The West is deluding itself over the extent of China's growth By Liam Halligan
The Middle East could be heading for a game-changing implosion. US bond yields are surging and Western central banks, despite growing tension within their ranks, remain in ostrich mode.
When the Panama Canal opening in 1914, it not only lopped 7,000 miles off the New-York-to-San-Francisco shipping route, avoiding Cape Horn, but also brought Europe much closer to Asia.
There seems no end to the steady stream of highly significant economic and political developments these days. We live in incredible times. Yet of all the events I followed last week, of all the data sifted and news wires perused, one story really grabbed me. Although I read it alone, it still elicited an audible "wow!"
China is in "advanced talks" with the Colombian government to build an alternative to the Panama canal. The mooted 220km rail link would run from the Pacific to a new port near Cartagena on Colombia's Atlantic coast. Imported Chinese goods would be assembled for re-export through the Americas and beyond, with Colombia-sourced raw materials filling ships making the return journey to Asia. Beijing is now reaching very high, pushing China onwards to the zenith of its modern-day power.
For centuries, visionaries dreamed of uniting the Atlantic and Pacific oceans by forging a path across Central America's tantalisingly slender isthmus. When that was finally achieved, the Panama Canal opening in 1914, it not only lopped 7,000 miles off the New-York-to-San-Francisco shipping route, avoiding Cape Horn, but also brought Europe much closer to Asia. This single, ultra-strategic waterway, transformed the commercial map of the world.
The canal was, and perhaps remains, the greatest feat of engineering in human history. Under Theodore Roosevelt, America succeeded where the French (and, centuries before them, the Scots) had not. Digging the vast trenches through swamp and forest meant overcoming malaria and coping with frequent flashfloods, while shifting hundreds of millions of tons of rock and soil.
It was a story – told superbly in Hell's Gorge by British historian Matthew Parker – of grit, skullduggery and labour exploitation on a gargantuan scale. Once completed, the canal effectively ended the imperial battle of trade routes and did so in America's favour. Now China has other ideas. The canal carries 300m tonnes of shipping annually – compared to the 80m it was designed to accommodate. Since it was built, world trade has expanded enormously – the UK's combined imports and exports ballooning from 35pc to more than 60pc of GDP in the past 50 years alone.
Large modern cargo ships, including LNG gas vessels, simply cannot fit through – which is why the canal's vast lock gates are currently being widened. But the mooted Sino-Colombian rail-link, involving the expansion of the Pacific port of Buenaventura, the whole thing to be funded by the Chinese Development Bank, would give Beijing its own 50m-tonne-per-year trade conduit, avoiding Panama's US-controlled pinch-point. China could then more easily land goods on America's East coast – provided the US didn't erect more trade barriers. The new Colombian railway might also mean Warren Buffet's vision of revitalising the US freight-rail industry as a land-route for global trade flows across the Americas might not look so smart.
Most of Columbia's coal – it is the world's fifth largest producer – is exported via Atlantic ports to the US and Europe. A new railroad south of the Panama canal could change that too, diverting such resources, via Pacific ports, to China. The Panama canal opened to ocean-going traffic just as the guns began booming in Europe at the start of the First World War. The symbolism was unmistakable. The old world was set on a course of collective self-harm, locked in conflict. The new world, the US, was meanwhile taking control of the high seas. This was truly set to be America's century – and nothing made that clearer than the Panama canal.
Now look where we are, almost 100 years on. America remains the world's largest economy. When it comes to corporate and military power, the US is top dog. There is a clear sense, though, that something has changed.
In an historical blink of an eye, within my adult life-time, America's role on the world stage has been transformed – from unassailable powerbroker, whose authority was rarely questioned, to the status of a fast-fading monarch, notionally still in charge, yet widely seen to be standing in the way of inevitable change. This palpable transformation has coincided with – and been partly caused by – America's shift from being the world's biggest creditor to the world's biggest debtor. The US has been joined in its rapid balance-sheet-reversal by the UK and several other "advanced industrial societies". Weighed down by huge financial liabilities and an expanding rump of unproductive workers, average living standards in America and much of Western Europe are most definitely in relative – if not absolute – decline. The current generation of school leavers in the industrialised world, for the first time in more than 100 years will, on average, be poorer than their parents.
Colombia is Uncle Sam's closest South American ally. But as President Juan Manuel Santos said last week, while cosying up to the Chinese, "Asia is the world economy's new motor". These geo-strategic trends – the rise of the East and the fall of the West – have been apparent for several decades. But they have been accelerated and accentuated by the Western world's "sub-prime crisis". This weekend, the so-called G20 group of nations met in Paris. In just a few short years this expanded group, including the likes of India and South Africa as well as China, has rendered the G7 defunct.
While the West accepts the diplomatic furniture has been re-arranged, we still act as if the world outside has not. "The maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable," Federal Reserve chairman, Ben Bernanke, boomed at the summit. Bernanke was pointing the finger at China – reiterating the Western view that our woes are all due to Beijing's reluctance to let the yuan (which has risen 20pc against the dollar since 2007) appreciate faster still. The response of almost every economist outside the Western world, on reading Bernanke's words, would surely be: "Who are you kidding?"
When it comes to under-valuation, America's "strong dollar" policy of recent years has been a study in how to keep a currency weak. Now the US, and the UK too, have resorted to "quantitative easing", the modern-day equivalent of the beggar-thy-neighbour currency devaluations of the 1930s.
The idea is not only to keep American exports as competitive as possible given relatively high labour costs, but also to impose "soft-default" on US creditors by lowering the real value of American's debts. Bernanke's G20 rhetoric fools no-one. But it does remind the rest of the world of the West's on-going capacity for self-delusion.
China's new "dry canal" between the oceans, its gateway into Latin America, may not happen. Colombia has every incentive to talk it up. Trade between Colombia and China has increased 500-fold since 1980, reaching $5bn (£3.08bn) last year, and Congress has refused to ratify a previously-agreed US-Colombia free-trade agreement for more than four years now. Bogota's patience, understandably, is wearing thin.
China's influence, and its financial muscle, is rising exponentially. Last year, the country loaned more to emerging nations than the World Bank. The fact that Beijing can propose building a new Trans-Continental Railway, in America's backyard, across a land-mass of unmatched strategic importance, and be taken seriously, speaks volumes.
The global power balance is shifting inexorably. The Western world needs to accept that. But as the G20 showed, the policies we propose and the decisions we take, are designed to deny, rather than accommodate, this new reality.