2018 annual forecast

Dec 21, 2017 | 18:22 GMT

11 mins read

Global Trends

In today's world, nations are becoming increasingly interconnected by air, land, sea and cyberspace. As globalization has knitted countries and continents closer together, the borders of the map and the barriers of geography have been rendered, in some ways, obsolete. Now events in one region can more easily have consequences in another, at times even rippling across the globe. We explore those with the greatest impact on international decision-making during the forecast period below.
Because the United States is the only actor with the ability to tip the scales of several geopolitical scenarios in either direction, any forecast of the year ahead must start with Washington.
section Highlights
  • The United States will reluctantly adopt a policy of containment toward North Korea when Pyongyang achieves a viable nuclear deterrent, likely in 2018.
  • An emerging coalition between China and Russia will increasingly challenge U.S. hegemony, although alliances will remain fluid worldwide.
  • Working within and beyond the bounds of the World Trade Organization, the United States will pursue an aggressive trade agenda against China, Mexico, South Korea and Japan.
  • As the global oil market recovers, Saudi Arabia will bear the burden of keeping production cuts in place as other oil producers renege on their agreed-upon quotas. The Saudis will look to Russia to help forestall an uptick in U.S. shale output.

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 a 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 program 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 defense network.

North Korean Nuclear Tests

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 theaters around the globe. To that end, they have hashed out a division of labor 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 defense.

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.)

U.S. Trade Balances: Top 10 Partners, 2016

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 White House. The United States has long held the opinion that the WTO is ill-equipped 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 market-economy 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.

Oil Production Cuts Offset by Production Increases

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.

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