Key Issues in Economic Analysis in an Increasingly Turbulent Security Environment

Shift toward Divided Global Trade

Recent trends in world trade reveal that the rapid growth witnessed at the beginning of this century appears to have ended, ushering in a phase of stagnation. While the factors that brought about such a paradigm shift should be cautiously identified, it is undeniable that soaring wages in China, which has been supplying vast amounts of low-wage labor to the global economy since the adoption of reform and open policy in the 1980s, and changes in China’s fundamental policies concerning market economy and international order, have had a significant impact.

The conflict between the U.S. and China has intensified. Not only has the Biden administration continued to maintain the majority of U.S. tariffs against China imposed abruptly during the Trump administration, but export controls targeting advanced technology have been strengthened. As chief economist of the International Monetary Fund (IMF) Gita Gopinath described the current situation as “Cold War II” (Gopinath 2023), it might be correct to say that we have stepped into an era that can be called the Second Cold War, transitioning away from the era of deepening globalization that followed the end of the U.S.-Soviet Cold War.

Indeed, trade between the U.S and China turned to decline in 2023, and foreign direct investment (FDI) into China experienced a sharp decrease. The global value chains, which rely on the intricate international division of labor incorporating imported intermediate goods into exports, have shifted to a phase of stagnation or reversal due to the apparent vulnerability to disruption which has been revealed in recent years. The U.S-China rivalry has escalated beyond the past economic disputes that characterized the Japan-U.S. trade friction into national conflicts involving security concerns including dual-use technology. This is increasing the division of the global economy into the following two rival blocs: market economies with well-developed institutions based on the rule of law and economies in which the state commonly intervenes and has wide and deep involvement in economic and social activities.

I would like to discuss the challenges related to conducting economic analyses in such circumstances.

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