A world of harmony

Insights 11/25/2019
Reading time: 2 minute(s)

Two economic powers are in a clinch: the US and China. Between the fronts, the EU is fighting for its own position. Could this showdown blow over, with a constructive coexistence emerging in place of today’s escalation?

With relations between the US and China marked by reproaches and mutual restrictions, it is uncertain where these economic and political conflicts will lead. Three scenarios seem possible. The most likely is a baseline scenario that results in a stalemate and a bipolar world order. Less likely seems a scenario in which China’s influence would be significantly curtailed by a coordinated reaction of the US and its allies.

Agreement and cooperation

While these first two scenarios involve persistent conflict situations, the third and most unlikely scenario is based on the idea of a lasting de-escalation of tensions. In this scenario, the US and China would take mutual steps in the direction of the other, and accept outcomes that are suboptimal for their respective countries. Together with Europe, they would also work on establishing global standards, rules and norms.

For such a development to be possible, a comprehensive trade agreement would have to come into existence. However, before such a détente is even conceivable, on both sides the nationalistic rhetoric would have to be dialed down. This could be in the realm of possibilities, since both sides are economically affected by mutually punitive measures, and thus also affected in terms of their domestic politics.

Normalizing relationships

In this scenario, the removal of economic sanctions and the normalization of the countries’ rhetoric would only be the beginning of a process that would be needed to rebuild mutual confidence. The technology sector worldwide would profit from a further positive development – and thus so would the global economy. Likewise, the decoupling of supply chains described in the baseline scenario would be slowed down. Such a constructive new start would, with certain limitations, benefit the export-oriented European economies as well.

One aspect remains unchanged in this scenario (and in the others, too): China is not going to back off from its territorial interests regarding Taiwan, Hong Kong, or the South China Sea. But notwithstanding these concerns, overall it would be possible to detect a decline in various tensions related to foreign policy issues.

Their differences don’t promise much hope

But even if all the previously described positive perspectives became reality, the permanent de-escalation scenario would still be unlikely, thanks to the fundamental differences between the two countries’ economic models, ideologies and claims to global leadership. It is very likely that over time, these differences would ensure that the consensus that had been reached would break down. And if agreements and obligations are no longer being met, every conceivable scenario winds up, once again, back at the base scenario, i.e. that of persistent conflict.

The Next Digital Superpower: Scenarios for the US-China Conflict

Looking at the global economy, the trade dispute between the US and China dominates the headlines. To reduce this dispute to a few trade issues is too vast an oversimplification. Rather, the present confrontation is the result of a series of developments that have evolved over several decades, set off by their fundamental disagreement over the state of the world.

With the white paper "The Next Digital Superpower", Vontobel and the Eurasia Group aim to provide an understanding of the causes of the complex interdependencies between politics, society, and the economy. The study also analyzes the potential effects of this conflict on the global economy over the next five years.

Read the whole white paper here.