February 24, 2023: Global News Roundup

Trade follows the flag—Competing economic blocs emerge as war intensifies

This post was originally published on IPEwithSBB.org.

The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.

I took a class in college on military geography. My professor, a PhD in History and veteran of the Vietnam War, started class on the first day by asking everyone what they thought “war” meant. Being the first day, only a few people raised their hands. They mentioned ideas from some classic thinkers on the subject, Prussian general and military strategist Carl von Clausewitz, Chinese general and military strategist Sun Tzu, Italian diplomat and philosopher Niccoló Machiavelli. My professor shook his head lightly, dismissing the definitions students had suggested. He then turned and wrote a formula on the board:

War = killing people + breaking things

As world news this week demonstrates, war doesn’t only break people, homes, schools, hospitals, and roads, it also breaks, and then reshapes, entire economies. In political economy, we often discuss how “trade follows the flag”, meaning that economic relations tend to follow behind military and security relations. War, conflict, expansion, and colonial conquest fundamentally alter the terrain on which trade and commerce take place. Last week’s post, about how the Ukraine war (literally) exploded and then reshaped European energy markets, provides a good recent example.

News this week showed how the expanding war—and the geopolitical shifts in which it is embedded, with new rising powers increasingly challenging US dominance—is breaking the global economy into roughly three pieces, or blocs. The term bloc often arises in discussions of historical periods in which the global economy was organized into rival military-economic groups with countries organized in multiple competing clusters. Examples include the interwar period between WWI and WWII, as well as the Cold War period from 1948-1991. During the early capitalist period, roughly from 1500-1800, the global economy was similarly militarized and rivalrous, but the competition was between empires, rather than among blocs of (at least nominally) independent states. During the Cold War, the global economy roughly split into the “First World”, “Second World”, and “Third World”, denoting, respectively, the US-led military and economic bloc, the Soviet-led military and economic bloc, and the non-aligned countries across the global South which stayed (mostly) neutral in the conflict and did business with both of the other blocs as they could (see map below).

(Image: Map of the world during the Cold War, divided into competing blocs. Courtesy of Tarik Fernandes and Deviante, 2017, here.)

On Tuesday, the India West Journal and a bunch of other Indian outlets ran a piece quoting a recent report from GIS (a prominent European geopolitical risk consulting firm). The original report from February 13, authored by Rudolf G. Adam, a former vice president of Germany’s Federal Intelligence Service, argued as follows about the consequences of the Russia-Ukraine-NATO conflict and the geopolitical shifts it signifies:

The geopolitical distribution of power will see a fundamental shift. Traditional political alignments will harden. The world will remain divided into three groups that face each other with suspicion and open hostility:

-Western liberal democracies (U.S., Canada, EU, UK, Japan, South Korea, Australia, New Zealand)

-Russia, Belarus, Iran, Syria, Venezuela and North Korea, with China staying close. Regimes in these countries despise legal constraints both in dealing with other international actors or with their own subjects

-Developing nations of the South Asian subcontinent, the Arab world, and South America

International institutions like the United Nations or the Organization for Security and Cooperation in Europe (OSCE) are paralyzed; regional associations will gather strength… The main beneficiaries of Russia’s war are China, India, Turkey, Iran and North Korea. They exploit trade opportunities that Western sanctions open for them. They profit from Russian oil at discount prices.

While I’m not sure I agree with all the details, the general gist of the argument is hard to deny. For shorthand, I’m going to refer to the “US-EU bloc”, the “China-Russia bloc” (includes Iran), and the “non-aligned bloc” (with India, and to a lesser extent Brazil, Turkey, and Saudi Arabia, at the helm). Of course, the make-up of these blocs is in flux and could change, though they appear to be more solid by the day. Let’s start with the military and security side of things. There was so much going on, I condensed it all into more concise summaries. Note especially how foreign policy stances and alliances are hardening among the Great Powers.

·       US President Biden visited Ukraine to confirm the US’s ongoing political, economic, and military support, and a delegation of members of the US Congress visited Taiwan in a similar show of support. The South China Moring Post reported that Taiwan is “learning from Ukraine” about how to wage asymmetric warfare (that is, war against a more powerful enemy). And the Munich Security Conference was held this week, at which NATO countries “intensified their offensive against Russia”, according to the WSWS.

·       Russian President Putin’s address to the nation this week—delivered a couple of hours before Biden addressed the people of Ukraine in his own “dueling” speech—was, more or less, a war rally to cement domestic support and demonize the US, NATO, and their objectives. “Two presidents, two speeches, two very different views of the world,” noted the BBC. Russia also “froze” its participation in the Strategic Nuclear Arms Reduction Treaty (START), which is the last remaining arms control agreement between the US and Russia governing the use of nuclear weapons. It was reported last week that the Collective Security Treaty Organization (CSTO), a military alliance between Russia and 5 post-Soviet states (Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan), is preparing for joint combat readiness drills. This week, Russia also called for a UN meeting to discuss the Nord Stream pipeline sabotage accusations.

