Here are some critical issues to watch around the globe over the coming month:

North America

US President Trump has succeeded in one of his major goals: renegotiating NAFTA, now known as USMCA. USMCA is a standard modern trade agreement requiring a higher minimum wage in certain industries to reduce the advantages of labor-abundant states and strengthening intellectual property rights. One unique aspect of USMCA is that it is subject to review by all three states every six years and can expire a decade after review if a single party wants it terminated. The termination provision is likely to prevent Canada or Mexico from pulling away from the US and toward China. However, it does also create vulnerabilities for the US that could be exploited in the future.

Global equities declined substantially in October. Gains have largely been eliminated for the year, indexes are in correction territory, and several S&P sectors have declined 10-15% in the last three months. On October 26^th the S&P 500 and Nasdaq Composite Indexes joined the small-cap US benchmarks in correction territory (down more than 10% from recent peaks). The narrowly focused Dow Jones Industrial Average avoided a correction and held up best, but the Nasdaq was the sole major US benchmark still ahead for the year.

The INF Treaty was designed to limit missiles with ranges between 300 – 3,400 miles. The Trump Administration has rightly pointed out that Russia has been in violation of the treaty since 2014. NATO has warned that Russia is creating a missile that will be able to hit our allies with little to no warning. For its part, Russia asserts that the US is itself in violation of the treaty. While tempting, the urge to scrap the INF Treaty is misguided and would lead to the creation of more nuclear weapons by both Russia and the US. If the US begins revamping its nuclear arsenal it will further delegitimize its standing with regard to non-proliferation in North Korea and Iran.

Europe

In a first, the EU rejected the Italian budget for not sufficiently addressing the deficit or reducing the debt. The government in Italy has said they will not be swayed by concerns within the EU and will proceed with tax cuts and spending increases. This episode will only serve to further widen the growing divide between the EU and populist governments.

British Prime Minister Theresa May has declared an end to austerity. The Chancellor of the Exchequer, Philip Hammond, has only agreed to fiscal stimulus plans if there is an agreement on a Brexit deal. In the wake of no deal, he has stated that there will need to be continued austerity. This forces a collision between Hammond and Brexiteers as the specter of a no-deal Brexit looms large. This clash comes on the heels of new movements to replace Theresa May with Boris Johnson as Prime Minister and Leader of the Conservative Party.

In contrast to the flailing Italian fiscal situation, Spain has put forth a budget which achieves its progressive agenda and meets the minimum standards of EU fiscal rules. The Spanish government is targeting a budget deficit of 1.3% of GDP. The gaps in the budget will be sealed by increased taxes on wealthy individuals and corporations. The most ambitious policy measure is a 22% increase of the minimum wage. The goals of such policy measures are admirable, but the effect of a major increase in both taxes and wages on companies could stall the struggling economy

German Chancellor Angela Merkel announced that she will be stepping down as leader of the Christian Democratic Union and will not seek the chancellorship in 2021. This comes at a point when the popularity of Chancellor Merkel has plummeted and the two parties within her coalition suffered severe electoral losses. It is likely that Merkel’s replacement will move away from the international approach of Merkel and begin to turn inward. Countries used to a willing partner in Berlin may have to look elsewhere for support or leadership.

Asia-Pacific

The 13^th annual summit between Japan and India is likely to focus on closer strategic cooperation between the two major naval powers as well as joint connectivity and infrastructure projects. The two leaders are expected to issue a joint statement about their intentions for pursuing a free and open Indo-Pacific area in cooperation with the US. This summit and subsequent statement signify the two countries’ cooperation to counter China’s growing regional influence and counter possible protectionism.

The summit between President Xi Jinping and Prime Minister Abe and China signifies a historic turning point in Japan-China bilateral relations. The two countries signed a currency swap arrangement to strengthen financial stability and cooperation in trade and finance. Japan remains wary of China’s growing regional power but with US tariffs biting both the Chinese and Japanese economy, the two countries are pushing for stronger financial and economic ties.

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