Geopolitical Tensions Derailing Economic Recovery

In my second Owleye column on my blog, I had called the geopolitical tensions emanating out of Russia and China at the time a red herring. I had written that the world, especially the media, were busy talking up the threat of war by Russia and China over Ukraine and Taiwan respectively.

I was wrong. Russia made the terrible mistake of attacking Ukraine and denying its right to exist as a sovereign nation. We are now six months into this war and there is no sign of it abating anytime soon. It took an immediate toll on Ukraine and its people, with over 10.5 million Ukrainians fleeing the country, and 6.3 million Ukrainian individuals registered as refugees across Europe. The menfolk stayed back to fight the war, with Western powers sending military equipment and assistance. And while the media does report a successful Ukrainian attack here and there, there doesn’t seem to be any sustained advantage the Ukrainians are gaining over the Russians.

Meanwhile, the economic toll of the war on Ukraine is estimated to be close to US $500 billion, and that on the rest of the world is inestimable. As one of the world’s largest exporters of foodgrain (mainly wheat) and sunflower oil, chemicals, steel, Ukraine’s crisis has had an immediate impact on the global economy, mainly on account of supply shortages and the ensuing price spikes we have already seen. Since February 24, 2022, when Ukraine was attacked, the prices of wheat, sunflower oil, chemicals and steel have risen by as much 30%-40%. While the prices of some commodities have fallen, many stay firm and with China reopening its economy after Covid, demand is likely to stay high. Thankfully, Ukraine was able to sign an agreement with Russia, UN and Turkey, allowing it to export 5 million tonnes of grain every month, for the next four months or so.

The Ukraine crisis has also had a huge impact on Europe, dependent as it is on Russian oil and gas. The draconian sanctions imposed by western countries have had little to no effect on Russia’s economy, as I had written before citing an article from The Economist. That’s because Europe itself continued to buy Russian oil and gas while it looked for other options, and many other poorer and developing countries, including my country, India, also kept buying Russian oil. China is now reported to be the biggest buyer of Russian oil and gas. On the other hand, Russia has cut gas supplies to Europe to 20% of what it used to supply earlier, which not only affects people’s lives, it could seriously limit economic activity after a point.

If this crisis is not bad enough to derail economic recovery and growth in the global economy, we now have the spectre of another looming in East Asia. The world is at a loss to try and end the Russian war, and yet it seems to want to start another one in the East China Sea. Having talked up the threat of China attacking Taiwan to take it over, and not having done anything to reset trade tariffs with China, the US was already provoking China with its continued sale of arms to Taiwan. Now, Nancy Pelosi’s visit to Taiwan, ostensibly to express solidarity with the Taiwanese, is threatening to snowball into a larger conflict.

Nancy Pelosi visiting Taiwan, August 2, 2022; Image: Makoto Lin, Office of the President of Taiwan on Wikimedia Commons CC 2.0

The China-Taiwan conflict is not quite comparable with the Russia-Ukraine one, though, as I have written earlier. Most of the international community, including the US, has accepted China’s “one country, two systems” rule regarding Taiwan. Which means most of the world accepts China’s sovereignty over Taiwan, and is not likely to oppose it.

That said, since Taiwan has a history as an American trading post when it was Formosa Island and since much of American investment has built the country over decades, America might feel that it has the right to intervene in its matters, even militarily. I hope it doesn’t come to that, because as I mentioned in my earlier column, this part of the world has been relatively peaceful ever since the Americans left Vietnam. It is also one of the fastest growing regions of the world, economically, contributing a third of global GDP growth.

With the world trying to recover from the global pandemic and with inflation already raging across the world, countries are under immense pressure to control price rise and boost economic growth. Supply chain problems, especially to do with microprocessors, was the biggest stumbling block as the world started to lift lockdowns and emerge from the pandemic. Taiwan is home to some of the world’s biggest chip manufacturers, as well as manufacturers of a host of electronic equipment and devices. So are South Korea and many other countries in the region, as part of the global supply chain. Any conflict that starts with Taiwan and China could flare up into a larger regional conflagration, and that is the last thing the world needs right now.

Taipei, capital of Taiwan the hub of global chips manufacture; Image: Timo Volz on Unsplash

America has passed a huge semiconductor manufacture stimulus package through Congress, called the CHIPS Act 2022 as it tries to bring home manufacture of microprocessors. The package is said to include billions of dollars as incentives for local R&D and subsidies for investment in local chip manufacture in the US. Could this have emboldened the US to take a tougher stance in Taiwan, and poke China in the eye?

And what would be the point of it all? To hurt ordinary Taiwanese, as they are left to cope with a possible Chinese attack? Pelosi’s visit was also meant to promote democracy in Taiwan, it was reported. I thought the days of America trying to promote democracy around the world as part of its foreign policy were over long ago. If anything, I think the visit was unnecessary provocation and quite irresponsible. If the US really cared about the people of Taiwan, it ought to have known that tensions between the island nation and China were already high and that a visit would only aggravate the situation. If the US really cared about democracy in Taiwan, it would not have accepted the one country, two systems rule so readily.

There are also reports of a blockade of Taiwan by China, with little or no facts to support the claim in media. We don’t know if this is also an economic blockade or merely an air and maritime one for a few days. This kind of news or discussion in media amounts to idle chatter and is quite irresponsible. The Chinese have increased their military drills in the East China Sea, including over Taiwan’s air space immediately after Pelosi’s visit, more as a reminder, I suppose, to Taiwan that the country is under China.

One only hopes that China does not follow in Russia’s footsteps and make the mistake of attacking Taiwan. China is itself recovering from the pandemic rather late and has registered its slowest pace of growth in decades. Its harsh zero-Covid policy and lockdowns have also affected the corporate earnings of many multinational companies that depend on China for its large market. The IMF has lowered its forecast of global economic growth for 2022 to 3.2% and maintains that inflation remains a huge risk. I am sure they think that the Ukraine crisis is another risk, keeping oil and commodity prices on the boil.

Shanghai International Finance Centre in China, engine of global economic growth; Image: Marc Olivier Jodoin on Unsplash

Then we have smaller political risks across the world, such as the mid-terms in the US, the leadership challenge in the UK and also fresh elections in Italy, as Mario Draghi’s government couldn’t complete its term thanks to a coalition partner not supporting his policies. This when Italy has to introduce economic reforms in order to receive its share of the EU Recovery Fund that was announced as part of a Covid-relief package, the first of its kind when Euro member countries decided to mutualise their debt.

The largest geo-political risks remain Russia and China, of course. With most western and developed countries opposing these large powers under the leadership of the US, we can expect turmoil in the months and years ahead. It is going to keep the global economy on tenterhooks, as the world enters a new kind of cold war era. The previous one left scars on the world which even the fall of the iron curtain could not erase. Now we have three of the world’s largest countries and two of them economic superpowers engaged in an eco-tech war, as also territorial disputes, that affects all countries.

The Ukraine crisis affected the world economically through food and fuel shortages and high commodity prices. The Taiwan crisis, should it happen, promises to worsen the chip and electronic components shortage through global supply chains. Whichever way we look at it, the global economy is going to be under a cloud. We recovered from the pandemic. Will we ever overcome this?        

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