Geoeconomics Bi-Weekly: New Studies Highlight the Changing Geoeconomic Landscape

State of the Global Economy 

After credit ratings agency Fitch Ratings revised China's credit outlook downward last week citing “uncertain economic prospects,” China received some much-needed positive news. On Tuesday, China’s National Bureau of Statistics announced a GDP increase of 5.3% in the first quarter of 2024 compared to Q1 2023, exceeding analyst expectations and keeping pace with China’s ambitious goal of 5% growth in 2024. This growth was largely export-driven as China copes with a highly indebted property sector low consumer spending. Factory investments in Q1 increased almost 10% from the prior year, while Chinese exports rose 7% on an annual basis in January and February. Actual trading volumes, however, are likely higher as the glut of Chinese products is depressing prices, frustrating foreign businesses that are now struggling to compete with Chinese manufacturers. This export-based growth model seems to be working for now, but its returns may diminish as the renminbi strengthens and exporters’ margins shrink. 

In the United States, inflation came in hotter than expected for the third straight month. The Consumer Price Index (CPI) registered an annual price increase of 3.5% in March, up from 3.2% in February, while Core CPI remained steady at 3.8%. U.S. job and wage growth also remained hot. The United States added 303,000 jobs in March, well over expectations of 200,000, while unemployment fell from 3.9% to 3.8%. Annual wage growth for the 12 months ending in March was 4.1%—the lowest annual increase since June 2021, yet still above inflation. Combined, the new data dampen expectations of an interest rate cut this summer. Inflation remains above the Fed’s 2% target, while strong employment and wage growth may provide the Fed with more leeway to maintain high interest rates without risking a recession. The Federal Reserve’s next interest rate decision comes on April 11th. 

Meanwhile, the European Central Bank (ECB) held interest rates steady for the fifth consecutive meeting, though ECB Governor Christine Lagarde alluded to impending rate cuts barring any major surprises. March CPI in the Eurozone registered an annual price increase of 2.4%, down from 2.6% in February, while annualized Core CPI fell from 3.1% in February to 2.9% in March. This new inflation data, along with findings from a quarterly survey of European economists, strengthen the possibility of rate cuts at the ECB’s next meeting on June 6th.  

If the inflation mismatch across the Atlantic leads the ECB to cut rates before the U.S. Federal Reserve, this historically unusual situation must be carefully managed. Some analysts contend that a diverging monetary policy from the United States could lead to a resurgence of inflation in the Eurozone as it could weaken the Euro and make imports more expensive. 

Around the World 

New study from New York Federal Reserve estimates over $130 billion in collateral damage to U.S. firms from semiconductor export controls: Since the United States first announced restrictions on exports of advanced semiconductor technologies to China in October 2022, U.S. semiconductor firms have warned that the restrictions would hurt their businesses. As U.S. firms can no longer sell many of their products to the Chinese market, they are concerned that they will lose revenue that is critical to keeping pace in the highly innovative, competitive, and globalized semiconductor industry. Last week, the N.Y. Federal Reserve published a study quantifying exactly how much collateral damage the export controls are causing. Per their estimates, U.S. semiconductor firms lost $130 billion in stock market capitalization due to the export controls, and experienced drops in bank lending, profitability, and employment. In 2022, the year before the export controls took effect, China accounted for 31.4% of all semiconductor purchases, with U.S. firms capturing 53.4% of the Chinese market.  

Supply chain and national security concerns drive large economies to rapidly implement industrial policies: Over the last several decades, industrial policy—targeted interventions such as tariffs, subsidies, and tax breaks designed to strengthen specific industries—largely fell out of fashion. Industrial policy is expensive, has many points of failure, and can increase geopolitical divisions, while economists have long debated its benefits and downsides. But despite the uncertainty, rising geopolitical tensions are spurring nations to quickly adopt industrial policy initiatives. According to a study from the International Monetary Fund, more than 2,500 industrial policies were introduced worldwide in 2023, roughly three times the number in 2019. The recent surge has mainly been driven by large economies, with China, the European Union, and the United States accounting for almost half of all new policies in 2023. Per the study, the new measures were primarily implemented to foster supply chain resilience and address security concerns, in addition to climate mitigation. 

United States announces $13 billion in subsidies for semiconductor giants Samsung and TSMC in bid to re-shore leading-edge chip manufacturing: Speaking of industrial policy, one of the more ambitious goals of the United States’ CHIPS and Science Act is to produce 20% of the world’s leading-edge semiconductors by 2030. Leading-edge semiconductors are critical components of advanced technologies such as artificial intelligence, smartphones, and defense systems, and the United States produces almost none of these chips today. To change that, in the last two weeks the Commerce Department announced $6.6 billion in subsidies for Taiwanese chipmaker TSMC and $6.4 billion for South Korean chipmaker Samsung. The two companies intend to use these funds to build and expand facilities in Arizona and Texas, including facilities to build leading-edge semiconductors. Over 90% of the world’s most advanced semiconductors are manufactured in Taiwan today, a major geopolitical flashpoint. 

Economic ties and geopolitical tensions pull nations in opposite directions, as evidenced by German Chancellor Olaf Scholz’s trip to China: As nations have become increasingly interconnected, economic considerations naturally play a greater role in foreign policy decisions. But sometimes foreign policy objectives and economic considerations pull countries in opposing directions, as Germany, the world’s third largest economy, is experiencing today. Many companies in Germany’s export-oriented economy are highly reliant on access to China, which is Germany’s largest trading partner. However, Germany is also a member of the European Union, which is concerned by China’s export practices and deeply troubled by its ongoing support of Russia. In a visit to China this week, German Chancellor Olaf Scholz attempted to balance these interests by echoing European concerns while also promoting increased business ties. China is the largest trading partner of over 120 countries, including U.S. allies Japan, South Korea, and the EU, which may make these actors hesitant to take too tough a posture on China despite geopolitical differences. 

Indian Prime Minister Modi expected to win third term as foreign firms remain cautious of investing in the world’s largest nation: Indians are largely optimistic about their economy, and for good reason. Over the last decade, India’s economy has doubled while its stock market has tripled. And as rising geopolitical tensions make investment in China increasingly risky, India is becoming an attractive alternative. But, despite all this, foreign direct investment (FDI) in India is lagging. Since 2016, FDI has actually decreased as a percentage of India’s GDP. It’s against this backdrop that nearly 970 million Indians—10% of the world’s population—head to the polls today in the world’s largest democracy. Current prime minister Narendra Modi’s BJP party is expected to win, but the BJP has much work to do to meet its ambitious goals for growth. Modi’s interventionist approach to the economy may be chilling investment. And despite growth, over 90% of India’s 1.4 billion people are estimated to live off less than $3,500 per year, while many traditional pains of doing business in India linger such as excessive red tape. The election takes place over 44 days, with results announced on June 4th. 

What we’re watching 

• April 23 – The U.S. Federal Trade Commission (FTC) votes on a proposed rule banning non-compete agreements in most situations. While many non-compete agreements for lower-wage workers are superfluous, there are certain scenarios with higher-income workers where they protect trade secrets and promote innovation. The rule is expected to be adopted by the FTC, then challenged in court. 
• April 30 – U.S. Federal Reserve meets to decide on interest rates 
• May 15 – Singapore’s prime minister Lee Hsien Loong will resign after nearly 20 years at the helm, in the 3rd leadership transition since the financial hub’s independence in 1965. Deputy prime minister and finance minister Lawrence Wong will take over as prime minister, as Singapore attempts to maintain its delicate geopolitical balance between east and west.