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annual forecasts

Dec 3, 2018 | 01:09 GMT

67 mins read

2019 Annual Forecast

In Stratfor's 2019 Annual Forecast we explore the critical factors that will influence the global system in the year ahead.
(MANJUNATH KIRAN/SPENCER PLATT/DANIEL LEAL-OLIVAS/MLADEN ANTONOV/JUSTIN SULLIVAN/ISSEI KATO/DAVID MCNEW/IGO ESTRELA/STR/AFP/Gett

Overview

 

The Great Power Competition Intensifies. The United States will escalate its strategic offensive against China with tariffs, sanctions, regulatory buffers around emerging technologies, stronger backing for Taiwan and a more assertive posture in the South China Sea. At the same time, failing arms control pacts will accelerate an arms race among the United States, Russia and China. The edgier geopolitical climate will create strategic opportunities for more vulnerable borderland powers, such as Poland and Taiwan, but will also create massive headaches for middle powers trying to find neutral ground, such as Turkey, India and Vietnam.

Increased Geopolitical Risk for Business. Citing national security threats, the United States will lean heavily on Europe, Japan, Australia, Canada, South Korea and Taiwan to erect stronger barriers to Chinese investment. This will affect research and trade in strategic areas, from artificial intelligence to 5G network rollouts beginning in 2019. China's imperative to catch up in critical areas like aerospace and high-end semiconductor development will only increase cyberthreats to corporations and compel an overall more offensive U.S. policy in cyberspace. In addition, corporations will have to contend with supply chain disruptions and heavier fines and lawsuits for data breaches.

Measuring Trade Volatility in the Global Economy. A U.S. showdown with the World Trade Organization could paralyze the body's dispute settlement process, forcing countries into a less predictable bilateral track to resolve their trade differences. Canada, Mexico, Japan and South Korea have a better chance of negotiating quotas to mitigate the threat of U.S. auto tariffs, but the European Union's trade talks with the United States are doomed to fail. And while additional U.S. tariffs on China will add to trade uncertainty, the overall effect on the global economy from White House trade policy in 2019 will be relatively muted.

Hair-Raising Scenarios for Italy and Brexit. A defiantly populist Italian government will pose the biggest threat to the eurozone in 2019 as concerns grow over the country's rising debt levels and fragile banking sector. Financial markets and dangerously wide spreads in bond yields — rather than threats from Brussels — will prove to be Rome's biggest disciplinarians. Brussels will simultaneously work to avert a no-deal Brexit scenario with the United Kingdom, but a British parliamentary veto remains the single biggest obstacle to its orderly exit from the European Union.

 

The Next Steps in the Anti-Iran Campaign. With far-reaching secondary sanctions in place, the United States will forge ahead with its campaign to isolate Iran regionally and weaken the country from within. This will increase friction between Washington and Tehran and diminish the already scant likelihood of a constructive negotiation. A common agenda opposing Iran will help insulate strategic, high-level ties between the United States and Saudi Arabia despite rumblings within the royal family and foreign governments over Saudi Crown Prince Mohammed bin Salman's leadership.

An Eye on Growing Supply in Global Energy Markets. Saudi Arabia and Russia will carefully manage oil output to prevent a price plunge as they monitor the effects of residual Iranian exports on the market. There is also the potential for production growth out of Iraq and Libya and a significant easing of export capacity constraints on the United States later in the year. Global liquified natural gas markets will be shaken up when the United States assumes its place among the top three LNG exporters in the world in 2019.

Disruptive Forces at Work in the Americas. Hard-line and U.S.-aligned governments in Brazil and Colombia could drive an atypically proactive regional effort to contain spillover from Venezuela's ongoing crisis. Brazil's efforts to shake up and reform the Mercosur trading bloc will come up against a politically hamstrung Argentina. The power of the referendum will meanwhile be put to the test in Mexico, where an aggressive populist agenda will raise investor risk.

