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全球經貿之三分天下 – Jason Ma
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The world could get carved up into these 3 blocs as Trump tariffs fuel deglobalization. Here’s which side each country might join
Jason Ma, 07/05/25
Wells Fargo sketched out a hypothetical scenario where the world is divided into three trading blocs led by the U.S., China, and the EU. (Getty Images) 請至原網頁觀看地圖
* The era of lower trade barriers and greater economic interdependence is waning, and President Donald Trump’s aggressive trade war is further stoking that trend. Economists at Wells Fargo recently sketched out a hypothetical scenario where the world is divided into three trading blocs led by the U.S., China, and the EU.
Globalization began retreating before President Donald Trump shocked the world with his aggressive trade war earlier this year.
But his tariffs accelerated the trend, prompting allies to question the U.S. role in the world with European Commission President Ursula von der Leyen even declaring in April that, “The West as we knew it no longer exists.”
While Trump pulled back from his highest rates, tariffs in some form don’t look like they are going away anytime soon. On Thursday, he suggested the U.S. will unilaterally impose tariffs as high as 70% in the coming days.
In a note last month, economists at Wells Fargo sketched out a hypothetical scenario where the world is divided into three trading blocs led by the U.S., China, and the EU.
The U.S. bloc includes most of the Western Hemisphere plus traditional allies in Asia and the Middle East. China’s bloc includes Russia, much of East Asia and Central Asia, the top economies in Africa, as well as a few countries in Latin America and the Mideast. The EU bloc is the smallest group, encompassing the European Union, the United Kingdom, Iceland, Norway, Switzerland, Turkey and Ukraine.
“Deglobalization has had its roots in the geopolitical and economic competition between the United States and China,” Wells Fargo said. “Recent events raise the possibility of further cleaving of the global economic order. Specifically, the possibility that the European Union goes in its own geopolitical and economic direction is no longer unfathomable.”
Economic impacts of deglobalization
Wells Fargo assumes legal challenges to Trump’s tariffs will eventually fail, with the effective rate settling at around 14%. While that’s well below some of the steepest rates Trump unveiled on “Liberation Day,” it still marks a sharp increase from the 2.3% effective rate at the end of 2024.
For its analysis, the bank looked at 100 countries that account for 97% of global GDP and 93% of global exports, then split them into the three blocs.
The U.S. bloc had about half of global GDP in 2023, while the EU and China blocs each represented roughly a quarter of global GDP.
In a tripolar world where each bloc imposes a 15% across-the-board tariff on the other blocs, Wells Fargo used the Oxford Global Economic Model to estimate global real GDP would grow 9.1% between 2025 and 2029, instead of the 11% rate under a baseline scenario where trade is essentially free.
That translates to the world missing out on about $3.8 trillion in GDP during that span, or roughly $1,800 for a typical household of four.
“The growth-reducing effects of the levies are felt in the first two years after imposition, but the level of global GDP never returns to baseline, at least not during the forecast period we consider,” Wells Fargo said.
U.S. bloc
* United States
* Japan
* India
* Brazil
* Canada
* South Korea
* Mexico
* Australia
* Saudi Arabia
* Argentina
* Bahrain
* Bangladesh
* Chile
* Colombia
* Costa Rica
* Dominican Republic
* Ecuador
* Egypt
* El Salvador
* Gautemala
* Honduras
* Israel
* Jamaica
* Jordan
* Kuwait
* Morocco
* New Zealand
* Panama
* Paraguay
* Peru
* Philippines
* Qatar
* Singapore
* United Arab Emirates
* Uruguay
EU bloc
* European Union
* United Kingdom
* Iceland
* Norway
* Switzerland
* Turkey
* Ukraine
China bloc
* China
* Russia
* Indonesia
* Thailand
* Vietnam
* Malaysia
* Afghanistan
* Algeria
* Armenia
* Azerbaijan
* Belarus
* Bolivia
* Cambodia
* Iran
* Kazakhstan
* Kenya
* Kyrgyzstan
* Nicaragua
* Nigeria
* Oman
* Pakistan
* South Africa
* Sri Lanka
* Syria
* Tajikistan
* Tanzania
* Tunisia
* Turkmenistan
* Uganda
* Uzbekistar
* Venezuela
* Zimbabwe
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伊朗戰爭與地緣政治及經貿 -- Jonathan Stephen Harry Riley
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Lesson in Geopolitics from the 2026 Iran War
Why the Iran Crisis Is a Crisis for Asia, and why the war in the Middle East is revealing structural weaknesses
Jonathan Stephen Harry Riley, 03/19/26
Since Israel and the US started a war with Iran on the 28th of February 2026, it has highlighted the massive weaknesses in the global economy and highlighted the water security weaknesses within the Gulf States, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
That is because Iran is attacking some 450 desalination plants in the Middle East, which could see over 100 million dead in the Guld if they start to focus on targeting those water facilities.
