The West vs The Rest, Part 1.
How will the geopolitical tug of war between the G7 and the rest of the world play out?
It is pretty obvious by now that we are no longer a united global community, looking forward to the next opportunity to sit by the fire place singing kumbaya.
What we are witnessing is the manifestation of a tug of war over resources, and control over the means of trade involving these precious goods and the services they are associated with.
I will try to elaborate in rough terms:
According to the International Energy Agency's latest data from 2019, the G7 countries accounted for approximately 29% of the world's total primary energy consumption.
Here's a breakdown of the G7 countries' share of global primary energy consumption in 2019, according to the IEA:
United States: 16%
Japan: 4%
Germany: 3%
United Kingdom: 2%
France: 2%
Italy: 2%
Canada: 1%
This gives a total of roughly 30%.
Contrast this to the size of their populations.
Here's a breakdown of the G7 countries' share of the global population as of 2021:
United States: 4.25%
Japan: 1.67%
Germany: 1.11%
United Kingdom: 0.88%
France: 0.86%
Italy: 0.69%
Canada: 0.49%
Together, the G7 countries account for approximately 10% of the world's population.
So 10% of the world’s richer nations use 30% of the energy globally, and the rest scrap over the remaining 70%. Proportionally speaking, that is approximately 3.5x more energy per capita for the G7 countries.
To put another layer on this unfolding story, the energy consumed by the G7 countries are often imported from non G7 nations (Russia and their energy trade with the EU is a prime example).
A similar picture can be painted for the following commodities*:
Copper: According to the United States Geological Survey, the G7 countries accounted for approximately 20% of the world's copper consumption in 2020, while producing only about 8% of global copper mine production.
Coal: According to the International Energy Agency, the G7 countries accounted for approximately 16% of global coal consumption in 2020, while producing approximately 7% of global coal production.
Natural Gas: According to the International Energy Agency, the G7 countries accounted for approximately 40% of global natural gas consumption in 2020, while producing approximately 24% of global natural gas production.
Polysilicon: China is currently the largest producer of polysilicon in the world, accounting for more than 80% of global production, while G7 countries consumed a combined share of approximately 50% of global consumption in 2020. Again, according to the International Energy Agency (and ChatGPT).
Consumption of energy and materials is a basic measure of wealth, and for years the consumption trends in the G7 nations have been higher than in the rest of the world. Can the G7 (west) continue to enjoy this relative excess vis-à-vis** the (rest) of the world?
The West has for some time now been short energy, food and more recently labour. Without these raw inputs, standards of living in the G7 countries would drop. Either they continue to get inputs from the rest of the world (migration included), or the proportions of consumption will start to normalise in favour of the developing nations.
Here are some factors that I believe has enabled the West to keep a strong grip on resource flows.
Relative political instability in non western nations → Capital flows into the west due to this ‘stability arbitrage’. Look at the image below for this stark contrast.
Military advantage
Supply chains can be protected by armed forces, so a strong military allows for more complex and long resource flows.
Military might allows for advantageous negotiation positions. See colonialism and the history around colonised countries for empirical evidence of this. Do note the global presence of western armed forces even in today’s non colonial era.
Property rights
Elites in both the G7 nations and in the rest of the world do not want to place their saved funds, or their investments in regions where rule of law is seen to be weak. Especially when it pertains to property rights.
If elites from the non G7 nations such as Middle Eastern oil sheikhs or South American mining tycoons have most of their funds tied up in G7 banks, real estate or equities, why would they want to challenge the status quo?
Are things now different in 2023?
Political Instability
A case can be made that since the outbreak of the pandemic in 2020, the non G7 nations have been relatively more stable/peaceful nations to live in. Be it BLM riots in the US or French protests against pension reform that are going on as we speak, citizens from both sides of the fence are wondering if maybe non western nations are starting to look more appealing. Even deaths due to the pandemic was much higher in the US and UK compared to countries like Indonesia (!), Thailand, China and South Korea.1
From my own anecdotal evidence, Bali, Singapore and Dubai saw a great influx of long term visitors (and capital) in recent years.
Military Advantage
The longer Russia is able to continue her actions in spite of the combined weight of western sanctions and NATO military (and financial) assistance to Ukraine, the more the West’s military invincibility will be called into question. Do note that Assad is still in power in Syria (with the help of the Russians) even though the west has been trying to oust him for awhile now. Note that this is not a statement that the G7 nations’ (and NATO) militaries are weaker. It is merely pointing out that there is a state that has been acting in open defiance now for more than a year to the ‘rules based order’, and has not yet been ‘subdued’.
Non aligned countries prefer to agree to trade deals without the threat of arms. A cursory search of foreign bases belonging to China or Russia would show a stark contrast to NATO bases globally.
Property rights.
With the sanctioning of Russian from the global SWIFT system, and the freezing of their national assets (as well as the assets of Russian billionaires on account of their nationality), any notion that the western controlled global financial system is neutral is now quashed.
Elites from nations like China, Saudi Arabia and Nigeria will now think twice before parking their funds and investments in western controlled financial instruments. Below is a chart of the price of Gold vs the US treasury note. This is a good proxy of a western reserve asset vs a neutral one. Gold has been outperforming, with an acceleration after Russian reserves were frozen. Capital is flowing less strongly into western sovereign bonds compared to neutral assets. This same chart with treasury bonds vs Bitcoin is too bonkers for the y-axis so I will leave it for another time.
Canadian truckers getting unbanked by their government due to their protests was also another shot across the bow. In this instance, elites FROM G7 nations probably are thinking twice about having reserve assets that are geographically diversified.
In conclusion, the appeal of the west for capital and resource flows are eroding for a number of reasons pointed out above. A few tough questions have to be posed at this juncture:
Can an over indebted and aging group of nations continue to hold sway over the the growing populations of non G7 nations?
Will the savings of the ‘Rest’ continue to flow west to be consumed?
Non G7 nations are now offering stiff competition in attracting investment, with demographic winds also firmly in their sails. What if they are now more attractive to the marginal investor? What if the marginal investor now comes increasingly from non G7 nations?
What happens when the G7 is openly hostile (and maybe soon to be at war) with the world’s largest producer of finished goods (China) and the largest exporter of energy (Russia)? How will the G7 get their required goods and energy?
How many nations will turn away from gunboat diplomacy given security promises from non G7 countries.
These are tough questions to answer, but they will be answered in time.
Given how the recent spate of bank failures across 2 western continents have much to do with valuation drops in western sovereign bonds, it might be that power is shifting away from the west right before our eyes. The other shoe just has not dropped yet.
*Sources:
Copper: United States Geological Survey (USGS), Mineral Commodity Summaries 2021
Coal: International Energy Agency (IEA), Coal 2021
Natural Gas: International Energy Agency (IEA), Gas 2021
Polysilicon: International Energy Agency (IEA), Renewables 2021
**"Vis-à-vis" is a French phrase that is commonly used in English to mean "in relation to" or "regarding". It is often used to compare or contrast two things, or to indicate a relationship between two parties.
Indonesia: 0.00059 (or approximately 59 deaths per 100,000 people)
Thailand: 0.00018 (or approximately 18 deaths per 100,000 people)
United States: 206.98 deaths per 100,000 people
United Kingdom: 232.68 deaths per 100,000 people
Germany: 33.49 deaths per 100,000 people
China: 0.0044 deaths per 100,000 people
South Korea: 6.17 deaths per 100,000 people
World Health Organization (WHO), the European Centre for Disease Prevention and Control (ECDC), and the official government websites of each country