Ethiopia Drives Big Change in the Horn of Africa. Ethiopia's ambitious agenda is generating economic interest and attracting outside powers to the Horn of Africa. But internal challenges to the current leadership and ethnic strife risk slowing Addis Ababa's momentum.

section

Nov 19, 2018 | 20:19 GMT

16 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.

section Highlights
  • A great power rivalry among the United States, China and Russia will accelerate a high-stakes arms race and increase competition in cyberspace. Global governance around these building threats will prove elusive as divisions deepen in the international system.
  • Even as the United States escalates a strategic offensive against China with additional tariffs and regulatory blocks, sanctions, increased backing for Taiwan, and maritime challenges in the South China Sea, Beijing will rely on its heavy economic leverage to chip away at U.S. alliances.
  • A White House showdown with the World Trade Organization could grind the body’s dispute settlement process to a halt, forcing countries back to a less predictable bilateral track to sort out their trade frictions.
  • As Iranian oil exports diminish under sanctions, U.S. production is set to increase, and as the global economy experiences more sluggish growth in 2019, Saudi Arabia and Russia will remain highly reactive to global oil markets to prevent a steep price plunge. Global liquefied natural gas markets, meanwhile, will grow more competitive as the United States earns its place among the world’s top LNG exporters in 2019.

A New and Uncomfortable Global Reality

More than a year ago, Stratfor noted that the intensifying competition among the United States, China and Russia would emerge as the defining feature of the international system, creating a conundrum for the middle powers caught in the throes of great power rivalry. It didn’t take long for trade wars, cyberattacks, shifting defense strategies and arms races to convince the world that this is the new and uncomfortable global reality.

Great power competition is set to only intensify in 2019. The White House will double down on its attempts to short-circuit China’s advances across a number of strategic fields. Beijing will take some blows along the way, but China still has the means and more motivation than ever to accelerate its timetable and efforts toward reaching parity with the United States. And while there is no love lost between China and Russia, the potential for a tighter alignment in 2019 is likely to overcome the friction points in their uneasy partnership.

This new global dynamic creates a massive headache for middle powers and globally exposed businesses attempting to navigate an increasingly complex landscape.

The year will expose the limits the United States faces in trying to isolate China both from within tightly interwoven supply chains and from even the most dependable U.S. allies, caught between maintaining a tight security relationship with the United States and a growing need to expand their economic ties with China. This global dynamic will create a massive headache for middle powers and globally exposed businesses trying to navigate this complex landscape. Even as major European powers try to assert EU sovereignty on the global scale to avoid becoming collateral damage, they will remain largely reactive to the broader competition. And for those powers lying along the borderlands, from Poland to Turkey to Taiwan, a tenser geopolitical climate will translate in some cases into strategic opportunities as they try to work quickly to shore up security alliances and extract special economic benefits from powerful suitors.

Disruptive technologies and fractured treaties will reshape military arsenals in the years ahead.

The rapid development of disruptive weapons technology combined with the steady deterioration of arms control pacts will accelerate the high-stakes arms race among the United States, Russia and China. Washington's likely imminent withdrawal from the Intermediate-Range Nuclear Forces Treaty and a shakier negotiation over the New Strategic Arms Reduction Treaty will deepen divisions in Europe as Western powers try to avoid getting caught in an arms buildup while states on the front lines with Russia, like Poland, the Baltic states and potentially Romania, volunteer to host U.S. military assets. At the same time, the United States will be freeing itself to build up a formidable arsenal to challenge China, all while Beijing strategically avoids entering such arms pacts and continues apace with its own buildup in the Western Pacific.

A map showing the U.S. ballistic missile defense network

The ideological dimension to the great power competition will play out more subtly. The United States is rising to the challenge of competing with a China-Russia axis, but it is relying on unorthodox tactics and a broadly unilateral course that will risk alienating many of the middle-power allies it needs on its side. With the Western front divided and the United States no longer actively defending — and in some cases actively battling — the postwar rules-based system of managing the global order, China will find plenty of inroads among middle powers to blunt the U.S. offensive. Moreover, the technology-driven form of digital authoritarianism that China is harnessing to manage affairs at home and export abroad will offer a compelling alternative to powers with autocratic leanings that have grown wary of the liberal political conditions that traditionally come with partnering with the West.

A graphic showing the comparative sizes of nuclear arsenals

U.S. and China, Ready to Rumble Into 2019

The U.S.-China competition will escalate on practically all fronts in 2019. Not only will China face heightened economic pressure from tariffs and regulatory blocks against Chinese firms, but the United States will also use sanctions to tighten the screws on Beijing over potential issues including cyberattacks and human rights. (Beijing's treatment of the Uighurs and other minority groups, for example, will present a prime target for U.S. sanctions policy.)