As to how this affects Asian nations, this war has shown how dependent they are on trade routes through the Middle East and how any disruption could cause those economies to shut down.
It also shows who depends on those nations and on the United States acting as the world police man and how dependent they are on the USA cutting grass in the Middle East by trimming the terrorists every few years.
Why the West keeps mishandling the Middle East and why politics matters
The Middle East is a region that needs to be managed, hence the analogy of cutting grass.
That’s why, when the USA took major steps, such as the Iraq War of 2003 and the Iran War of 2026, it showed how war in the region can have unintended consequences and that intervening nations don’t have the long-term political capital to stay and initiate generational change.
Also, because the USA and its allies are not fighting on a death ground, the war is not existential for them; in layperson’s terms, they can pack up their bags and go home, since losing is something they can afford.
It’s a key reason why great powers can lose small wars and why the USA lost the Vietnam War and gave up on trying to turn Afghanistan into mini-California.
This is also why Russia has over 1.2 million dead in their attempt to conquer all of Ukraine since 2022, because for the Ukrainian nation and its people, the war for them is existential.
Another lesson for the West is that there is a big difference between nation-building and nation-creation when there is no institution, no rule or law, and nothing to work with.
It’s a much longer and harder task because history matters, no matter how much Western liberals want everybody to be the same.
Also, nation-building in post-war Japan and Germany worked because the United States was not starting from scratch; there were already institutions in those nations, which made the job easier.
This includes the rule of law, and a lack of tribalism makes the task of nation-building much easier.
In contrast, we can look at the USA’s 20-year war in Afghanistan from 2001 to 2021, trying to bring feminism and LGBTQ+ rights to a deeply tribal, conservative society and trying to give girls the right to wear miniskirts and have the California lifestyle and New York City lifestyle.
That kind of project the US would have needed to be involved in for at least 3 generations, and the USA and its allies believe they could do all of this was due to Western hubris after winning the Cold War, which they believed highlighted the superiority of Western liberal democracy over all other political systems.
But what Western leaders forget is that democracy is one of the worst political systems, and the only issue is that all the others are worse.
The Chinese politician Zhou Enlai, when asked in 1972 about the impact of the French Revolution and democracy, stated that it was “Too early to say” whether democracy would be a success for China and its history, since the Qin dynasty united it in 221 BC.
China has only ever had a monarchy and a central bureaucratic state, and the belief, rooted in Chinese legalism promoted by the Qin, that humans are fundamentally evil and need rulers to survive, and that there can be no challenge to the rule of law.
This is the polar opposite of the belief that there is a universal human and that people are the same, which is wrong and racist in its own way. Still, after the horrors of the Holocaust and the wars of the last century, people in the West and Europe needed to believe it.
Because politics is not about truth and fact, it’s about what people believe and how people feel, and those have nothing to do with reality. That’s also why people vote for political leaders who give them free stuff, even though there is no such thing as a free lunch.
International Global choke points shipping 全球航線咽喉點
Israel and the USA
When it comes to the current conflict with Iran, the USA and Israel are not united when it comes to the outcome of the conflict, mainly due to the USA under Donald Trump being very erratic and changing what it wants from Iran every few days.
So, there’s not really any point in talking about the US objectives, because there doesn’t seem to be a clear, highlighted objective.
As for Israel, they are getting ready for a world where the USA is no longer the world police man, which, to be honest, all nations should be getting ready for that new world order after the USA reveals the relationships or lack of relationships with the rest of the world.
What is good for Israel is not necessarily what’s good for the region as a whole or for another country. What’s good for Israel is that Iran is in chaos after over 40 years of Iran backing terrorist organisations throughout the Middle East to attack Israel, with Hamas in Gaza, Houthis in Yemen, and Hezbollah in Lebanon, all to spread terrorism and destroy the state of Israel.
