The Impact of US-driven Geo-

Economic Fragmentation andEconomic Nationalism

Adam S. Posen
ESRI International Conference 2024 "Major Future
Economic Challenges"
Tokyo, 01 August 2024
1750 Massachusetts Avenue, NW | Washington, DC 20036 | www.piie.com

Underlying global economic themes for 2024 thru 2028
1. Long-term interest rates in the G7 will stay up in coming years, even if short-term rates
are cut by central banks and inflation stays around target.
2. The trend productivity growth rate in the US has risen and this faster rate will besupported by widespread adoption of AI over the next two-to-five years.
The spread and speed of productivity acceleration in rest of the world remains to be determined.

3. China will find various fiscal and monetary stimulus policies ineffective, bearing out
the Economic Long COVID analysis. Growth will remain slow, chiefly in the private sector.
4. There is a lasting and widening gap between several larger EM and the rest of the lowand middle-income economies with respect to growth, debt, and financial stability.
5. The corrosion of globalization continues in the critical areas of foreign direct investment,
technological exchange, and business/research networks, though industrial trade is resilient.
6. Green technology diffusion will be politically fraught and uncertain/Impact of Economic Fragmentation | 2

The US has been withdrawing fromglobalization since before 2002

Peterson Institute for International Economics|

1750 Massachusetts Avenue, NW|

Washington, DC 20036|

www.piie.com

Peterson Institute for International Economics|

1750 Massachusetts Avenue, NW|

Washington, DC 20036|

www.piie.com

Peterson Institute for International Economics|

1750 Massachusetts Avenue, NW|

Washington, DC 20036|

www.piie.com

Peterson Institute for International Economics|

1750 Massachusetts Avenue, NW|

Washington, DC 20036|

www.piie.com

Why will long-rates stay up? Fragmentation in multiple ways
• Most things that kept r* down from 2007-2019 remain in place, notably:• Demographics, risk aversion, and Asian savings glut
• Forecasts also previously assumed low productivity growth• A number of things have shifted due to geopolitics and COVID, however• G7 and China will increase fiscal spending on defense, green, and industrial policy• Reversing the Cold War Peace Dividend, worth ~0.7% increase• Fragmentation of global financial markets will trap savings in China and reduce available
savings in the West – net is higher rates in US transmitting elsewhere• Risk aversion has been reduced in US in response to YOLO and safety net• Productivity growth trend has arguably increased – the last 4 quarters are not a blip

• US 10-year Treasury average real rate will increase over the next few years

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The political landscape for US anti-globalization• Neither China nor trade are first-tier concerns for most Americans. Migration,
however, is a first-tier concern for many American voters.
• These concerns drive politics via symbolism rather than economic outcomes• The same voters who are suspicious of US engagement abroad dislike trade/migrants• Political advisors confuse lower income voters in swing states with popular views• Congress is addicted to demonizing China for performative reasons• The result is that the proposed policies are largely untethered from economics,
especially Trump’s. But business is frightened to fight back or sees the gains.
• Congress is almost certain to be split whoever wins: R Senate, D House• This raises the likelihood of budget breakdown and little oversight• This creates more room for Trump Executive Orders, less room for Harris• Trump would be more about executive discretion and deal-making (corruptionand uncertainty); Harris would be more about legislation and rule of law
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Limited differences on trade/FDI/migration• Biden retained essentially all tariffs and migration restrictions imposed by Trump• FDI screening and restrictions were expanded by Congress during Trump, but still havenot been fully implemented. The treatment of Nippon Steel, however, is worrisome.

• Trump will deliver 10 or 15% tariffs “across the board” and 50-60% on China• This will translate in practice to raising of all tariffs in the areas deemed ‘national security’or eligible for Super 301 protection during Trump’s first term – with individual exceptions• The imposition of 50%+ tariffs on eVs from China – and from Mexico made by
Chinese producers – is likely to be implemented soon by either administration• Harris would prefer to put in place standards and other NTBs and subsidies fordomestic production than to raise tariffs in order to achieve the same result• Similarly, Trump will demand WTO revert to the GATT or the US withdraws, while
Harris would not withdraw but would seek the same outcome• Whatever Trump promises during the campaign, Harris is likely to match
Impact of Economic Fragmentation | 10

Very different on export controls/sanctions• The one claim Biden made about trade/China during the SOTU was that hisadministration has been tougher on tech restrictions, which is true.
• Trump would de facto suspend Russian sanctions, as well as Ukraine aid• Trump would loosen all attempts at financial sanctions except on Iran and Venezuela• As seen with TikTok this week, Trump would case by case erode China restrictions• He would retain the appearance of China restrictions, but Russia will provide access• Congress (Senate R’s) might stand up to Trump on this set of issues re China, but
Trump will retain discretionary implementation so no real teeth will remain• Both the Harris and Trump Administrations would declare that pharmaceuticals
supply is a national security measure and try to end dependence on PRC• Both the Harris and Trump Administrations will impose unilateral restrictions, but
Trump to extract concessions (and reverse them), Harris to pursue security

Impact of Economic Fragmentation | 11

Little international difference on climate• Harris would like to be very different than Trump on climate, and will do so via
regulation and by encouraging state governments to advance restrictions• He will not however be able to pass new legislation nor do anything to credibly restrict
continued gas/oil extraction, ICE production, pipelines, etc., as he has not so far.