On the security front, the United States will more assertively challenge China directly in the South China Sea and over Taiwan, possibly leading to more standoffs and close calls between U.S. and Chinese forces in maritime hot spots. U.S. economic efforts to directly counter China's Belt and Road Initiative, in contrast, will face much greater limitations, as Beijing leverages joint economic access and partnership deals with powers big and small to dilute U.S. alliances.

Despite imposing tariffs on around $250 billion in Chinese imports, the White House can still hit China with another round of tariffs if concessions from Beijing don't materialize.

On trade, temporary truces between Washington and Beijing will be possible as the two sides negotiate some economic reprieve, but the key word is "temporary": The gulf between U.S. demands for deep structural reform in China's economy and the reality of what Beijing is willing to offer without compromising its critical industrial technology strategy and stability at home is simply too wide to allow for a more comprehensive and enduring deal to emerge between them. The United States has already imposed tariffs on roughly $250 billion in Chinese imports. Frustrated by the limited concessions it will be able to extract from Beijing, the White House can still blast China with another round of tariffs targeting a remaining $267 billion in imports.

Potential export controls on "dual-use" targets will prove highly disruptive to many corporations.

U.S. economic pressure against China will also extend well beyond tariffs. U.S. tech firms will face more regulatory oversight as the United States tries to restrict Chinese access to dual-use technologies and scrutinizes the U.S.-China supply chain for national security vulnerabilities. Potential export controls on "dual-use" targets, from high-performance chips to general artificial intelligence research, will be highly disruptive to many corporations. The United States has already been erecting barriers to Chinese investment and research in strategic sectors, but it will also be heavily lobbying other countries — particularly Japan, Canada, European nations, Australia, New Zealand, South Korea and Taiwan — to downgrade their ties with major Chinese tech companies, like Huawei and ZTE, that will be branded as a critical national security risk to their countries.

Timing is key: 2019 marks the rollout of revolutionary fifth-generation telecommunications technology in the developed world.

The next two years will bring a game-changing level of speed and connectivity to underpin transformative technologies, like the "internet of things," virtual and augmented reality, artificial intelligence processing, autonomous vehicles, and telemedicine — which are already areas of intense U.S.-Chinese competition. And since Huawei and ZTE are two among a small handful of technology companies that have developed the technological infrastructure and standards around 5G, the U.S. government will do whatever it can to prevent its biggest strategic competitor from embedding itself deep inside the economic nervous systems of itself and its allies. That growing imperative will naturally add fuel to an already building fire between the state and the corporation in several advanced economies as multinational tech firms with deeply layered supply chains try to resist a rise in regulatory handicaps to business models that rely on open trade and cross-border data flows.

Any kind of global consensus on the priorities and methods needed to govern cyberspace will remain elusive in 2019.

Intensifying great power competition in cyberspace will only aggravate state-corporate friction over policy. As the biggest target of cyberattacks, the United States is moving down a more offensive path, with China and Russia squarely in its sights. (The lead-up to the 2020 U.S. presidential race will draw additional attention to the cyberthreat posed by China, in particular.) A growing trend can be seen in Western countries where governments will rely on heavy fines and the buildup of consumer lawsuits to hold corporations accountable for large-scale data breaches. Calls among major powers to develop global norms for cyberspace will grow more urgent, but consensus and enforcement for any such agenda will remain elusive given widely divergent positions among the United States, Europe, Russia and China over the priorities and methods needed to govern cyberspace.

A graphic showing the major players in the 5G tech value chain

The Global Headwinds of U.S. Trade Policy

Outside of the tight U.S. economic focus on China, the looming threat of U.S. auto tariffs and a showdown between the United States and other major powers at the World Trade Organization (WTO) will reverberate throughout the global economy. The White House's economic policy, while prone to the machinations of rival ideological camps, remains largely driven by an interest in reducing trade deficits through bilateral negotiations. The U.S. administration is also not afraid to use heavy-hitting tactics as leverage. Even as the White House threatens tariffs on auto imports — a major driver of the U.S. trade deficit — in the name of national security, it will not settle on trade deals that fail to include significant concessions in markets like agriculture, where U.S. exporters are more competitive. The United States will also use bilateral trade agreements to discourage U.S. trading partners from signing free trade agreements with China (Canada's pursuit of such a deal will test the credibility of that tactic).

A graphic showing the impact of auto tariffs on the U.S economy

The finalization of the United States-Mexico-Canada Agreement (USMCA), which already includes greater protections for U.S. auto manufacturers and quota provisions, will largely insulate Mexico and Canada from the threat of U.S. auto tariffs. A diminished economic threat to North American trade will reduce urgency from the U.S. Congress to impose legislative checks on White House trade policy.