As for the USA, it’s in Israel’s interests to use them when they still can, so that Israel will be in a position of strength in the future to win political dominance in the Middle East or to enter a partnership with Turkey or Saudi Arabia.
This has helped, since the war, Iran has launched all-out drone and missile attacks against its neighbours, who are supporters of the United States or are on the side of Israel and Sundia Ariba in the border cold war between those states and Iran since the Iranian Revolution in 1979.
As for the USA, its war machine is meant to be a highly efficient scalpel, but it is not suited to a war that becomes a slogging match, because the USA retooled its military after the Cold War, given the unlikelihood of fighting a land war like World War II.
But to fight a much smaller and more limited conflict, that’s why the USA is rapidly running out of missiles to use against Iran over the long term, with the USA already having used, according to Sky News, 10% of the estimated 4,000 Tomahawks in the US military’s arsenal.
As of writing this, the United States and Israel have targeted at least 5000 Iranian military sites and assess, but they have forgotten that the enemy also gets a vote on when the war ends, and how long the war lasts, because it’s easy to start a war but very hard to see how it will end.
Furthermore, the USA is a victim of its military technological success because, as already stated, it becomes so advanced that it cannot sustain a long, drawn-out conflict due to a lack of economies of scale.
A good example is the German Tiger Mark I & II Tanks created in 1942. At the time, it was the best tank in the world, but fewer than 2,000 of them were ever made. In contrast, the USA had over 50,000 Sherman tanks, and that quantity has a quality all of its own.
That’s also a big reason for the Russian issue in Ukraine: it’s using tanks that cost millions of dollars but can be destroyed by a $500 Ukrainian drone.
Asian dependency on the Middle East
Gulf oil supplies 40 to 80% of crude imports for China, India, Japan and South Korea, according to The Economist.
It also accounts for nearly a third of China’s liquefied natural gas imports and more than half of India’s, and even more for small Asian countries.
Last year, 87% of crude oil and 86% of liquefied natural gas that passed through the Strait of Hormuz went to Asia, making any prolonged closure a serious threat to the region.
Qatar’s producers, for example, are critical to the world’s helium supply, which is essential to semiconductor manufacturing.
India imports 55% of its crude oil from the Middle East, amounting to 2.74 million barrels per day. India’s fuel reserve is 74 days, according to Reuters; Japan’s is 254 days, and South Korea’s is 208 days.
And in the long term, if the US withdraws from its military commitment, Asian states will need to build up their assets to project power in the region, because trade and oil must flow through it.
With that said, it applies equally to European states, given the interconnectedness of global supply chains.
The Middle East is such a hotbed because so much trade passes through the region, and it’s the only way for trade to flow from east to West, making it essential to global geopolitical security interests. It’s also the birthplace of the three Abrahamic religions: Christianity, Islam, and Judaism.
The place is basically Frank Herbert’s Dune trilogy.
The reason it’s not immediately affecting the West is de-industrialisation. And thanks to energy efficiency, renewables, and the rise of services, the ratio of global oil consumption to world GDP has fallen from 7% in the 1970s to less than 3% today.
Given how interconnected everything is through global trade, any shocks in Asia and any disruptions to global supply chains will affect everybody. In many ways, there is no such thing as a regional catastrophe anymore, and there is no one human civilisation.
We are all connected, and everybody will feel any regional shock in the global economy. It also shows the massive weakness, with the current conflict in the Middle East laid bare, after every conflict or dispute that impacts global trade.
Again, the Middle East is a region that needs to be managed, not to go gun-ho or take a sledgehammer when a scalpel is what’s needed. In the end, the trade must flow.
Written by Jonathan Stephen Harry Riley
I have been writing from 2014 to the present day; my writing is focused on history, politics, culture, geopolitics and other related topics.
Published in The Geopolitical Economist
In the global geopolitics, truth is one, but the wise interpret it differently.— Here, we interpret these diversions
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全球經濟的多重咽喉和瓶頸 -- Michael Spence
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請參考：The Strait of Hormuz and the Power of Chokepoints
The Global Economy’s Many Chokepoints
Michael Spence, 03/27/26
In a highly decentralized and competitive network, investors are incentivized to optimize for efficiency rather than for resilience. This dynamic has produced a highly fragile global economy, owing to single points of failure that extend far beyond geographical bottlenecks like the Strait of Hormuz.
