Author : Andy Quirk
Date : January 23, 2018
This monthly briefing will keep you up-to-date on the major geopolitical and geoeconomic issues of the time, allowing you to identify potential risks and strategize accordingly. It will cover topics from each corner of the globe, analyzing the major geopolitical events ongoing and the impact that has on the global economy. As this is the first edition, it will focus on broad issues to watch out for in 2018.
Here are five major issues to look out for this year:
The Americas: NAFTA
President Trump recently reiterated his threat to withdraw from the North Atlantic Free Trade Agreement, arguing that gains from a new deal could be used to pay for the Mexican border wall. U.S. farmers and the agricultural sector are likely to be the most affected by the U.S. withdrawing from the agreement. NAFTA renegotiations began last year but have had little progress so far. A withdrawal from NAFTA with no alternative deal in place would raise export tariffs, disrupt supply chains, and increase price for consumers. Agriculture would likely be the most affected, but manufacturing, apparel, and the medical device industry would all suffer. Trump’s promise to follow through on a better deal on NAFTA has potentially detrimental risks to the U.S. agriculture and food industry, which is heavily reliant on free trade with its neighbors. A U.S. withdrawal from NAFTA could also spur anti-America sentiment in Mexico, particularly as Mexico has elections this year. The leading candidate, Andres Manual Lopez Obrandor has already vocalized discontent at the U.S. Also worth watching: U.S. Government reaches agreement to reopen after brief shutdown; new tax legislation hurts U.S banks immediately, but could help boost profits in the long run.
U.S. – China relations
The U.S. – China relationship is the most important economic and political relationship in the world, and it has at times looked both positive and negative under the Trump Presidency. There are both roadblocks and avenues for the relationship. The roadblocks include the South China Sea dispute and North Korea. China’s desire to control shipping routes in the South China Sea – where some $3.37 trillion worth of goods travel through – illustrates a desire to take a more assertive role in both the regional and international economy. As evidenced by a calming of tensions, it is not in China’s interest to leverage restricted access to the sea lanes in return for control because of the number of goods that flow in and out of China through those ports (39% of all China’s trade). China’s increasing and more advanced use of economic statecraft – the use of economics as a tool of foreign policy – is worth watching in 2018. The U.S. has signaled a desire to negotiate trade deals bilaterally and has pulled out of multilateral trade deals. China sees the U.S. withdrawal as an opportunity to become more involved in the Southeast Asian economy. This is a clear opportunity for China to rewrite the rules of global trade and could have a serious impact in how the international economy is governed. What to watch for in 2018: a bilateral investment treaty between the U.S. and China
Europe’s obvious strains over Brexit are not improving. The most worrisome dispute is over the potential return of a “hard” border between Northern Ireland and the Republic of Ireland. Two issues still stand out on an economic front: the future of trade in Europe, and the divorce bill that the UK must pay to exit the EU. The UK has already started to see the economic impacts of its decision to leave the EU. Many of the world’s biggest investment banks, including Morgan Stanley, JP Morgan, Goldman Sachs, Bank of America Merril Lynch, and several more, have already committed to moving their European headquarters out of London. This will cost the UK countless jobs as well as putting an enormous dent in the financial services sector, which currently brings in $224 billion per year, accounting for 12 percent of the UK economy. Prime Minister May indicated in September that she hoped for a comprehensive and deep free trade agreement that included services. To achieve that goal, she will likely have to make broad concessions on regulatory issues with the EU. Also worth watching in Europe: Merkel gets closer to coalition with SPD; France gets tougher on immigration; EU implements financial market regulation.
U.S. – Iran tensions
U.S. – Iran relations have been worsening throughout the Trump Presidency, peaking as President Trump decertified the Iran Nuclear Agreement (also known as the Joint Comprehensive Plan of Action (JCPOA)). Importantly, President Trump has not shown any immediate desire to reimpose nuclear sanctions against Iran. Even if he did, it is unlikely that European Financial institutions would stop doing business with Iran – a privilege that was returned to the European financial sector after the JCPOA was implemented. The President and the U.S. Treasury Department may choose to impose non-nuclear sanctions against Iran, including over human rights violations in light of the recent protests across Iran, where at least 20 people have been reported dead and hundreds more arrested. Sanctions would likely impact Iranian firms and individuals doing business in the U.S., and possibly limit European imports of Iranian oil. It’s unlikely China and India, two major importers of Iranian oil, would acquiesce to U.S. demands on cutting imports. The impact of a new round of sanctions on Iran would be severe for the regime. The recent protests demonstrated that the people are tired of a regime that spends more money on military power than it does on its people at home. If non-nuclear sanctions are placed on Iran, careful attention should be paid firstly to the price of oil, and secondly to Iran’s domestic situation; it’s unlikely President Rouhani could survive another round.
Tensions escalate in the Horn of Africa and Red Sea Region
Tensions amongst Turkey, Egypt, and Sudan continue to rise following Turkish President Recep Tayyip Erdogan’s visit to Sudan last month, where he announced a deal to temporarily control the Red Sea island of Suakin. Egypt and Saudi Arabia have hit back at Turkey, arguing that this is not expanding the local economy or culture and is instead an attempt by Turkey to build its military power in the region. Egypt responded by sending troops to Eritrea, which borders Sudan and Ethiopia. The dispute over Turkey’s agreement with Sudan is beginning to represent bigger and more dangerous tensions in both the Horn of Africa and the Middle East. Tensions between Egypt and Ethiopia over the use of water of the Nile River and Ethiopia’s $4.8bn hydroelectric dam project are also increasing, as Egypt fears it will be unable to secure water rights from the Nile River Basin once the dam goes into effect. Both Sudan and Ethiopia gain from the dam, as Ethiopia will be selling electricity to Sudan under the agreement. Monitoring this situation is important because of the geopolitical and geoeconomic tensions that already exist but have been relatively benign over the past decade. Egypt is supported by Saudi Arabia and the United Arab Emirates in its fight against Turkey, which is supported more loosely by Iran and Qatar. Saudi Arabia’s grievances with Qatar and Iran are an important factor here. Egypt also has disputed territories with Sudan, known as the Hala’ib Triangle, which have been exposed as both countries have increased their military presence in the region. What seems like a minor dispute between Egypt, Turkey, and Sudan, has the potential to unleash a broader proxy war where major economic powers, including the UAE, Saudi Arabia, and potentially the U.S. have a stake.