Germany has the most to lose from a trade battle with the United States over autos but won't be able to force the European Union — and France in particular — into making concessions on agriculture to satisfy the White House.

Japan runs a good chance of mitigating the threat of U.S. auto tariffs through a limited trade deal with the United States given the agricultural concessions it made in its free trade agreement with Canada and in the Comprehensive and Progressive Trans-Pacific Partnership in 2018. South Korea will also likely agree to quotas to fend off auto tariffs. In contrast, the prospects for a comprehensive U.S.-EU trade resolution in 2019 look outright dismal. Germany has the most to lose from a trade battle with the United States over autos but will not be able to force the European Union as a bloc, and France in particular, into making concessions on agriculture to satisfy the White House. Depending on which administration trade hawks and pragmatists have the president's ear at the time, the White House will likely choose between reneging on a truce, imposing auto tariffs anyway and doubling down on Europe in hopes that it will eventually drive Brussels to a deal; or tempering its ambitions and focusing instead on ongoing negotiations over regulations and standards that fall short of formal free trade talks.

Parallel to these troubled trade negotiations is a growing confrontation between major economic powers and the WTO.

The World Trade Organization is currently arbitrating a number of national security-related cases, including one regarding the U.S. justification for imposing tariffs on steel and aluminum in early 2018. The White House will make an example of these cases to argue that the multinational body has no right to arbitrate matters of national security in the first case. Should the White House win this argument, it could make it easier for other states to erect protectionist barriers in the name of national security.

Should the White House lose, the decision will only add to its building crusade against the WTO's credibility. To be clear, Congress has the authority to prevent an outright U.S. withdrawal from the WTO, which would upend the global economy. But the United States does have the means to paralyze the organization's dispute resolution process. Because of the United States' continued block on new appointments, by December 2019 the appellate body risks falling below the minimum three members required to rule on cases.

This form of protest by the United States, which preceded the presidency of Donald Trump, is designed to spur support from the European Union, Japan, Canada and other major trading partners for WTO reforms that would speed its rulings and clarify jurisdictional boundaries as the United States tries to prevent the body from stepping into sovereign trade territory. It's also intended to get the WTO to hold China and other developing nations more accountable for trade abuses including state subsidization and intellectual property theft. Relatedly, a WTO panel on a case brought against the European Union by China, which is seeking recognition as a market economy, will wrap up in 2019. If the European Union loses this case, it will add momentum to the U.S. argument that the WTO is unfit to regulate China on trade.

An increasing number of influential countries are pushing for WTO reforms to speed up the organization's rulings and clarify jurisdictional boundaries to limit forays into sovereign trade territory.

But U.S. demands for reform will be a lot to ask from the slow-moving and fractious multinational organization that's ruled by consensus. There's a real threat that the United States will grind the dispute settlement process to a halt, a scenario that would drive economic powers back into bilateral negotiations to sort out their differences as they did under the General Agreement on Tariffs and Trade, the pre-WTO system that governed global trade in a geopolitical climate oozing with uncertainty.

The Global Energy Outlook

A collapse in oil markets is unlikely in the first half of 2019 as sanctions diminish Iranian oil exports and pipeline constraints limit U.S. production growth. But that supply picture will shift significantly in the second half of the year when U.S. pipeline capacity expands. Saudi Arabia and Russia will remain highly reactive to any signs of oversupply that could send oil prices into a tailspin. Iran still will be able to export about 1 million barrels per day for around the next five months under limited sanctions waivers, and there's potential for Libya and Iraq to sort out internal political differences long enough to notably affect the market. At the same time, the potential of an internal meltdown decreasing production in Venezuela and discord in the Persian Gulf impeding tanker traffic in the Strait of Hormuz will be closely watched for more acute supply disruptions.

A graphic showing oil supply and demand

The United States, meanwhile, is preparing to shake up global liquefied natural gas (LNG) markets. By the end of 2019, the United States will join Qatar and Australia as one of the world's largest LNG exporters. The broader geopolitical effects will take several years to play out as a more competitive LNG market drives short-term contracts and gas-on-gas pricing, particularly in Asian markets with rapidly growing demand. U.S. trading partners under siege by the White House will try to leverage increased purchases of U.S. LNG to temper trade frictions, while Eastern European powers will use U.S. LNG purchases to better insulate themselves from Russia.