MILAN – Iran’s effective closure of the Strait of Hormuz, through which about a fifth of the world’s oil and a quarter of its fertilizer passes, has highlighted a well-known vulnerability of our complex networked global economy: a single point of failure can create massive and costly disruptions. Yet such points of failure have been proliferating for decades.
Global trade flows through a number of other critical passages, which could also become disruptive bottlenecks.
The Strait of Malacca between Malaysia and the Indonesian island of Sumatra – one of only two sea lanes linking the Indian Ocean to the Pacific – receives much attention in war simulations.
When the Suez Canal was blocked for six days by a massive container ship, the Ever Given, in 2021, the disruption reverberated across supply chains for months. The Panama Canal raises similar risks.
Excessive market concentration generates similar vulnerabilities. The dominance of a few Japanese producers of microcontrollers and engine airflow sensors – small but essential components in automaking – meant that, when a massive earthquake and tsunami hit Japan in 2011, the global auto industry contracted sharply.
Such vulnerabilities are somewhat easier to address than those embedded in geography, like the Strait of Hormuz. Since 2011, automakers have diversified their suppliers, built up buffer stocks, and created large data systems that improve transparency in complex supply chains, making it easier to identify hidden single-source risks.
But diversification comes with trade-offs, as the advanced-semiconductor sector is likely to learn. A single Dutch company, ASML, produces all the extreme ultraviolet lithography equipment required to produce the most advanced semiconductors, and only two companies, Taiwan’s TSMC and South Korea’s Samsung, have the capabilities to produce 2-nanometer semiconductors.
Given the obvious vulnerabilities this creates, governments are now promoting diversification. The United States and the European Union have introduced incentives for TSMC and Samsung to diversify their production geographically, and the US government is backing the development of Intel’s advanced-semiconductor capabilities. Meanwhile, China is investing heavily to reduce its dependence on external sources in semiconductor design and fabrication.
But while this approach might increase resilience, the sector can ill afford lower efficiency. The most advanced semiconductors are crucial not only to training generative-AI models, but also to advancing physical-AI applications (such as robotics and autonomous vehicles), which require low latency, high thermal efficiency, low power consumption, and a long battery life. It is not clear that the diversified supply chains currently being built will be able to keep up with demand.
Rare earths represent another notable vulnerability in technology supply chains. A range of critical and strategic products – including electric vehicles, consumer electronics, medical technologies, and advanced military technologies – depend on these essential ingredients, yet China alone controls about 60% of global rare-earth mining and over 90% of processing.
Points of failure characterize the financial sector as well. The US-controlled SWIFT inter-bank messaging system for cross-border transactions is an obvious example.
At the economy level, excessive dependence on any one source for anything – from energy to demand – can generate a point of failure, as Europe learned after Russia’s full-scale invasion of Ukraine in 2022. This is true not only because of the risk of an accident or shock, but also because excessive dependence enables extortion or other forms of pressure, exemplified by China’s rare-earth export controls, America’s enforcement of sanctions via SWIFT, and US President Donald Trump’s use of tariffs.
The proliferation of points of failure has to do with the global economy’s design and incentives. In a highly decentralized and competitive network, investors are more motivated to optimize for efficiency (the benefits of which are appropriable, meaning they accrue largely to the investor) than for resilience (the benefits of which are spread across the network). When there are many investors, none has an incentive to internalize the costs of balancing efficiency and resilience.
Networks with a greater concentration of ownership are more likely to optimize for resilience. Three companies (Alcatel Submarine Networks, SubCom, and NEC) supply and maintain 87% of the vast global network of undersea fiber-optic cables, which convey over 95% of international data traffic, including payments and other financial transactions. These “architects” have a powerful incentive to build resilience into the system, such as by increasing the number of cables, spreading out landing points, ensuring wide dispersion, implementing looped designs, using internet protocols for seamless rerouting around blockages, and including spare capacity. After all, resilience is part of the package they are selling.
The same is true in the auto sector, where large players like Toyota control a sufficiently large chunk of the supply chain to benefit from optimizing for both cost and resilience. For the internet, it was the US government that acted as the primary architect, ensuring, for example, that embedded protocols automatically reroute traffic around blockages. In fact, large national economies are important players because, to some extent, they internalize and aggregate the benefits of resilience across a range of small private-sector players.
