself. In fact, in all probability, the other war in the Middle East could become even more dangerous under Trump. He can be expected to take a much more pro-Israel stand, seeing this simplistically as a war between the West and Islamists rather than the long-festering issue of a separate state for Palestine. Netanyahu is probably the one leader most eager to see Trump return.

All these political and geopolitical issues will weigh heavily on countries’ ability to navigate the global economy, as they come to terms with the changing scenarios. This is of course, on top of all the economic troubles already facing the world’s major economies. From high inflation – or the lack of it – to high unemployment, weakening consumer demand and weak business investment, there are enough issues that economies have to focus on. So far, we have to be thankful that the world has largely escaped another recession while trying to recover from the Covid-induced one. There is no denying the fact that there is still weakness in the underlying conditions in most parts of the world, and to that extent any escalation in geopolitical tensions ought to be avoided.

According to the UNCTAD Global Investment Trends Monitor, globally foreign direct investments in 2023 were up marginally by 3% at US$ 1.37 trillion, but this was because of a few European economies functioning as conduits, such as Netherlands and Luxembourg. Excluding this, global FDI flows fell 18% over 2022, and were extremely weak in 2023. This, despite the strong post-pandemic recovery and the world avoiding a recession. And the WTO wrote in December of 2023 that G20 trade policies were becoming more restrictive even amid slowing trade growth. Trade and investment are the growth multipliers of any economy, and restrictive or protectionist policies can harm more than help countries, especially when we are all trying to climb out of a slump.

It is in times like these that economic policy needs leadership that takes all elements into consideration and is long-term in view as well. For example, if countries in the West (US, UK and Europe) decide to retaliate against what they see as China’s overcapacity problem, they will fail to take advantage of what could actually help all countries grow together. Instead, if they helped China find a way out of the overcapacity problem, which is really to boost domestic consumption demand, it would help all economies concerned, with China gaining the most. China’s latest GDP figure for Q1 2024 has just been announced at 5.3% and is better than estimates of 4.6%, though exports which grew at 14% is said to be a significant contributor and that is not entirely good news. Industrial output and retail sales both came in below estimates at 4.5% and 3.1%, but if you ask me, the estimates seem on the high side considering the slowdown that China is experiencing. ?

As I have been writing on my blog, investing in emerging and developing economies in Latin America as well as Africa can help the global economy in the current economic recovery phase. Unfortunately, that is not where most investments are headed, except for Brazil and Mexico in Latin America, the latter perhaps gaining from UMSCA with the US and Canada, as well as investments from China. If I am not wrong the biggest investor in these two continents is still China, even with its current economic slowdown. However, I am not merely talking of investments in mining and extractive industries, but in manufacturing and services as well. It also makes sense to invest in East Asia and in India, not merely as a China+1 strategy, but for the economic growth potential of these economies.

However, as always, the US continues to be the largest FDI destination as it is seen as a safe haven investment. However, even in the US, FDI inflows in 2023 were down by 3%, greenfield projects by 2% and infrastructure-led project finance deals down by 5%, according to the same UNCTAD Report. It appears that investments arising out of Biden’s new CHIPS Act, IRA as well as infrastructure will take time to fructify, and the full impact of these reforms can only be seen in the next 5 to 10 years. In this context, it makes sense to also look at the industries attracting the largest investments, both state and private capital. I say this because while the fight against inflation and interest rate normalization take their own time, the technological revolution is not waiting for anyone. Economies, especially advanced ones and China, are already at a major inflection point in terms of how AI and other aspects of digital technology are changing ways of doing business.

From what I have been reading and hearing in the news, it appears that AI and big tech is what is attracting huge investments, leading to a rather frothy stock market and a possible asset bubble in AI and chips technology stocks. Next seem to be investments in renewables and green energy transition – including EV technology – though this is reported to have slowed down since the Ukraine conflict and now the Middle-East conflict as well. This has also meant that the energy sector in general is attracting large investments. Strangely, but not surprisingly, these are the very industries that are victims of geopolitical tangles since they happen to be global in nature, and one needs to tread carefully.

Another industry that ought to be attracting large investments is healthcare and biotech. However, all one hears nowadays is about weight-loss drugs, which I am not impressed with. I think more investments, both state and private, ought to go into healthcare systems and healthcare infrastructure as well, especially in developing countries.

In India, the investment focus is on EVs, green energy and digital technology at least from the government’s point of view. And we also face the danger of being swamped by cheaper Chinese EVs, solar panels, and possibly AI-enabled apps, if we don’t quickly step-up local production and capabilities. As it is, Indian EV makers such as Tata Motors, Mahindra and possibly Maruti-Suzuki depend on Chinese EV battery technology, since we haven’t developed local capabilities and expertise in this area. And while there is a lot of talk of negotiations with Tesla, we must be careful not to allow any special concessions to any foreign company; we must encourage local manufacturers as they operate in lower-priced segments and we must also be cautious of the fact that allowing Tesla will mean opening the doors to Chinese EVs which span several price segments, I think. That will mean opening the floodgates.

India’s geopolitical concerns or tangles with major economies are thankfully fewer than many other countries and we must capitalize on the enviable position we find ourselves in. We didn’t seem to have any issues importing Russian oil at the height of the Ukraine conflict and that too at deeply discounted prices, even if it put us on the wrong side of history. We did have concerns with Chinese electronics companies and apps, many of which we banned but I think it was more a response toeing the American line. Made-in-India Chinese mobile handsets still do exceedingly well in our country and compete with Samsung even though they did finish off our own homegrown manufacturers who couldn’t compete well enough.

As far as India’s global trade is concerned, we have grown our trade with US, Europe and China, though our trade with China is still hugely one-way. We ought to try and correct this imbalance by engaging and negotiating better with China on greater access to their domestic market for Indian companies, rather than take a Trumpian, deficit-obsessed, trade war approach. Meanwhile, the Indian stock markets have been on a tear the past couple of years, reaching all-time highs. This, even with several foreign investors pulling out of India – as money returns to the US – and gross FDI inflows too falling in FY24 to FY15 levels of around US$ 46 billion. I read this in The Economic Times recently, but Google won’t serve me the correct links, thanks to unprofessional PR agency idiot bosses meddling. This huge drop in FDI too needs remedying.

I’d like to conclude by saying that there are geopolitical tensions impacting the global economy, but that we needn’t allow them to get the better of us. If we engage better and try to find solutions and ways forward, most of the world has plenty to gain. Because while a few economies such as US, China, Russia, Brazil and India have large enough domestic economies to cater to, the world is still too interconnected and globalized for us to ignore or neglect the geopolitical dangers on the one hand, and the new possibilities they present on the other.

This article was first published on my blog on April 18, 2024. ?