Slow and Steady as She Goes for the Global Economy

When we step back and look at all the factors likely to drive instability in the global economy in 2019, there is cause for concern, but not necessarily panic. Growing levels of corporate and sovereign debt, slow growth in workers' incomes, demographic stresses and building political constraints to structural reform make a troubling backdrop to the longer-term economic outlook. Nonetheless, the biggest threat to the U.S. economy from White House trade policy — the collapse of NAFTA — has been mitigated. The potential for more U.S. tariffs on Chinese imports and on U.S. auto imports from outside North America will create localized, sectoral pains but will have a limited impact on the U.S. economy and global economy at large. The White House will point to stable U.S. economic growth to justify an aggressive approach on trade, though the stimulant effects of U.S. tax cuts and fiscal spending will wane in the next few months and keep U.S. monetary tightening on a relatively moderate course.

A chart showing global trade and world gross domestic product

As long as U.S. economic growth remains relatively stable, U.S. importers struggle to find cheap alternatives to Chinese products and American consumers continue to tolerate slightly higher prices on Chinese goods, China will be able to weather the economic blows from its enduring competition with the United States while relying more heavily on fiscal adjustments at home to maintain stability.

A bar chart showing national debt -- total and components thereof -- as a percentage of GDP

In Europe, a no-deal Brexit scenario can still be averted, even if narrowly. Even as the Italian government and European Commission will avoid escalating their confrontation into a systemic crisis, the fragility of Italy's banking sector will remain the biggest risk to eurozone stability. The European Central Bank will implement its shift toward monetary tightening slowly and cautiously as the Italian risk hangs over the eurozone and as economic expansion in Europe slows overall.

Emerging markets will remain under strain from a strong dollar, weak currencies, high inflation, heavy import bills and domestic political constraints on economic reform.

An International Monetary Fund (IMF) bailout agreement is preventing the Argentine economy from collapse, but is also raising the potential for a more fiscally lax Peronista comeback in October elections. Turkey will have a bit more political room to pursue light reforms in 2019 while trying to prevent the more controversial aspects of its foreign policy from aggravating economic stability at home. Pakistan is cobbling together IMF and foreign assistance to avoid a balance-of-payments crisis, while the Indian government will prepare for spring elections by avoiding big trade concessions and pressuring the central bank to keep monetary policy loose. Mexico's new government was spared a NAFTA nightmare but will drive up political risk for investors with an aggressive populist agenda. And while smaller Asia-Pacific economies, including Thailand, Vietnam, Malaysia and Taiwan, will be caught in the crosshairs of the U.S.-China trade battle, they are also among the first places that U.S.-based companies in China looking to diversify supply chains will consider as the competition between the economic giants endures.

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

section

Nov 19, 2018 | 20:48 GMT

8 mins read

Middle East and North Africa

The Middle East and North Africa is the world's crossroads. It encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between. The story of the region, as is so often the case of places stuck between foreign players, is the story of trade, exchange and conflict. The traditional powers of the region are Turkey and Iran — Saudi Arabia and Egypt are the current Arab powers — and their competition for influence over the region's weaker states makes the Middle East and North Africa an arena of violence and instability.
The Middle East and North Africa encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between.

Key Trends for 2019

The U.S.-Iran Collision Course

The U.S.-led sanctions campaign will hurt Iran, but it won't lead to the collapse of the Iranian government even as the country's economy struggles. By increasing sanctions, the United States hopes to coerce Iran to return to the negotiating table. This will not work; while Iran is known for its political feuding, its parties will prioritize regime stability over their usual politicking. Moreover, sanctions have intensified popular unrest, which strengthens the political capital of conservatives and hard-liners against the administration of moderate President Hassan Rouhani. Furthermore, Iran's assertive intelligence and security apparatus will be empowered by the need to deepen Iran's defensive strategy in the face of the intensifying pressure. 

Iran will do what it can to retaliate against its aggressors, stopping just short of provoking a conventional military response — for now.

Tehran will be tempted to retaliate by harassing U.S. and allied vessels in the Persian Gulf, conducting ballistic missile tests or resuming its nuclear activities, but it will only do so when absolutely necessary. Instead, Tehran will more readily employ cyberwarfare, conduct covert operations, or use its key regional proxies to strike back at the United States, Israel and the Gulf states. Iran wants to avoid provoking a conventional military strike against itself, but as political support from the European Union weakens over 2019 and economic guarantees are replaced by political rhetoric, Tehran will be more willing to engage in sharper retaliatory measures. Learn more about Iran's strengths and vulnerabilities.