When markets undersupply resilience, countries become important players in delivering it. To this end, they have a few options. They can go it alone, such as by “onshoring” the production of critical goods like semiconductors. They can increase international cooperation – for example, by forming a coalition to maximize alternative sourcing of rare earths. Or they can pursue some combination of the two. A crude rule of thumb might be that cooperation is less expensive than onshoring, more effective in principle, and in certain cases, essential – but much harder to achieve.
Whatever approach countries choose, eliminating or mitigating points of failure will be expensive. But, at a time of growing fragmentation and deteriorating cooperative, it is a cost they will have to bear.
Michael Spence, a Nobel laureate in economics, is Professor Emeritus of Economics and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, Senior Adviser to General Atlantic, and Chairman of the firm’s Global Growth Institute. He is Chair of the Advisory Board of the Asia Global Institute and serves on the Academic Committee at Luohan Academy. He is a former chair of the Commission on Growth and Development and a co-author (with Mohamed A. El-Erian, Gordon Brown, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023). He’s been writing for PS since 2008.
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美國財政「漸破產」前景堪憂 - Eleanor Pringle
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此處「漸破產」的「用法」源於「漸凍症」的詞型。
America is ‘going broke slowly’ says J.P. Morgan, as national debt balloons and tariff revenue looks shaky
Eleanor Pringle, 10/14/25
* J.P. Morgan’s David Kelly warned this week that while America is “going broke” it’s doing so slowly enough that markets aren’t panicking yet. With U.S. national debt now topping $37.8 trillion and interest payments exceeding $1.2 trillion, Kelly said the debt-to-GDP ratio—already at 99.9%—will likely keep rising even under moderate growth. Despite tariff revenues and temporary deficit relief, he cautioned that political choices or a slowdown could quickly worsen the fiscal picture, urging investors to diversify away from U.S. assets before “going broke slowly” turns fast.
America is going broke, J.P. Morgan Asset Management’s chief global strategist, David Kelly, wrote in a note this week, but no one is panicking yet because the government is going broke slowly.
Kelly outlined that while the economy is facing a barrage of issues (geopolitics, trade wars, changing immigration enforcement, and government shutdowns to name a few) one of the key longer-term issues is how the U.S. government is going to pay its bills.
In a bid to wrangle down U.S. federal debt—and its contributions to the wider national debt—President Trump initially asked Tesla CEO Elon Musk to form the Department of Government Efficiency (DOGE) with the goal of axing $2 trillion from the federal budget.
But the pair then famously fell out over the White House’s One Big Beautiful Bill Act, which the Congressional Budget Office (CBO) estimated will add another $3.4 trillion to the national debt over the next decade. The White House countered its tariff regime will offset the spending and any decrease in revenues owing to tax cuts. The CBO estimates that tariffs should reduce total deficits by $4 trillion by 2035.
America’s national debt is spiraling higher by the second. At the time of writing it sits at over $37.8 trillion, and there are $1.2 trillion in interest payments to service the borrowing. JPMorgan CEO Jamie Dimon and Fed chairman Jerome Powell have both expressed concerns about it.
Kelly’s point is that while investors are mindful of the basic math, the problem is going to unfold over a long period of time.
“The question I am asked most frequently by investors and financial advisors is, ‘When is the federal debt going to blow up in all of our faces?’ My usual answer is that, while we are going broke, we are going broke slowly. Global bond markets are very well aware of the trajectory of U.S. debt. The fact that even today, the U.S. government can borrow money for 30 years at a yield of just 4.6% speaks to a conviction that there remains room for the government to borrow more,” Kelly wrote in a note yesterday.
Optimism or naivete?
The economist wrote that in the near term casual speculators may have some reason for optimism. For example, he pointed to tariff revenues raking in significant sums ($31 billion in August, according to the White House) and recent estimates from the CBO and the Committee for a Responsible Federal Budget that deficits for fiscal year 2025 will total 6% of GDP, down from 6.3% last year.
This reduction in borrowing as a percentage of economic growth is a key factor watched by America’s lenders. A nation’s debt-to-GDP ratio is a clear barometer of whether it will be able to repay its debts or pay higher interest rates to sell its borrowing.
But Kelly cautioned: “It’s worth pausing here to consider this number. The total federal debt in the hands of the public is now almost $30.3 trillion or, we estimate, 99.9% of GDP. Starting from these levels, if nominal GDP grows by roughly 4.5% going forward, (comprised of 2.0% real growth and 2.5% inflation), then any budget deficit north of 4.5% will cause the debt-to-GDP ratio to rise. Under our assumptions, the debt-to-GDP ratio climbs from 99.9% on September 30th, 2025, to 102.2% of GDP 12 months later.”
