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The New Economic World Order After Covid-19

The New Economic World Order After Covid-19

"Unless we change direction, we are likely to end up where we are headed." - Chinese proverb.

A few days ago, China’s President Xi Jinping issued a thinly-veiled attack on the United States, condemning its economic and military hegemony and calling for a new world order whereby “International affairs should be handled by everyone.” Although Xi did not explicitly name the U.S. in his 18-minute speech, he took aim at Washington’s efforts to decouple supply chains from China, specifically the Trump administration’s ban on American semiconductors and other high-tech goods from being sold to Chinese companies such as Huawei

Xi lamented the current unilateralism, saying the rules set by one or a few countries ‘‘should not give the whole world a rhythm.’’

Interestingly, Xi made those comments just days after U.S. President Joe Biden and Japan’s prime minister Yoshihide Suga committed to work together to oppose Chinese coercion in the South and East China Seas. 

Readers might be wondering which are these privileged economies that might be giving Xi hissy fits.

Well, it’s mostly the usual suspects, apart from the usual exceptions.

Whereas the Covid-19 pandemic has sent many economies into their worst economic recessions in recent history, the old world economic order remains mostly intact with the exception of a few notable changes. More importantly, the United States, China, Japan and Germany, in that order, still rank as the world’s largest economies.

However, some countries have moved places as a result of the pandemic while others are no longer among elite company.

The data is derived from CNBC, which compares nominal gross domestic product across countries provided in the IMF’s World Economic Outlook database.

So what are the biggest developments in post-pandemic economic rankings? Here we go:

Brazil drops off

For starters, Brazil has dropped out of Top 10.

The big news in the New World Order is that Brazil went from being the ninth largest economy in 2019 to the 12th largest last year. Indeed, the South American powerhouse was the only country to fall out of the top 10 ranking.

Even worse news for BRIC investors: The IMF says Brazil’s time in the cold is likely to last until 2026 when it might return to the Top 10.

That revelation is hardly surprising, considering that Brazil is currently afflicted by the world’s third-largest caseload of Covid-19 infections, with the health secretary recently warning of an imminent collapse by the country’s health system.

On a brighter note, the IMF has forecast that Brazil’s economy will expand 3.7% in FY 2021 after contracting 4.1% in 2020.

South Korea rising

Naturally, there’s a new entrant to the Top 10, which happens to be South Korea.

With Brazil dropping out of the world’s 10 biggest economies, South Korea moved up to 10th place with the IMF predicting that it might maintain that spot till 2026.

South Korea has recorded some success against Covid-19 though cases have been surging again this month.

However, strong semiconductor exports have been instrumental in limiting economic contraction to just 1% in 2020.

A global shortage in semiconductor chips has been wreaking havoc on the tech sector, automotive industry, consumer electronics industry, and everything in between. After years of tepid demand, the COVID-19 pandemic spurred a huge tech buying spree with manufacturers of personal computers, tablets, laptops, and gaming consoles­ caught off guard. 

Indeed, the PC industry has been enjoying a major revival thanks to the work-at-home phenomenon with computer sales in 2020 exceeding 302 million units, good for a 13% Y/Y increase and the most since 2014. At the same time, webcam sales surged almost 360% with video conferencing becoming the new buzzword of modern communication.

The trade war between the United States and China has only served to make a bad situation worse.

In a decision announced last fall, the U.S. Commerce Department declared Chinese chip manufacturer Semiconductor Manufacturing International or SMIC, persona non grata after determining the company supplies the Chinese military with chips thus making it a threat to national security. The federal government restricted SMIC from obtaining some U.S.-regulated chip-making equipment leading to U.S. buyers cutting back orders from the company. SMIC is one of the largest manufacturers of semiconductor chips, accounting for about 5% of global semiconductor supply.

Luckily, South Korea’s chip manufacturers have largely remained in Washington’s good books.

U.K. leapfrogs India

Another piece of bad news for BRIC investors: India, the world’s fifth largest economy in 2019, slipped to sixth place after the U.K. leapfrogged it.

Unlike Brazil though, the IMF says the South Asian country could regain fifth place as early as 2023. 

India has struggled to contain the pandemic even amidst widespread lockdowns, with the IMF predicting that the economy contracted a whopping 8% in FY 2020 which ended in March 2021.

On its part, the U.K. has rolled out the second-most most successful Covid-19 vaccination program after the U.S. In fact, businesses in the country are doing brisk business after lockdown reopening--another big plus for the economy.

In the final analysis, the old order appears set to remain mostly unchanged especially at the top echelons. U.S. businesses remain eager to expand their operations in China after the Asian nation recorded 18.3% year-on-year economic growth in the first quarter of 2021 but are constrained by geopolitical tensions between the two nations remaining high with the Biden administration recently announcing that it will maintain most of the Trump-era tariffs. This is unlikely to change anytime soon.

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