A chart showing the exchange rate of the Iranian rial over time

The United States Bolsters Regional Allies

In carrying out its regional strategy, which hinges on containing Iran, the United States will lean on two sets of allies with similarly aligned objectives. The first set includes allies most concerned about Iran and willing to embrace hard-hitting anti-Iranian policies: Israel, Saudi Arabia and the United Arab Emirates. These countries are rapidly overcoming decades of mistrust and conflict to better coordinate against Tehran in cyberspace, in enforcing sanctions, and even militarily

The United States will rely on its allies in the Persian Gulf to assist with Washington's Iran containment strategy.

The second set of allies, Kuwait, Oman and Qatar, is more loosely aligned and less willing to take a tough position on Iran. These countries can provide strategic, diplomatic and economic value to the United States in certain regional conflicts and crises. An improved alignment between them could reduce the intensity of the Qatar blockade, but the underlying conflict among members of the Gulf Cooperation Council will endure. Learn more about how these countries will attempt to demonstrate their strategic utility to the United States.

Spotlight on Saudi Arabia

Saudi Arabia will have to manage growing concerns over Crown Prince Mohammed bin Salman throughout 2019. In the wake of exiled Saudi journalist Jamal Khashoggi's murder, the crown prince's actions will come under increasing international scrutiny. Although he remains well entrenched within the Saudi monarchy, Crown Prince Mohammed's dominant position still depends on support from his father, King Salman, and quiet resistance will continue to build within the royal family. Some of Riyadh's key allies will limit military support and foreign direct investment to Saudi Arabia, but crucial relationships are unlikely to shift

The stain of the Khashoggi affair will linger on the House of Saud into 2019.

Riyadh will continue to advance its Vision 2030 goals over the coming year, easing austerity measures in response to positive economic signs — higher oil prices in 2018, the opportunity to make up for decreased Iranian oil exports, and a relatively successful non-oil revenue generation strategy. This means the kingdom can avoid making hard structural changes to the Saudi economy, especially the labor markets. Complaints over housing, salaries and quality of life will compel the state to use its fuller royal purse to douse grievances with cash. Read more about the troubles facing Saudi Arabia in the wake of the Khashoggi affair.

A graphic showing the family tree of a key Saudi faction

The Syrian Cauldron Could Spill Over  

In the closing stages of the Syrian civil war, five key powers — Turkey, Russia, Iran, the United States and Israel — are competing for influence and control. Moscow and Tehran firmly back Syrian President Bashar al Assad but differ not only in the levels of support they provide but also in their overall objectives. Russia has used the Syrian conflict to expand its footprint in the Middle East and will be protective of its gains and materiel, though Moscow has little desire for open conflict with Turkey, the United States or Israel. Iran, on the other hand, will be more aggressive in its support for Damascus, especially in opposition to Ankara and Washington. Tehran will also continue to build up its forces inside Syria as a deterrent to Israel and as a means to supply Hezbollah, its powerful ally in nearby Lebanon. Israel will attempt to foil Iran's plans but is intrinsically wary of sparking an unintended conflict with Russia. 

A map showing the Syria battlespace

Turkey and the United States remain opposed to Assad's rule, but despite being NATO allies, they will pursue their own agendas in Syria. The United States is focused on eradicating remnants of the Islamic State in the country, though Washington more broadly seeks to remove Iranian influence from Syria as part of its anti-Iran strategy. Challenging Iran in Syria creates tension between the United States and Russia — Moscow cannot and will not force out Iran. Despite efforts to deconflict, the possibility of a military incident involving U.S. and Russian assets is not beyond the realm of possibility

The possibility of a breakout conflict involving the major powers overseeing the Syrian conflict is conceivable in 2019.

