Changing world order & its Implications

There are changes happening in the world today that have the potential to change power equations. I had written on that in my previous blog. This one is building on it.

Changing world order – While the west led by the US may still be powerful, the world order is certainly changing. The US certainly lost some sheen when it exited Afghanistan abruptly and  gifted it to the Taliban, which it was fighting against for 20 years! It abandoned military equipment valued at over USD 1 billion, during this hasty retreat.

NATO, for all the hubris regarding their military strength, is hesitating to directly get into the war in Ukraine that they were instrumental in creating. At the same time they lose no opportunity to ridicule Russia – be it their inability to capture Ukraine, their retreat now, their inferior fighting machines, alleged inability to sustain a war for long etc.

The US has also been retreating militarily. It wants NATO allies to increase military spending and Trump had even accused their allies of ripping the US off on the trade front. During his tenure, it resorted to trade sanctions with its closest allies like Europe, Canada etc. These actions are not about Trump; it is probably a change of direction in the US bureaucracy and government.

The evidence of that came after Biden came to power. US made Australia cancel the submarine deal ( valued over USD 90 billion ) with France, a close western ally, and signed a deal for nuclear submarines with Australia. If there was any doubt about US duplicity, it was removed for all the world to see.  It would throw anyone under the bus was the loud and clear message!

US leadership of the western coalition is weakened by its actions; allies clearly know that they need to fend for themselves. This loosens the grip of the US over its allies and reduces its heft. and clears the deck for realignment in the world order. After the rude treatment it received France is now looking to regroup and realign with other countries that it can trust and work with. Read this.

Covid has also proved that most nations are self-centered and every country needs to essentially fend for itself. So countries like the US giving lectures without assisting in any way is seen as an irritant and a nuisance, not as a leader. Countries know that they need to put up with it but will have to get their solutions elsewhere.

On another front, China is ever more belligerent, routinely clashes and chastises the US on a range of issues. The US too has been beholden to China, much more than necessary, which emboldened China and made them even more abrasive. More of this later.

In such a dynamic where are we headed? Let us look at some of the countries and regions.

The USA – The US is a military and economic super power. It is a tech powerhouse. It is home to the famed Silicon Valley, which still leads the world in innovation. There are several other pockets in the US that foster innovation and startups.

It has some of the best universities in the World and students flock to it. The US attracts talent in droves and gets the best minds to work in its companies. It exercises enormous soft power through Hollywood.

But there are many fault lines. Its global leadership and ability to carry even close allies along is questionable. Europe is now facing the brunt of the war that US-headed-NATO has orchestrated! They all stood with the US on sanctions and they got singed! The US had sanctioned Iran and Venezuela earlier and had not allowed their oil into the market. With Russian oil also out, the fuel prices skyrocketed. All countries are facing the brunt of sanctions – inflation is soaring across the globe and scores of countries may go into recession in the coming months.

Covid proved again that the US was not a reliable partner. It was not willing to share vaccines, even after they had enough. They blocked export of key ingredients required for Vaccine manufacture to India, which was donating & sharing vaccines with other countries. They relented later. But the damage was done and the US came across as an unreliable, arrogant country.

The US was affected by Covid like many other countries across the globe. The chaos that ensued, the non-availability of ICU beds, oxygen supplies etc. and the consequent proritisation of treating younger people over older ones and the number of deaths ( over 1 million ) due to Covid took the sheen off the superpower status and showed their acute vulnerabilities in healthcare.

US dollar primacy was one reason for US supremacy. It is the world’s reserve currency. The US had been printing greenbacks and till date has made the world pay for its prolific consumption. The US dollar is the currency for fuel and other global trade. US banks are earning huge money by facilitating payments. But that is going to change. The sanctions on Russia and its blockage from the SWIFT interbank network made Russia insist on trade in Roubles. This is a watershed moment.  However, there are many who think US Dollar primacy is intact. See this – 1 & 2 .

The world has understood the vulnerability and how the US can shut them off at any time, if it suits them. Saudi Arabia is already talking to China to sell fuel in Yuan. They are expanding the scope further – see this. Russia is accepting payments in roubles from the world. Rupee-rouble trade is already happening ( though miniscule now ) & will probably gather pace. India is also working with five other asian countries to do bilateral trade in rupee and their respective currencies. Many bilateral trade agreements in their own currencies are expected in the future.

The west does not see this as a problem and many analysts are saying that US Dollar primacy cannot be replaced. This is misplaced optimism as reserves are kept aside for trade purposes. If the trade itself can be conducted bilaterally, in third currencies US dollar reserves become far less important. The world realises the raw power that the US wields and its trigger happy approach to punishing those who are “against them”.  The slow slide of the dollar has begun. This is going to be the single most important factor in the descent of the US to being just another major power.

The US as an exporter of goods is not that significant (USD 1.7 trillion ), compared to the size of its economy ( USD 25 trillion ). In fact, US exporters can benefit if the dollar weakens. But, imported goods will be costlier for US consumers. If the dollar weakens, holding dollars will become less attractive. 

