2018 an­nual fore­cast: Global trends

Though a pre­ven­tive strike can't be ruled out, its steep price tag – a messy war that shoves the world back into eco­nomic re­ces­sion – will make the United States more likely to re­sign it­self to the un­com­fort­able re­al­ity of North Korea's pos­ses­sion of a vi

Financial Nigeria Magazine - - Contents - Chilean Pres­i­dent Michelle Bachelet speak­ing on trade and mul­ti­lat­er­al­ism at WTO con­fer­ence, March 2017 “2018 An­nual Fore­cast: Global Trends” is re­pub­lished un­der con­tent con­fed­er­a­tion be­tween Fi­nan­cial Nige­ria and Strat­for.

Geopol­i­tics is Back with a Vengeance

Coun­tries across the globe will kick off the new year with a bit of good news. A decade af­ter fi­nan­cial cri­sis shook the world to its core, growth in the global gross do­mes­tic prod­uct has fi­nally be­gun to pick back up. The Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment es­ti­mates that the global econ­omy will grow more than 3.5 per­cent in 2018 – the fastest pace seen in eight years.

But many of the deep struc­tural prob­lems that the fi­nan­cial cri­sis ex­posed have en­dured, sig­nal­ing a more frag­ile re­cov­ery ahead than the cycli­cal re­bounds of the past. More­over, a num­ber of geopo­lit­i­cal risks – loom­ing con­flict on the Korean Penin­sula, threats of a global trade war, stark bat­tle lines drawn in the Mid­dle East, and anx­i­ety over Chi­nese and Ital­ian debt, to name a few – could cut the econ­omy's come­back short. As U.S. na­tional se­cu­rity ad­viser H.R. McMaster said re­cently, "Geopol­i­tics are back, and back with a vengeance af­ter this hol­i­day from his­tory we took in the post-Cold War pe­riod."

By them­selves, these threats will in­flu­ence how gov­ern­ments and cor­po­ra­tions adapt to a tenser in­ter­na­tional en­vi­ron­ment in 2018. How­ever, the worst-case out­come of each risk isn't nec­es­sar­ily the most likely. And be­cause the United States is the only ac­tor with the abil­ity to tip the scales of sev­eral sce­nar­ios in ei­ther di­rec­tion, any fore­cast of the year ahead must start with Wash­ing­ton.

By now the world has had a year to ob­serve the pres­i­dency of Don­ald Trump. While there are some as­pects of his term that are unique, and there­fore more fleet­ing in their ef­fects, many of Trump's ac­tions stem from deeper forces that will last well be­yond his time in of­fice. With re­gard to the for­mer, a hand­ful of in­sti­tu­tional checks on the ex­ec­u­tive branch made head­lines through­out 2017. Congress worked to tie the pres­i­dent's hands in lift­ing sanc­tions against Rus­sia. (Law­mak­ers may like­wise try to block Trump from uni­lat­er­ally with­draw­ing from the North Amer­i­can Free Trade Agree­ment in 2018.)

The na­tional se­cu­rity es­tab­lish­ment has an­gled to pre­serve U.S. com­mit­ments to NATO while clearly defin­ing the risks at­tached to in­sti­gat­ing war with North Korea or abandoning a nu­clear deal with Iran. Fig­ures at the state, cor­po­rate and lo­cal lev­els have openly de­fied Trump's at­tempts to with­draw from the Paris cli­mate change ac­cord and to re­duce state sup­port for al­ter­na­tive and re­new­able en­ergy sources.

But Trump also doesn't con­sider him­self be­holden to the Repub­li­can Party or his na­tional se­cu­rity ad­vis­ers, and he has shown less hes­i­ta­tion than most Amer­i­can pres­i­dents to dis­miss dis­senters or ap­point loy­al­ists who ad­here to his agenda. Thus, Trump has a wider mar­gin in which to op­er­ate than many of his pre­de­ces­sors, which not only will raise the risk of rifts widen­ing within the Repub­li­can Party in an elec­tion year but will also keep U.S. al­lies and ad­ver­saries on their toes as they try to dis­tin­guish be­tween the rhetoric and re­al­ity com­ing from the White House.