Debt is likely to rise even quicker than this, he added.
On tariffs, for example, there are still questions about the legalities of Trump’s action. If they are overturned by the U.S. Supreme Court, “this would, at a minimum, force the administration to go back to the drawing board to impose replacement tariffs under some other authority or by sending a bill through Congress. Moreover, it could force substantial refunds of tariffs already paid in recent months,” Kelly added.
Moreover, these estimates are reliant on “no recession and no need for other major spending on domestic or international priorities.” Questions about whether the U.S. may already technically be in a recession in some states are growing. Kelly adds: “Because of all of this, a deficit equal to 6.7% of GDP should probably be regarded as a low-ball estimate of this year’s red ink.”
The takeaway for investors is diversifying their portfolios in case America’s debt begins to spiral more quickly than the current environment, Kelly said: “There is a danger that political choices lead to a faster deterioration in the federal finances, leading to a backup in long-term interest rates and a lower dollar. Based on current allocations and valuations alone, many investors should likely consider diversifying their portfolios by adding alternative assets and international stocks. The risk that we move from going broke slowly to going broke quickly adds an important reason to make this move today.”
This story was originally featured on Fortune.com
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從稀土金屬分析中國全球經濟攻略 -- Hans van Leeuwen
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China has the world in a $1tn choke hold
Experts fear Beijing’s economic arsenal leaves its international partners at risk of coercion
Hans van Leeuwen, 10/15/25
The world’s investors, executives, policymakers and politicians all now keep an eye on the Truth Social account @realDonaldTrump. The president’s posts have the power to move markets and even shake up the world order.
Now there’s another habit they might need to cultivate: watching the announcements from China’s ministry of commerce.
The ministry’s initially low-key announcement last week of new regulations on Chinese rare earth exports has sent shock waves through the West.
Beijing awarded itself the power to dictate what many companies, based anywhere in the world, do with key products that contain rare earths or battery materials sourced from China. The sweeping powers affect everything from cars to solar panels and missiles. And almost all companies affected have nowhere else to go.
“This is a completely new dawn. This no longer has anything to do with trade. We’ve morphed from a trade war into a grey-zone operation,” says James Kynge, a China watcher at think tank Chatham House.
“It’s a complete step change in China’s leverage and China’s ability to coerce not only the US, but every other country in the West, if it chooses to do so. The evidence of the past suggests that Beijing may well use this leverage. And then we’re into a whole different world.”
For years, Beijing has been building up an arsenal of economic weaponry. Chinese goods could be either withheld from a country or dumped on it. Exports to China could be blocked. The world’s largest creditor could toy with an indebted government’s bond market, or call in its loans.
From time to time, it has turned this coercive firepower on countries that it views as transgressive. Countries including Japan, Norway, Lithuania and Australia have already been put through the vice.
Now, it is showing the world just how far it is prepared to go.
The new rare earth powers have been announced amid claims that Britain dropped a trial against two alleged Chinese spies because of its dependence on Beijing for cash.
The case against two Britons collapsed after the Government failed to brand China a national security threat explicitly. The spooks have also reportedly been kept away from a decision on whether Beijing can build a new super-embassy in London.
In the US, Trump’s response has veered between pugnacious and placatory. After the rare earths decision, he vowed massive tariffs, only to back-pedal two days later. On Tuesday, he was back on the war path: China’s quiet boycott of US soybeans was “an economically hostile act” that would require “retribution”, he told his Truth Social followers.
Beijing has described its latest rare earths measure as retaliatory, not escalatory.
“China has said in as many words that it has modelled its own approach on what the US has been doing,” says Nigel Inkster, a former deputy MI6 chief now at Enodo Economics.
China’s use of economic weaponry
But Xi has spent his entire presidency building towards this moment. Economic weapons have always been part of his arsenal.
The most obvious is the Belt and Road Initiative (BRI), a $1.3tn (£970bn) scheme of loans, grants and investments used to fund infrastructure projects in 150 countries worldwide.
The programme creates openings for Chinese investments and contracts for its companies. It locks economies into Chinese trade and freight corridors. It buys influence over governments.
