During her speech at the World Congress for International Economic Association on the 11th of this month, Mrs. Gita Gopinath, the Deputy Managing Director of the IMF, made a hint about the possibility of a second cold war, which might cost the world trillions of dollars. She said that the globe is more divided than it has ever been and that this could halt economic growth. It seems difficult to prevent a second cold war, which might damage the world economy by over 7%. There are three main challenges to the world economy right now. Specifically, the world’s superpowers’ trade impasse, China’s economic downturn, and the escalating military instability throughout the world.
Together, the USA and China account for 43% of the world’s GDP. The world is suffering as a result of the ongoing trade stalemate between the two countries, which began in December 2018 when US President Donald Trump decided to impose tariffs on Chinese products. Reversing Trump’s tariffs has been President Joe Biden’s goal since taking office, but so far, his efforts have yielded no fruit. President Xi claimed he wanted stability during their November 15th meeting at San Francisco, but he seems to be acting contradictorily. China has targeted businesses such as Foxconn, Capvision, Brain and Company, Mintz Group, and others, raiding their offices and intimidating their staff in an effort to muzzle its critics and dominate the narrative about its economy.
That is the quintessential Chinese response to criticism: it cracks down. This is a tried-and-true tactic, but Beijing was a little late this time, the cat was already out of the bag. Thus, it doesn’t seem like normalization between the two nations will happen anytime soon, and the effects on the economy are clear. According to the 2023 World Trade Organization report, the US-China trade dispute has already caused a 0.1% drop in the world GDP thus far. Experts assert that this statistic is not comprehensive and that the ongoing trade conflict is negatively impacting globalization, compelling numerous nations to choose camps and re-align their trade policies. They further suggest that China’s economic downturn may make things even far worse.
China is the second-biggest economy in the world, with a GDP of $18 trillion, or 18% of the world’s total GDP. However, as of late, the country’s economy has been seriously challenged; Loan defaults are rising and the unemployment rate for young people is at an all-time high. China has at least 8 million people on its blacklist as of the end of last month due to loan defaults on both personal and company debts. In China, defaulters face severe legal repercussions; they are not only prohibited from purchasing airline tickets but also from making mobile payments, which negatively impacts individuals and businesses.
Manufacturers are also having difficulty; just only this year, their profits have decreased by 9%. We are discussing more than 13,000 domestic and international businesses that rely on the Chinese economy. Due to a decline in consumer demand and lower expenditure, firms in China are producing fewer goods and reporting a dip in profits. Large investors are leaving China because they are suffering significant losses in the Chinese markets; by August of this year, they had taken out at least $10 billion.
The Chinese local government is reportedly struggling to pay off $7–11 trillion in debt, with loans that are deemed high risk, indicating they could have trouble making their payments or perhaps default. This information was reported by the Wall Street Journal. In the face of such a crisis, an individual or a nation would best handle it by reducing spending, increasing revenue, and renegotiating the terms of the debt but sadly, China does none of those things. The local government in China is responding to a financial blow by releasing more debt; they are using these fresh loans to recapitalize banks. A single default might cause a financial storm in China, given the country’s financial system is weak, dependent on debt, and exists only through constant borrowing.
Other big economies are being harmed by China’s fall. For instance, China’s declining demand resulted in fewer orders for most Japanese enterprises, as Japan recorded a significant decline in exports in July. Similarly, South Korea and Thailand have also reduced their economic forecasts, citing their reliance on China for trade as justification for the notion that China’s problems are global in scope.
The third concern is the rise in military confrontations around the world. Of the 32 active battlegrounds, two are significant wars. The Israeli- Hamas war in Gaza and the Russian invasion of Ukraine have both shocked the world economy. Over $2 trillion has already been lost in the Russia-Ukraine war, and an additional $1 trillion or more might be lost if the Israeli-Gaza confrontation because every day it drags on, it risks spilling into a larger regional battle. The Iranian backed Houthi rebels are attacking commercial ships in the red sea, China is seriously bullying its neighbors in the south sea. Sadly, there doesn’t seem to be a quick fix for these, which pose a threat to businesses and indicate uncertainty for the world economy.