For all reasons mentioned till now, the US will find it increasingly difficult to exercise its writ on its allies and others. Some may grudgingly fall in line, to an extent. But the US has already reached that point several years ago and it will be in a decline over time. We may not notice it while this is happening; but its descent from a superpower to just a major power ( like the UK ) is on. It may happen over say 20 years or more. Contradictory opinion can be accessed here.

China – China is an unlikely miracle coming out of a system that claims to be “anti-capitalist”. Its ascent has been meteoric, which by itself is an understatement!

It has become a factory to the world over time and is said to be producing 25% of world factory output! Virtually every supply chain passes through China today. Impressive, to say the least.

They have delivered impressive economic gains to their people. They have the second largest economy in the world at about USD 20 trillion ( see list here ). On purchasing power parity basis, China is already No.1!

They are in the fast lane in terms of transforming their universities into world class institutions, catching up on tech and ostensibly leading in some areas like drones, 5G, Quantum Computing etc. But much of what China has achieved is through stealing from other countries, copying and reverse engineering products. The products are mostly unreliable. Those who have bought their stuff know that ( see this and this).

China has honed propaganda and elevated it into a sublime art! The contrived achievements of China, the unbelievable numbers packaged as a sign of superlative achievement, their military prowess, their world beating tech progress, their fast pace of growth have all been pushed well. They have in their pockets the world media who are well compensated for regurgitating propaganda material that China supplies. Professors, Executives, “Social Workers”, NGOs etc. have been co-opted to show China in a positive light, suppress abuses and further China’s agenda. Confucius institutes worldwide are just the visible part of the propaganda apparatus. With all this hype even the US believes that Chinese have arrived and have even moved ahead of them. See – Chinese believe in defeating people in their minds first!

When everything is going well we sometimes get the itch to move into another rarefied orbit. China has got this ambition to recapture its pole position in the world, as it was in the hoary past! It developed hegemonistic ambitions and started harassing various countries on border issues, indulging in salami slicing and capturing territory justifying it by using Ming era maps! It used the same maps to justify capturing 90% of South China sea! It has disputes with over 20 countries on the border and maritime boundaries.

To further their global ambitions, they established the Belt and Road initiative. Various countries signed up for it. China doled out loans and started building roads, railroads, power plants, airports etc. Only that many of these projects were not economically viable and proved to be white elephants for the countries which participated. Debt was doled out at high rates and countries were struggling to meet their obligations as the project was not generating the revenues it should. China gained a lot here – their companies with their own chinese labour built these. When these countries were unable to pay the debt, they surrendered some territory, port or other such asset to China! Hambantota port is a case in point. That is debt-trap diplomacy at work!

For someone exporting so much and dependent on others for their revenues, they over reached themselves in going out of the way to antagonise countries. They don’t have many friends across the globe. Countries that are beholden to them may vote in their favour grudgingly, but they are not friends. Problem is that without good working relationships, one cannot go far.

The biggest problems however are internal. China’s impressive growth numbers have not been based on exports alone. To show world beating growth, China has constructed several infra projects to shore up GDP numbers. Ghost cities, roads to nowhere, bridges and viaducts to impress, high speed trains and other vanity projects are legion. Only that, by doing all these, China has totted up a pretty impressive debt! China’s debt is at 270% of GDP.  The money it has spent on high speed trains alone is USD 900 billion and they are making huge losses every single day! But don’t worry, the accommodating credit rating agencies affirm A+ rating for China!

There is a real estate crisis and the companies are falling like flies to a flame. The real estate contribution is 30% of the GDP! Citizens’ savings in real estate are about 70%. They are seeing their savings go to rubble ( literally sometimes ). Just one real estate company, Evergrande, has over USD 300 billion in debt that it is not able to pay.

Bank failures are expected to follow as they have lent a lot to the real estate sector. People are not able to withdraw money in some provinces. We never know if it is nationwide, as getting information is a challenge. Global Companies had started abandoning China, during the pandemic. Samsung has exited China fully. Japan had given incentives to it’s companies to relocate away from China. The world had realised during the pandemic that putting all the manufacturing eggs in the China basket is risky and adopted what is known as the China +1 strategy. Simply put, factories will come in other parts of the world too as a de risking strategy. This means employment opportunities would go down in China.

Already 600 million people in China are living on USD 2 per day per person. Li Kueqiang, chinese premier who is No.2 in CCP said that. There have been a string of natural disasters in China in the last two years. The food supply is not expected to be robust. There are regions like Tibet, Xinjiang, Inner Mongolia etc. which are restive regions kept under repressive control.

In the long term, the population contraction, which I have mentioned before, could be a major problem. Putting all these together, China is in a bit of a jam – a jam that can make China unravel. China can descend into chaos and even disintegrate. It may just be a shadow of its current self in the future. That has the potential to happen even in this decade!

Some of my conclusions may look dramatic. But I have made those based on the extrapolation of some of the information I have presented ( and many others I have not ). At the very least, I do hope it has given some perspectives. I encourage you to draw your own conclusions.

More on other countries and regions in the next edition!