The first half of this year was the BRI’s biggest yet: $66bn of construction contracts were awarded and $57bn of investments made, according to a report from Australia’s Griffith University and China’s Green Finance and Development Centre. There were record outlays on energy, metals and mining and technology.
The BRI has helped China become the world’s largest lender to developing countries. Its total now exceeds the combined lending of the International Monetary Fund, the World Bank and the Paris Club of 22 major creditor countries.
When the projects are debt-funded, Chinese lenders often demand key assets as collateral.
“If you’re in hock to China for billions and billions of US dollars, then you’ve got to be nice to China,” says Kynge. “I wouldn’t quite call it coercion. I call it leverage, but it could turn into coercion.”
The Stimson Centre has suggested that the BRI may have helped steer some developing countries away from recognising Taiwan diplomatically.
Although recipient countries benefit from the infrastructure, the BRI investment can go awry.
In Sri Lanka, a Chinese company took control of the Hambantota port in 2017 under a 99-year lease after the government in Colombo was unable to repay the debt.
In Ethiopia, a railway to the Port of Djibouti fell short of both the coast and Ethiopia’s industrial parks. The BRI had also saddled Ethiopia with debt, concentrated among Chinese creditors. According to a report published by the Hong Kong Trade Development Council, “positive spillovers from investment and lending from China have been limited”.
The second weapon in Xi’s arsenal is the monopolies China has built up in supply chains for goods the world cannot do without. The country’s mines churn out 61pc of the world’s rare earths, and its refiners and manufacturers process 92pc of the world’s supply.
China also holds dominant positions in the manufacture of batteries, solar panels and wind turbines, giving it the power to control prices, profitability and market access worldwide.
Many of the major producers are state-owned, state-controlled, or at the whim of state direction – meaning Beijing can use them as a lever of coercion.
“It’s not just China’s readiness to withhold access to things, it’s also the other side of the coin: China can flood international markets with highly subsidised products like electric vehicles and solar panels. For Europe, this is a particular cause for concern,” Inkster says.
Beijing exercises this control behind the fig leaf of bureaucratic procedures. The rare earth “ban” in April was actually just a new licensing process. Similarly, import bans – such as those on Australian wine, barley and lobsters in 2020 – were framed as anti-dumping or sanitary measures.
“China disguises such actions as technical trade disputes, but the intent is political and the outcome is coercive,” said John Coyne, from the Australian Strategic Policy Institute.
Now, China is deploying this weapon even more blatantly. Recently, it has simply stopped buying American soybeans, sorghum and beef.
The boycott is a significant blow to American farmers. China bought $12.6bn of US soybeans last year but has not purchased any since May. Trump has noticed: on Tuesday, he threatened to retaliate by terminating US imports of Chinese cooking oil.
Beijing is increasingly complementing this leverage with its third weapon: strategic investments, which reward friendly countries like Hungary and Spain, while freezing out the miscreants.
In the past two years, Spain welcomed a €1bn battery gigafactory investment, and two EV ventures worth a combined €1.7bn. When the EU was readying tariffs on Chinese-made EVs last year, the pushback came from Spanish Prime Minister Pedro Sanchez.
Britain and the EU have stepped up their security screening of Chinese investments, and the country has been ejected from nuclear and steel projects in the UK.
But Labour has lately sounded more emollient. “China, because of its emerging economic status, isn’t just unignorable, it is also desirable to engage with,” Peter Kyle, the Business Secretary, said recently during a trip to Beijing.
Kynge wonders when, or whether, London and the European capitals will get serious about building resilience to China’s leverage. He reckons Beijing’s latest rare earth clampdown could be “a catalyst, finally, to goad the EU and the UK into action”.
“If we do actually do something, then maybe in several years, when we’ve built up some kind of a resilient supply chain for rare earths, people will look back at this moment and say China overplayed its hand,” he says.
Building up alternative supplies of rare earths will be a costly and lengthy task. In the meantime, Inkster has another suggestion: don’t be cowed. He counsels Britain and its allies to stiffen their spines, starting with the espionage prosecution.
“I honestly doubt that prosecuting this case would have a significant impact on China’s readiness to trade or invest. And even if it did, I think it would be temporary and reversible,” he says.
“At a time when the Chinese economy is still going through a pretty rough patch, they’re unlikely to want to cut off their noses just to spite their face.”
But with the world’s second-largest economy flexing its ever-growing muscles, and Trump’s America less squarely at Britain’s back, the former spook’s advice may go unheeded.
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