The New “Triangle” World Order – and how US, EU and China must work together to keep the global economy going.

It has to be, without a doubt, that the fall of the Berlin Wall and the subsequent collapse of communism constituted the single most transformative event of the past 40 years. Since man walked the surface of the Moon, the collapse of communism signified the predominance of ‘one’ over the ‘other.’ A New World Order was beginning, in which the US stood dominant – the single economic and military superpower. However, this very victory led (inevitable some would say) to the end of American domination over the world.

No, it was not the events of September 11^th, 2001 and the subsequent ill-advised and ill-executed wars of Iraq and Afghanistan that revealed the true nature of ‘the emperor new clothes.’ Rather, it was a financial crisis which originated in the US and caused a GLOBAL recession that exposed both the weaknesses of free markets and the vulnerabilities of the American financial system (the pride of the capitalism as we know it). The financial crisis exposed the interconnectedness of this new (post soviet) world – a world that the US cannot rule on its own, nor fix on its own either.

I believe that the New World Order is a ‘triangle’ one in which the US, the EU and China will share both the blame for any problems and provide the solutions. When I say China I mean Eastern and Southeastern Asia. Japan, South Korea, Taiwan, Singapore, Indonesia, and the rest of Indochina, together with China form a loosely integrated market with overlapping investments, supply chains and trade dependencies – an informal precursor of the EU. I identify China as the ‘central’ piece of this economic juggernaut, and believe that for the near future China’s economic performance will dictate growth in the rest of the region. That is, until India rises and takes its rightful place in the global economy.

As we know by now, the global recession was caused by a housing bubble in the US, fueled by greedy financial sector flush with foreign money. EU banks and other global investor’s poured money into the US housing market through their investments on Wall Street banks. US banks were able to loan money for houses due to low interest rates. Interest rates stay low because of foreign purchases of US government debt (US Treasury Securities). Low interest rates fueled consumption of cheep goods from China and further outsourcing of US manufacturing. The global shift of manufacturing to China and the surrounding region further exacerbated global trade imbalances with the US.

The greatest economy in the world was supposed to accommodate foreign needs, and be both a safe destination for their hard-earned savings and a reliable consumer for their goods. Guess what? The emperor thought that he was fully covered!

Through this blog, I intent to further demonstrate how interconnected are the economies of the US, the EU and China, and how much they need each other if they want to continue growing. By exploring trade flows, economic developments and trade disputes I intend to show not only how important global cooperation will be for future growth, but also how detrimental it can be for the global recovery if either one of the big three (US, EU and China) fail to understand the symbiotic nature of the global economy and focus only on their domestic problems.

China, and the rest of the region, relies heavily on exporting to the US and EU for economic growth. As the US and EU consumption drops, so will the region’s economic prosperity. China needs to increase domestic consumption to deal with future sluggishness of the US and EU economies. Furthermore, China (like other developing countries) has been investing its hard earned money from exporting in US government debt. As of September 2010, China and the other regional economies held $2.2 trillion of U.S. government debt out of a total $4.2 trillion held by all foreigners. Such an exposure demands diversification.

Therefore, China needs a functioning EU market with a stable and reliable currency, to be both an alternative to the US market and an alternative reserve currency. China should be helping to stabilize the sovereign debt crisis in the EU. On the other hand, the US (and to a certain degree the EU as well) need not only cut government debt, save more and consume less. The US needs to do what it does best, which is innovate! The US must put into productive use its own savings and that of other countries by creating the next technological evolution – which will lead to the next economic breakthrough, and the creation of new industries and new products.

The next five years will be very critical to the global economy and world prosperity. Will China’s rise damage recovery efforts in the West, or will slower demand in the West doom China’s efforts to grow? Or will the big three see that only through cooperation they can grow the ‘global economic pie’ and help everyone prosper? Stay tuned…