Cop­ing with a Nu­clear North Korea

Trump's most con­se­quen­tial de­ci­sion in 2018 will be how to deal with North Korea's rapidly de­vel­op­ing nu­clear arse­nal. The win­dow for a U.S. pre­ven­tive strike aimed at dev­as­tat­ing Py­ongyang's pro­gramme is clos­ing fast. Though a pre­ven­tive strike can't be ruled out, its steep price tag – a messy war that shoves the world back into eco­nomic re­ces­sion – will make the United States more likely to re­sign it­self to the un­com­fort­able re­al­ity of North Korea's pos­ses­sion of a vi­able nu­clear de­ter­rent.

This ac­cep­tance will mark the start of a new and un­sta­ble era of nu­clear de­ter­rence as the United States and its Asian al­lies adopt a pol­icy of con­tain­ment to­ward the Her­mit King­dom. The grad­ual degra­da­tion of arms-con­trol agree­ments struck in the 20th cen­tury will only fur­ther com­pli­cate mat­ters as Rus­sia and China try to balance against the United States' ex­pand­ing mis­sile de­fence net­work.

In fact, lately Rus­sia and China have found more rea­son to co­op­er­ate than com­pete with each other. Both coun­tries are work­ing to in­su­late them­selves from U.S. pres­sure and re­duce Wash­ing­ton's in­flu­ence in strate­gic the­atres around the globe. To that end, they have hashed out a divi­sion of labour of sorts: Where both states share in­ter­ests, Rus­sia ad­dresses se­cu­rity is­sues as it deems fit while China takes the lead on eco­nomic mat­ters. Moscow and Bei­jing also have deep­ened their co­op­er­a­tion in fi­nance, trade, en­ergy, cy­ber­se­cu­rity and de­fence.

Though this emerg­ing part­ner­ship poses a strate­gic threat to the United States, it will also pro­vide am­ple op­por­tu­nity for ex­ploita­tion as Wash­ing­ton tries to bol­ster its al­lies in Rus­sia and China's neigh­bor­hood. (Tai­wan, in par­tic­u­lar, could be­come a source of con­tention be­tween Wash­ing­ton and Bei­jing next year.) Still, to­day's in­ter­na­tional en­vi­ron­ment does not re­sem­ble the Cold War, when bolder lines de­fined al­liances and great pow­ers en­gaged in zero-sum con­tests. Eco­nomic in­ter­de­pen­dence, mu­tual dis­trust and un­re­li­able se­cu­rity guar­an­tees will en­cour­age os­ten­si­ble al­lies to hedge against one an­other for their own pro­tec­tion. Such fluid re­la­tion­ships will come to de­fine the global or­der in 2018 and be­yond.

An Un­re­lent­ing U.S. Trade Agenda

The threat of North Korea will not spare China, South Korea or Ja­pan from the United States' ire in the trade realm. The Trump ad­min­is­tra­tion is unique in its will­ing­ness to com­part­men­tal­ize the North Korean cri­sis and its trade agenda. In keep­ing with the White House's de­ci­sion to tar­get coun­tries with which the United States has large trade deficits, China, Mex­ico, South Korea and Ja­pan will re­main in Wash­ing­ton's crosshairs in 2018. (As the Trump ad­min­is­tra­tion quickly dis­cov­ered, Ger­many is not easy to iso­late from the rest of the Euro­pean Union, which pro­tects it some­what from the White House's puni­tive trade mea­sures.)

Should ne­go­ti­a­tions reach an im­passe, the United States is more likely to aban­don its trade deal with South Korea than other agree­ments on the ta­ble. The ties that bind the U.S. econ­omy to South Korea's are weaker than those link­ing it to coun­tries like Mex­ico. And though Trump could choose to pull out of NAFTA next year, the bloc's pro­po­nents – in­clud­ing U.S. law­mak­ers who will weigh the risks of with­drawal as they head into midterm elec­tions – will try to legally block moves by the pres­i­dent to keep the trade pact from fall­ing apart. By and large, the role of the U.S. Congress in reg­u­lat­ing for­eign com­merce and le­gal dis­putes will con­tinue to curb ex­ec­u­tive ac­tion in trade in the year ahead.