Turkey, for its part, will maintain its focus on containing Kurdish forces in Syria. This is problematic for the United States, which uses the Kurdish People's Protection Units (YPG), a group Ankara sees as a terrorist organization, as an ally against the Islamic State and as a proxy against Iran. In Syria's northwest, Turkey's pledge to protect Idlib province could stretch Ankara's credibility as a local partner, especially given Damascus' stated goal of total reconquest. Idlib could well become a flashpoint among Turkey, Iran, Syrian loyalist forces and, more remotely, Russia. Given the opposing interests in Syria, the potential for accidental escalation or even a state-to-state confrontation in 2019 is higher than ever, though every power will take steps to avoid this. Learn more about the possibilities for state-to-state confrontation and what 2019 will hold for the Syrian conflict

Handling Turkey's Fragile Economy

The biggest challenge facing Turkey in 2019 will be its distressed economy. As well as managing record inflation, President Recep Tayyip Erdogan will have to contend with a privately held corporate debt bill roughly equal to a quarter of the country's gross domestic product — all while avoiding another lira crisis. Erdogan will be politically compelled to broaden his support base ahead of local elections in the spring, courting financially concerned Turks from across the electoral spectrum, some of whom have been turned off by the president's nationalist policies. Turkey's brittle economy also weakens Ankara's position when it comes to dealing with key partners in the West. The U.S. relationship with Turkey is increasingly fractious thanks in part to Ankara's growing ties with Russia and Washington's support for the YPG in Syria. 

President Recep Tayyip Erdogan will have his work cut out in 2019 to stabilize the Turkish economy.

Because of its vulnerability to U.S. economic pressure, Turkey will attempt to shore up foreign investment and maintain stable economic relations with Europe. However, Turkey's historically complex relationship with the European Union will complicate that effort. Beyond stabilizing its economic situation, Ankara will continue to pursue other core imperatives in 2019, including the containment of autonomous Kurdish movements in Turkey's former Ottoman domains. Ankara will exert whatever influence it can in northern Syria and continue military strikes against Kurdistan Workers' Party positions in northern Iraq. Learn more about Turkey's precarious economic position going into 2019.

A chart showing key Turkish economic indicators

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • January: The inaugural meeting of the Middle East Strategic Alliance (MESA) — dubbed the "Arab NATO" — could take place.
  • January: The heads of state of the African Union will hold a summit in Egypt.
  • Feb. 17-22: Financial Action Task Force (FATF) plenary meeting in Paris at which Iran's status will be discussed.
  • March: Local elections will be held in Turkey.
  • April: The presidential election in Algeria will be held.
  • August: Annual Iranian naval drills take place in the Strait of Hormuz.
  • November: Israeli parliamentary elections must be held by the end of the month.
  • Unknown Date: 2020 Iranian parliamentary elections will be announced.

section

Nov 27, 2018 | 13:49 GMT

8 mins read

Asia-Pacific

The Asia-Pacific is home to more people than any other region. Centered on the western rim of the Pacific Ocean, this region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. Several of these countries, most notably China, experienced rapid economic growth in the second half of the 20th century, giving the region a new sense of global economic relevance that continues today. That relevance, however, depends largely on China, a power in transition whose rise is testing the network of U.S. alliances that have long dominated the region. How effectively Beijing manages its transition will shape the regional balance of power in the decades to come.
Centered on the western rim of the Pacific Ocean, the Asia-Pacific region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast.

Key Trends for 2019

China Weathers the Trade Storm

Beijing will try to keep its lines of communication with Washington open on trade by offering to buy more U.S. goods and selectively lower barriers to investment, but its concessions won't meet U.S. demands for structural economic reform. Still, China will only respond in kind to U.S. measures targeting Chinese firms and entities and not take any blanket punitive action against U.S. businesses. Beijing will also deepen public-sector reforms by soliciting foreign investment for its financial, auto and energy sectors. Furthermore, it will ease restrictions in sectors that align with China's prime interests, such as medical services and education.

China's refusal to concede to U.S. demands will prolong the ongoing trade dispute.

The United States will maintain its demand that China ease state support for its tech sector, but that will only compel Beijing to accelerate its efforts to ease China's dependence on foreign technology and diversify its supply chain — thereby necessitating increased state support for the sector. Needless to say, China's refusal to bow to U.S. pressure on tech will prolong their trade dispute. At the same time, China will strive to acquire technology and cooperate on sector-specific activities with advanced tech powers like Japan, Israel, Taiwan and the European Union, but such activities will face increased scrutiny over concerns about Chinese investment and industrial espionage. Read more on China's efforts to reform its state sector.

A bar chart showing China's domestic market share targets

Beijing Battens Down the Hatches

Because the extended trade war threatens the economy in China's coastal regions (and, thus, social stability), Beijing will ease its tight regulations designed to contain debt and protect the environment while upgrading infrastructure, generating credit and offering direct subsidies to boost growth. China will also carefully manage the yuan's value to mitigate the damage to exports, allowing it to cope with reduced growth. But an accumulation of debt and the fragility of the housing market will limit Beijing's ability to use massive credit flows and sharp currency devaluations as a means of economic stimulus. 