• As with WTO, Harris would not withdraw from Climate Accords, while Trump
would, but Harris would de facto block progress by insisting on America-only rules• Harris would continue to insist that US green tech subsidies are equivalent to EU
Carbon Price, and put in place a CBAM versus many LMIEs• Conflict with the EU over US grabbing energy intensive industries either way• Trump would explicitly back the ongoing production of ICE, while Harris would set
targets for its replacement, but protectionism on eV/batteries would stall progress

Impact of Economic Fragmentation | 12

Geopolitical change will affect Third Nations’ global access•

Both U.S. and E.U. brands/companies are likely to go into secular decline in rest of the world•
•
•
•

•

The US+2 strategy will be less protected from low-cost competition outside of Japan and U.S.
••••

Combination of self-dealing, barriers to imports/migration, and unpopular stances will reduce demand
Genuine question of how much can Japan, Inc., grow in non-China in competition with China?
Likely substantial increase in tied lending, infrastructure investment, FDI with green offset, in LDCs
U.S. and E.U. likely to be miserly, PRC too bullying – a real opportunity for Japanese-financed growth?

Military use and adjacent emergency use markets may be a growing exception
Middle East and SE Asia also could prefer a non-US but non-China dependent set of standards
Do not put large bets, though, into Central America, South Asia, Sub-Saharan Africa

Safe to assume that geopolitics will drive down gas and petrol prices medium-term••

U.S. and others will want to get what is in the ground sold before they can no longer do soGenuine uncertainty how much green network gets built in ROW given climate – is there a role for EU orJapanese infrastructure diplomacy?

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Best current guesses about US Foreign Economic Policy Impact
A. Will 2024 be a political realignment election, meaning the wiping out of either the current
Democratic or Republican Party as a player, empowering the President even more?
Wipeout more likely if Harris/Dems win than if Trump/Reps win. Could swing left(er) on climateB. How much could Chinese and EU problems – or exogenous productivity gains in US – mask
the costs of these policies and minimize the relative pressure on the US?
Relative performance could hide a lot of US costs from ill-advised policies by either party

C. Would Trump’s weakening of NATO commitment encourage Russian/Chinese adventurism?
Main impact would be China using Russia to evade restrictions instead of vice versa
Fissures within EU would likely grow, leading to migration and FDI problems

D. Does EU vs US vs China divergence on climate policy create new conflicts?
Yes. China’s role in EM and ROW will rise, and EU and US role will decline, as a result
Impact of Economic Fragmentation | 14

The global pushback on Bidenomics
America’s Zero-Sum
Economics Doesn’t Add Up
Adam S. Posen
Foreign Policy
March 2023

https://foreignpolicy.com/2023/03/24/economy-trade-unitedstates-china-industrymanufacturing-supply-chainsbiden/• Biden IP ignored global impact• National champions arise fromproducer subsidies and tradeprotections -> Corruption• Rapid subsidies arms race

• Exclusion of LMIE from tech future
and politicization of trade/FDI• Slower diffusion of green tech
• Limited recognition now by BidenHarris Administration

Impact of Economic Fragmentation

Imports of most IPEF countries
have concentrated on China(Lovely, 2024)

Impact of Economic Fragmentation | 16

Hyperglobalization is Dead (Subramanian, 2023)
35

Global Exports as share of Global GDP (%)
Gross Exports
30

25

20

Value-added Exports

1510

Impact of Economic Fragmentation |Possible End of Disruptive North-South Trade(Subramanian, 2023)
Post-global financial crisis,
imports from South into
North have exerted less“pressure”

Average income level of manufacturing imports

The corrosion – not the end – of globalization• Trade is the most resilient part
• Multi-layered fabric of global
interdependence• Some parts fraying, someparts expanding, some holes• Foreign ownership and businessnetworks are more vulnerable
Adam S. Posen
Foreign Affairs, March 2022
https://www.foreignaffairs.com/articles/world/20
22-03-17/end-globalization• These hold up prospect ofdiverging technical standards andslower innovation spread

Impact of Economic Fragmentation

The changed macro and geopolitical landscape• Long-term real rates will remain 0.5-1.0% higher than they were before 2020
• Average growth will be weaker in almost all economies, G20 and LMIEs• Likely positive exceptions: India, Indonesia, Brazil, Southern Europe• Rest of the BRICS and poorer countries will be in persistent difficulty• Lack of SIFI financial exposure means less response by G20 to the problems• Decoupling of China/US and to lesser degree EU on investment, technology,
business networks, and capital flows will be far greater than in trade• Diversification of state-run/regulated portfolios will decrease• Instability in developing world and military build-ups will reinforce each other• Rising fiscal sustainability risks will be partially offset by economic nationalism

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