The sep­a­ra­tion of na­tional se­cu­rity and trade may be unique to the Trump ad­min­is­tra­tion, but pro­tec­tion­ism and a will­ing­ness to flout the rul­ings of the World Trade Or­ga­ni­za­tion (WTO) ex­isted in Wash­ing­ton well be­fore Trump ar­rived at

The grad­ual degra­da­tion of arms-con­trol agree­ments struck in the 20th cen­tury will only fur­ther com­pli­cate mat­ters as Rus­sia and China try to balance against the United States' ex­pand­ing mis­sile de­fence net­work.

the White House. The United States has long held the opin­ion that the WTO is ille­quipped to hold China ac­count­able for the free trade vi­o­la­tions that its par­tic­u­lar brand of state cap­i­tal­ism per­pe­trates. Al­though the Euro­pean Union and Ja­pan share the United States' de­sire for stricter en­force­ment of WTO reg­u­la­tions, Wash­ing­ton will not bank on the slim chance that the un­wieldy trade body will push re­forms through its pon­der­ous, con­sen­sus-based bu­reau­cracy.

With China squarely in its sights, Wash­ing­ton will slap Bei­jing with puni­tive mea­sures on trade, in­vest­ment and in­tel­lec­tual prop­erty en­force­ment that it can ar­gue are within or out­side of the WTO's ju­ris­dic­tion, de­pend­ing which des­ig­na­tion best suits its needs. The United States al­ready has dusted off two im­por­tant trade tools at its dis­posal: A Sec­tion 301 in­ves­ti­ga­tion of in­tel­lec­tual prop­erty theft and forced tech­nol­ogy trans­fers, and a Sec­tion 232 in­ves­ti­ga­tion into whether im­ports of Chi­nese steel hurt U.S. na­tional se­cu­rity and are thus sub­ject to tar­iffs. (A re­view of the first case is due in Au­gust, and a re­view of the sec­ond case is due in Jan­uary, at which point the pres­i­dent will have 90 days to act on it.)

Wash­ing­ton also will keep lob­by­ing the Euro­pean Union to with­hold mar­kete­con­omy sta­tus from China in the WTO – a la­bel Bei­jing claims the or­ga­ni­za­tion promised it in 2016 that would make it more dif­fi­cult to im­pose anti-dump­ing mea­sures against China. Though a ver­dict for the le­gal chal­lenge on this mat­ter won't come un­til 2019, a WTO panel will re­view the case in 2018.

The Trump ad­min­is­tra­tion's trade­mark blunt­ness and uni­lat­eral pur­suit of its trade agenda will con­tinue to raise alarm world­wide, leav­ing the im­pres­sion that the White House is in­tent on dis­man­tling the WTO and raz­ing the global trade or­der that it has un­der­pinned since the end of World War II. But such con­cern is likely un­war­ranted. Though the United States will be more will­ing to act in­de­pen­dently out­side the bounds of the WTO, it will not in­cur the eco­nomic risk of with­draw­ing from the bloc. In­stead Wash­ing­ton will rely on it as an en­force­ment body, even as it com­pen­sates for the in­sti­tu­tion's weak­nesses with mea­sures of its own.

De­spite the es­ca­la­tion, the White House will stop short of trig­ger­ing a trade war. While U.S. trade part­ners will watch its moves with ap­pre­hen­sion, they will re­spond mildly for the most part. Some, like Ja­pan, will try to de­flect Wash­ing­ton's ad­vances by high­light­ing their strate­gic re­la­tion­ship with and in­vest­ments into the United States. Oth­ers that come into the White House's di­rect line of fire will chal­lenge its trade attacks at the WTO and in U.S. courts, where lit­i­ga­tion could out­last Trump's cur­rent term. As for China, some puni­tive U.S. trade mea­sures will even neatly in­ter­sect with Bei­jing's do­mes­tic re­forms and will not pose an ex­is­ten­tial threat to the Chi­nese econ­omy.

