During the past decade, the global economy has transitioned out of an era in which globalisation was the key driver of economic and financial relationships into one shaped by geopolitics. Previously, most governments had believed that closer economic integration would promote long-term prosperity. Now, integration is seen as a source of risk and insecurity.

Here we take a look at how the map and the relationships within and between the geopolitical groupings that it shows are evolving. The map below shows our assessment of current alignments for around 250 countries and territories.

Using our current classification, the China bloc accounts for half (54%) of the world's non-Antarctic land mass, compared with 35% for the US bloc. The China bloc is home to slightly more of the world's people than the US bloc (46% vs. 43%). But, the China bloc generates only 27% of the world's GDP, compared with 67% from the US bloc. In the chart below, selecting a bloc or a country highlights its share of global GDP in 2022.

This is one example of how thinking at the level of geo-political alliances or blocs is helpful in illuminating patterns that aren't so evident when focusing on individual countries. The outer ring of the chart above shows that the economies of China and the US are of broadly comparable size, when measured at market exchange rates. But the grouping of countries centred on China is much smaller. That picture hasn't been changed much by the recent geopolitical shifts even though, by our reckoning, most of them went in China's direction. The countries that we think have moved into the "China bloc" since we first drew the map in 2021 together generate only 1.4% of global GDP.  

If the blocs hold together, it would require the defection of some major economies to close the gap significantly. This seems unlikely as things currently stand: most of the world's large economies are strong US allies. Another way the gap could close would be for growth in the China bloc to outpace by a wide margin growth in the US bloc. Our forecasts suggest it won't. The chart below shows how the breakdown of global GDP will shift if the membership of the blocs doesn't change. On our forecasts, the China's bloc's share of global GDP will only be one percentage point higher, at 28%, in 2030 than it was in 2022.

Perhaps the biggest risk to this view that the global economy of the future will continue to be dominated by the blue economies is that the US bloc may not hold together. That might happen if, for example, the US took a more isolationist path. A world that was split three-ways between a China-centred bloc, the US, and a grouping of other Western economies would be more evenly balanced.

Of course, GDP doesn't tell the whole story. There are other dimensions to power, not all of them economic. And within the GDP data, the size disparity is much smaller if we focus just on global capital spending – the China bloc accounts for 37% of the total against 58% in the US bloc – or on industrial output (38% of industrial value-added globally versus 55%). For some investors, it will be these shares that matter more. In agriculture, the China bloc accounts for 49% of output, compared with 38% for the US bloc.

One noteworthy difference between the blocs beyond their economic size is that the US bloc contains countries across a much wider range of incomes, from high to low; China's allies are predominantly at it's income level or lower.

Similarly, economies in the US bloc encompass a range spanning both high-tech and low-income manufacturers and exporters of both services and commodities. The bloc centred on China has less breadth – apart from China itself, most are commodity producers.

The greater diversity of the US bloc will, we suspect, make adapting to shifting patterns of trade and financial flows much easier.

In 2022, 144 countries traded more goods with China than they did with the US. For only 60 countries was the US the bigger trading partner. But observations like these can lead to the size of China's role in global trade being overstated. Half of global goods trade happens entirely between countries that we class as in the US bloc. That share is slightly higher now (53%) than it was immediately before the pandemic (52%) and higher than it was a decade ago (49%).

By contrast, only 7% of trade takes place entirely within the China bloc and 24% of global goods trade is between the two blocs. Both shares have fallen since the pandemic. The share of global trade in goods that happens between the two blocs is currently the lowest it has been since 2007.

The US bloc accounts for 70% of global equity market capitalisation and the US on its own is 44%. The China bloc makes up 26% of the global total. 20% is mainland China and Hong Kong.

An article by Capital Economics, 16th November 2023

Written by Julian Evans-Pritchard, Head of China Economics and Mark Williams, Chief Asia Economist and abridged by James Scott-Hopkins

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