·       China’s “top diplomat”, Wang Yi, was in Russia this week, and “vowed to strengthen ties between their two countries despite “pressure from the international community” ahead of the first anniversary of Russia’s invasion of Ukraine.” Then, Russia indicated that President Xi was planning a personal visit to Russia. Meanwhile, the US accused China of planning to send arms to Russia for use in the Ukraine war. Reuters reported that US official are “concerned by greater alignment between China and Russia”. (This “alignment” has been pretty obvious for a while now.)

Turning to the economy, trade followed the flag. The US-EU bloc was busy this week developing policies to undercut their rivals in the Russia-China bloc, including preparing new rounds of jointly-backed sanctions against Iran and new “anniversary sanctions” on Russia being worked out by the EU to serve up on the one-year anniversary of Russia’s invasion of Ukraine (it’s today). Ten EU member-states also called for a “crackdown” to enforce sanctions on trade in military parts with Russia. Reuters further reported that G7 members are trying to garner support for US-EU sanctions from members of the G20, currently led by India—head of the non-aligned bloc—and that India is resisting the pressure. And, this week I actually saw a suggestion from Europe that allies should work to form a formal bloc, in the historical sense of the term discussed above. In an interview with Nikkei this week, former British Prime minister Liz Truss called for an “economic NATO”: “An economic version of something similar to NATO that centered on the G-7, included [sic] a different mix of countries inside and outside the bloc such as Australia, was needed to counter China's Belt and Road infrastructure initiative, Truss said.”

Meanwhile, the China-Russia bloc was working on consolidating and defending its economic position, in some cases (e.g., Iran) leveraging economic hardship caused by sanctions from the rival bloc to recruit allies. Iranian President Ayatollah Seyed Ebrahim Raisi visited Beijing last week to work on “strategic agreements”, including deals on “commerce and the economy”. (In fact, Iran’s currency collapsed over the past couple of weeks, partly because of the news about incoming EU sanctions.) While Iran’s relations with China are not all that warm or friendly, the two nations are being drawn closer together by the shifting geopolitical and economic terrain. “Xi, who rolled out the red carpet for Raisi, called for US sanctions to be removed as a key part of restoring the nuclear deal and opposed ‘interference by external forces in Iran’s internal affairs and undermining Iran’s security and stability’”, reported Al Jazeera.

There’s so much more news on this issue to discuss this week, but I’ll just briefly summarize because I’m already going longer than usual with this post:

·       Iraq decided to allow China to pay for oil in yuan, instead of US dollars. (Economic blocs historically are anchored by the currency of the major power that leads the bloc, so any discussions of de-dollarization are super relevant because they indicate an ongoing transition from a dollar-led global system to a more fractured economic system in which multiple countries and currencies compete for dominance.)

·       Likewise, Russia and India are working together to expand trade in rubles and rupees. The Russian ambassador to India noted that, in bilateral trade, "nothing restricts us to use the US dollar or euro with non-sanctioned Russian banks" or the use of "the currencies of third countries."

·       Russia is expediting its transition to ruble- and yuan-based trade as US-EU bloc sanctions increasingly prohibit access to dollars and euros. Elsewhere it was reported that Russia is dumping the euro (and euro-based assets) from its reserve funds, investing only in yuan and gold moving forward.

·       The BRICS organization was excited—really, really excited—this week about potential new members, including Saudi Arabia, Argentina, and Iran.

And, in other, completely unrelated local news, there’s a new baby sloth at the Denver Zoo, pictured below.

(Image: Charlotte, the baby sloth's mother, gets some sustenance from her favorite snacks, pear and corn on the cob, while baby sleeps, courtesy of the Westword, here.)

Things I’m keeping an eye on:

1.     Financial markets: I haven’t been reporting much on interest rates and central banks, mostly because every time I go to summarize what’s been happening, central bankers have flip-flopped yet again on inflation expectations, dragging markets along with them. All the back-and-forth is giving me motion sickness and makes me think no one quite knows what to expect in the coming months. On this note, I recently read a rather odd speech by Huw Pill, Chief Economist and Executive Director for Monetary Analysis of the Bank of England, who characterized inflation as a “wicked problem”, which is a type of problem that involves so many interconnecting parts and people that it is impossible, or nearly impossible, to solve. Pill also quoted Yogi Berra in the speech: “It is difficult to make forecasts – especially about the future”.

2.     End of pandemic-related government assistance: The Financial Times reported this week that business bankruptcy filings in the EU are exploding as government assistance programs established during the pandemic come to an end. This will likely be an issue in other parts of the world as well, including in the US, where the Fed estimated recently that about 9% of listed companies in 2020 were “zombies” (zombie companies are companies that do not earn enough to service their debts, and require cheap credit and/or bailouts to stay afloat).

3.     Anti-war sentiment: While President Biden was in Ukraine, Americans got busy protesting the war. The non-aligned bloc is also protesting the Ukraine war, though in a different way. A Financial Times headline this week read “For many outside the West, Russia is not important enough to hate.” A few days earlier, a similar headline: “Western pleas over Ukraine fail to sway African and South American leaders.”

4.     On a similar note, G20 ministers are meeting this week, partly to discuss debt workouts for the many governments in default or nearing default. Support for US-EU bloc sanctions are also on the table, and, as noted above, non-aligned India is resisting the pressure so far.