The New Neutrals Are The Hedge Economies

The global economy has entered a new era of geopolitical fragmentation, driven by a series of shocks over the past eight years, including trade conflicts, the COVID-19 pandemic, and ongoing wars in Ukraine and the Middle East. This fragmentation is reshaping investment and trade flows, leading to a reorganization of the global economic landscape.

The Great Fragmentation

The dominant trend shaping the global landscape in 2024 is the “Great Fragmentation.” This phenomenon is characterized by:

• Disintegration across international politics, economic spheres, geopolitics, social dynamics, and technological realms
• Increasing global competition for dominance in key areas
• Growing polarization in the West
• Rising challenges faced by multilateral institutions in a more multipolar world
• Growing assertiveness of actors such as the Global South

Emerging Economic Blocs

The global economy is reorganizing into three main groups:

1. US-led pro-Western bloc
2. China & Russia-led bloc
3. New Neutrals

The “New Neutrals” comprise 101 economies that consistently opt out of the geopolitical fray, as measured by their stance on United Nations votes. This group represents more than half of the world’s population and almost a fifth of its economic output.

Economic Impact of Fragmentation

The fragmentation of the global economy is having significant effects:

• Slowdown in trade of goods, but not services
• Growing fragmentation of global trade and production
• Decoupling between China and the United States
• Increase in trade-restricting measures (nearly 3,000 imposed in 2023)

These changes are likely to lead to:

• Higher inflation
• Tighter monetary policy
• Lower and more uneven economic growth across countries

The Rise of “New Neutrals”

Countries refusing to align with either major bloc are benefiting economically from their hedging stance:

• Significant increase in foreign investment in new factories and other long-term projects
• Growing trade with the China & Russia bloc, particularly due to China’s exports and Russia’s energy resources

Reshaping of Trade Routes

The fragmentation is leading to new trade patterns:

• “Friend-shoring”: Redirecting trade based on alliances
• “Reshoring” and “nearshoring”: Moving production closer to home or to geopolitically aligned countries
• Emergence of “connector countries” and new trade routes

Impact on Specific Countries

• United States: Emerging as a key beneficiary of global fragmentation, with favorable legislation mobilizing capital in strategic sectors
• India: Positioned to become the next global manufacturing hub due to its large labor and consumer markets, edge in pharmaceuticals, and production-linked incentives
• Mexico and Vietnam: Benefiting from their ability to attract nearshoring and friend-shoring opportunities

While some argue that this new state of affairs signals the end of globalization, it’s more accurate to say that globalization is rapidly changing shape. The emergence of the “New Neutrals” and the reshaping of trade routes demonstrate that the global economy is adapting to a more fragmented geopolitical landscape, with some countries and regions poised to benefit from these shifts.

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Above image: https://www.imf.org/en/News/Articles/2024/05/07/sp-geopolitics-impact-global-trade-and-dollar-gita-gopinath

David Shiller

David Shiller is the Publisher of LightNOW, and President of Lighting Solution Development, a North American consulting firm providing business development services to advanced lighting manufacturers. The ALA awarded David the Pillar of the Industry Award. David has co-chaired ALA’s Engineering Committee since 2010. David established MaxLite’s OEM component sales into a multi-million dollar division. He invented GU24 lamps while leading ENERGY STAR lighting programs for the US EPA. David has been published in leading lighting publications, including LD+A, enLIGHTenment Magazine, LEDs Magazine, and more.

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