WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Robert Stehrer

The economic and political weights in the world are nowadays rapidly shifting. This is mostly visible in the rise of China, but also reflected in the larger shares developing economies such as India or Brazil tend to gain over time. This trend will continue over the next decades, although maybe at a slightly lower speed than before the crisis.

In terms of purchasing power parities, China has already become the largest economy in the world (the US ranks second), and will also be so on the basis of market exchange rates in the next decade. According to recent estimates (PwC, 2015) China will reach a share in the world economy of about 20% in 2030 (in PPP) and from then on it is expected to hover around that level. India’s share is expected to reach about 13.5% in 2050 and thus would overtake both the EU and the US. The share of the US and the EU combined is projected to decrease from about 30% now to around 25% in 2050 (with the US holding a share of about 15% and the EU of about 10%). Though such long-term forecasts are naturally prone to a large degree of uncertainty, the general trend seems undeniable.

To give another example of the ongoing shift, recent research suggests that the international monetary system has transitioned from a bi-polar model (the US dollar block with around 40% and the euro block with around 20%) to a tri-polar one, i.e. including the Chinese renminbi with around 30%.

Economic shifts drive changes in international relations

Such large economic shifts will in the medium to long run inevitably also imply shifts in the structure of political power in the world. First, this is currently mostly visible in Asia, where China is taking more and more political power, though in a non-aggressive way. The Belt and Road Initiative, which also has a global outreach to India, Africa and European countries (e.g. in the 16+1 initiative), can be seen in this perspective ⁽¹⁾. Second, the US ‘America First’ strategy adopted by President Trump can be interpreted – even if the individual measures taken or announced often seem to be erratic and inconsistent – as an indication of a retreat from being the global power, which the US became after World War II, and particularly after the fall of the Soviet Union about 30 years ago. Third, the failure of the Doha Round of multilateral trade negotiations is another sign that developing countries are defending their interests more strongly.

The road from here is uncertain

There are three possible outcomes. The Hegemonic Stability Theory (HST) argues that the international system is more likely to be stable when a single nation takes the role of a dominant global power or hegemon which defines, develops and enforces the rules of the global system (see Kindleberger, 1973). Consequently, the question in this respect is (i) whether the US will be able to remain the hegemon despite its declining economic and political power or (ii) whether China will emerge as a new hegemon and is willing to take over this role. The third possible outcome – and maybe the most likely – could be that the world enters a system of multipolarity. It remains unclear, however, what this could look like and to which extent it could be based on the existing, though reshaped, institutions of global governance (such as the United Nations, IMF, WTO, etc.). In a dynamic sense such a change could also mean that – according to the long-cycle theory – the world enters a new ‘global system cycle’ where a ‘hegemonic war’ might result in a new hegemon (most likely China) though this will take time and might create a number of tensions.

In either scenario, the strategy of the EU and the US should be to retain the principles of the international governance structure, which have proved to be successful in the after-war period (e.g. the principles for ‘rules-based trade’ at the WTO level or various conflict resolution mechanisms) and are expected to also be so in a multipolar world system.

⁽¹⁾ For critical views concerning the Chinese expansion see Holslag and Miller. The EU is also increasingly concerned about the Chinese Silk Road strategy.

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