The Fractured Age: How US-China Rivalry Reshapes Global Economy

The End of Hyper-Globalization

• 🌍 The era of hyper-globalization, starting around 1989, which promised prosperity and the spread of common values, is over.
• 📉 This shift is marked by the rise of geopolitics, national security, and strategic rivalries increasingly shaping global economic outcomes, leading to a "fractured age."
• 💡 While globalization was blamed for job losses, technological change was a more significant factor, though globalization did have genuine costs.

Shifting Global Dynamics

• 📈 Global tariff levels, which fell significantly from the 1990s to the mid-2000s, have begun to rise again, particularly in the US.
• 🇨🇳 China's entry into the WTO in the 2000s was a pivotal moment, integrating Chinese producers into the global economy, and its share of global exports has continued to grow despite US tariffs.
• ⚠️ Hindsight suggests mistakes were made in allowing China into the WTO, especially as China, under Xi Jinping, began to use trade and technology to challenge US dominance rather than integrate.

The World Divides into Blocs

• 🌏 The world is not de-globalizing but rather fracturing into two main blocs: one centered around the US and another around China.
• 📊 By population, roughly half the world is in each bloc; by GDP, the US bloc accounts for about two-thirds, and the China bloc about 25%.
• 🤝 Alliances are crucial, with Europe, Japan, and India leaning towards the US, while Russia and parts of Africa align with China; countries like Brazil and Indonesia remain unaligned.

Strategic Sectors and Economic Costs

• 🛡️ Fracturing is expected to be concentrated in strategic sectors like semiconductors, battery technology, pharmaceuticals, and dual-use goods, impacting about 10-15% of global trade.
• 📉 If contained to these strategic areas, the economic cost is estimated at around 1% of global GDP; a broader split could cost 2-4% of global GDP, comparable to the impact of the global financial crisis.
• ⚡ This fracturing is likely to lead to more volatile inflation rather than structurally higher inflation, as supply chain shifts and export controls on critical minerals create price fluctuations.

Geopolitical Risks and Capital Flows

• ⚠️ A deeper split between blocs poses risks, including the potential for conflict, particularly over flashpoints like Taiwan, which could severely impact global GDP, especially the chip industry.
• 💰 While global capital flows might decrease as a share of GDP due to policy makers' concerns about financial vulnerabilities, a complete disentanglement between the US and China is unlikely due to China's vast external assets.
• 🇨🇳 Western investors are showing increased reticence towards investing in China and its allies due to sanctions risk and opaque foreign investment rules.

Portfolio Implications

• 💡 Investors may need to reconsider heavily investing in Chinese equities and focus more on developed markets like the US and Europe, though US outperformance may narrow.
• 🥇 Gold has seen increased demand as a hedge against dollar exposure and sanctions risk, particularly from emerging market central banks.
• 💎 Opportunities exist in identifying and developing domestic sources for critical minerals where China holds a chokehold, particularly in processing.
• 🚀 Exposure to big tech and AI is still considered a reasonable bet for future growth, though current valuations appear frothy.