A Crude Re­cov­ery

Bar­ring a ma­jor shock to the global econ­omy, OPEC and non-OPEC oil pro­duc­ers hope to meet their goal of re­bal­anc­ing the oil mar­ket in 2018. As the world's in­ven­to­ries con­tinue to de­cline in the first half of the year, po­lit­i­cal di­vi­sions in Iraq and ca­pac­ity con­straints in Libya and Nige­ria will mit­i­gate the risk of oil pro­duc­ers ex­tend­ing their agree­ment to limit out­put into 2019. Sig­na­to­ries will hold a crit­i­cal meet­ing to re­view their progress in June.

The big­gest ques­tion next year is how well Saudi Ara­bia and its Gulf al­lies will see the pact through to its con­clu­sion. They will try to shoul­der the bulk of the bur­den of main­tain­ing pro­duc­tion cuts as com­pli­ance starts to slip among other mem­bers ea­ger to exit the agree­ment. And as its ex­pi­ra­tion draws near, U.S. shale pro­duc­tion will likely ramp up amid higher oil prices. De­ter­mined not to in­cen­tivize a strong re­cov­ery in U.S. shale out­put, Saudi Ara­bia and Rus­sia may con­tinue to col­lab­o­rate in en­ergy long af­ter the cur­rent quo­tas have ended. For in­stance, Saudi Ara­bia can use Rus­sian as­sis­tance to di­ver­sify its en­ergy sec­tor while work­ing with Moscow to re­strict pro­duc­tion.

But this co­op­er­a­tion in en­ergy will do lit­tle to defuse the com­pe­ti­tion in­ten­si­fy­ing in the Mid­dle East. The Trump ad­min­is­tra­tion's vow to pre­vent Iran from fol­low­ing in North Korea's foot­steps will bring Tehran and the fate of its nu­clear deal with the West back into the spot­light. Saudi Ara­bia and Is­rael, keen to roll back Ira­nian in­flu­ence while they have the bless­ing of the White House, will re­vi­tal­ize their cam­paign to weaken Iran and its al­lies, in­clud­ing Le­banese mil­i­tant group Hezbol­lah.

Backed by Rus­sia, Iran will have the re­sources to hold its ground as the war among re­gional prox­ies builds. But it will take care to avoid alien­at­ing Europe, which will be nec­es­sary in check­ing any ef­fort by the United States to shred the Joint Com­pre­hen­sive Plan of Ac­tion. The Euro­pean Union, along with China, Rus­sia and In­dia, won't fully com­ply with U.S. at­tempts to rein­tro­duce sanc­tions against Iran's en­ergy sec­tor. But if the nu­clear deal col­lapses, oil pro­duc­ers may aban­don their pro­duc­tion cuts early as Saudi Ara­bia and Rus­sia move quickly to ac­count for the loss of Ira­nian sup­plies on the mar­ket.

Much of the ur­gency be­hind Saudi Ara­bia's re­form agenda and pre­oc­cu­pa­tion with the global oil mar­ket's re­cov­ery stems from a longer-term chal­lenge that the king­dom and other oil pro­duc­ers face: the ex­pan­sion of the elec­tric ve­hi­cle mar­ket. Over the past year, Europe, China and In­dia spear­headed pol­icy ini­tia­tives that aimed to boost the adop­tion of al­ter­na­tive-en­ergy ve­hi­cles.

In­dus­try re­ports, more­over, point to grow­ing de­mand for such cars in the short and medium term. As de­mand rises, so, too, will de­mand for the ve­hi­cles' bat­ter­ies and the lithium they are made of. Though this trend will take decades to un­fold, in­vest­ment in the pro­duc­tion of elec­tric cars and re­lated tech­nol­ogy will in­crease next year. Be­cause lithium re­sources are con­cen­trated among only a hand­ful of coun­tries, in­clud­ing Ar­gentina, Chile and Bo­livia, sev­eral pro­duc­ers will be well po­si­tioned to take ad­van­tage of mount­ing in­ter­est in lithium – es­pe­cially Ar­gentina, since the Com­mon Mar­ket of the South, to which the coun­try be­longs, will lib­er­al­ize its trade poli­cies in 2018.

Test-launch of long-range strate­gic bal­lis­tic rocket Hwa­song-12 (Mars-12) by North Korea in May 2017. (KCNA / Reuters)

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