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US-China Relations Will Define Global Politics in 2013: The Economist

The relationship between the world's great economic powers — the U.S., Europe and China — will be in transition in 2013, and changing political leadership is a big reason why, says Daniel Franklin, editor of The Economist magazine's "The World in 2013."

The relationship between China's new leader Xi Jinping and President Barack Obama "is absolutely the crucial one now for global politics," Franklin tells The Daily Ticker.

Related: China a 'Currency Manipulator'? So Is Everybody Else

Franklin says both men need to keep U.S.-China trade flowing. China is the second largest trading partner of the U.S. Last year $503 billion worth of goods were exchanged between the two countries. 80% of those items were U.S. imports from China.

Franklin says both countries also need to work on resolving disputes between China and other countries over ownership of islands in the South China Sea. Many of those countries, including Japan, South Korea, Taiwan and the Philippines, are allies of the U.S.

"This is something that has to be handled, adjusted to, and it will be awkward, no doubt about it," says Franklin.

The European Union is the largest trading partner of the U.S. and is another region in political transition. Germany, Europe's largest economy, will be holding an election for chancellor next year. Franklin expects Angela Merkel, head of the Christian Democratic Union, to be re-elected but says she will likely head a "grand coalition" with the opposition Social Democrats.

In Italy, Mario Monti, who's worked closely with Merkel, has announced he'll be stepping down after a little over a year in office. Monti is credited with adopting economic reforms that brought the EU's fourth largest economy back from the brink. But Monti says he's lost the support he needs to govern.

France, the second biggest economy in the EU, faces the challenge of reviving an economy that's been running big deficits for years. President Francois Hollande "has big problems…in getting the country's finances on a very sound footings," says Franklin.

Beyond China and Europe, the Mideast poses another challenge for the global economy, says Franklin. "I'm afraid the outlook for Syria does not look good for the year ahead," says Franklin.

Related: For Markets, Mideast is a Much Bigger Worry Than Europe: Jim Rickards

Adding to the uncertainty is the situation with Iran—whether Israel will attack and whether Iran will develop nuclear weapons. The preference is for "sanctions on Iran to bite hard enough that there's a change of course," says Franklin. But if that doesn't happen and there's a military confrontation, the price of oil will soar -- affecting every nation in the world, Franklin warns.

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