China will have to rely more on fiscal stimulus — including reducing taxes — to encourage consumption and private sector activity.

It will also encourage the increased use of the yuan in currency swaps and in trade with countries participating in the Belt and Road Initiative to mitigate currency volatility. And to keep hedging against U.S. trade pressure, Beijing will pursue bilateral and regional free trade agreements, such as the Regional Comprehensive Economic Partnership in the Indo-Pacific region and trilateral negotiations with Japan and South Korea, all while forging ties with new export markets along the Belt and Road and in Africa. Southeast Asia's emerging economies, meanwhile, will be ready to lure any factories that relocate from China amid the trade war. Threats to the overall regional supply chain and external financial volatility could also present challenges to countries with higher debt or current account deficits, such as Malaysia, Indonesia and the Philippines. Learn more about why state-owned enterprises are so important to China.

A graphic showing China's local debt risk and tariffs impact, by province
A chart showing China's household income and debt.

Great Power Competition in the Asia-Pacific

As it tries to chip away at the U.S. regional alliance structure, China will continue its conciliatory outreach to Japan, India and the member states of the Association of Southeast Asian Nations (ASEAN) by privileging dispute resolution efforts and economic partnerships while also making overtures to Australia, whose April elections could foster some rapprochement. At the same time, Washington will bolster its naval presence in the South China Sea and the Taiwan Strait and further challenge the One China principle by elevating Taipei's status at international associations and regularizing arms sales, naval patrols and high-level visits. 

The U.S. Navy will be more prevalent in the South China Sea and the Taiwan Strait, which will provoke China to adopt a more robust military posture.

In response, China will adopt tougher naval and aerial postures to assert its territorial claims, increasing the chances of accidents involving the U.S. military. The United States is considering making a naval port call in Taiwan — an event that would trigger a more direct Chinese military response. Japan, India and Australia will increase security cooperation with Washington, but they will refrain from joining U.S. freedom of navigation operations in the South China Sea or patrols in the Taiwan Strait. Elsewhere in the region, U.S.-ASEAN military exercises and U.S.-Vietnamese defense cooperation will complicate Chinese efforts to limit the further regional expansion of U.S. influence. Find out more about Taiwan's role in U.S.-China competition.

A Fraying Consensus on North Korea

The United States is intent on extracting tangible concessions from North Korea in 2019. But this is also the year that Pyongyang hopes to squeeze the most out of the Trump presidency before the United States becomes distracted by its election cycle. Given the obviously high stakes of open warfare, neither will deliberately scuttle the dialogue. North Korea will carefully offer tangible pledges but will also expect concrete progress on sanctions relief or toward a peace deal; throughout the process, it will obfuscate and delay where it can. Pyongyang will also insist on assurances that any bilateral deal will have staying power beyond the current administration. 

The United States will hesitate to extend an economic lifeline to North Korea by lifting sanctions, but time is on Pyongyang's side as the international consensus on maintaining sanctions unravels.

For the moment, Washington's veto power on the U.N. Security Council will allow it to block any effort to repeal the multilateral measures, even as China and Russia push for the international community to reward North Korea for its cooperation. At the same time, the United States will pressure others to fall into line on sanctions by shaming transgressors and threatening secondary sanctions against those who deal with Pyongyang. Complicating matters, inter-Korean detente is reaching the point where it cannot proceed much further without sanctions exceptions — something the United States will only approve after careful consideration. The growing discrepancy between the pace of the inter-Korean dialogue and the pace of the U.S.-North Korean discussions will leave room for China to extend its influence on the Korean Peninsula. Overall, while swings towards breakthroughs and breakdowns will occur throughout the year, North Korea will still maintain possession of many elements of its hard-won nuclear program at the end of 2019.

A graphic showing road and rail infrastructure on the Korean Peninsula.

Moving the Belt and Road Forward

With its access to U.S. markets under strain, Beijing will redouble its efforts to find new export markets and partners through the Belt and Road Initiative. Washington will work principally with Japan and Australia to offer alternative infrastructure investments to counter China's ambitions in the Indo-Pacific, but Beijing will temper potential partners' concerns regarding financial sustainability, political influence and national security threats by attracting third-party investors. It will also work to undermine Washington's regional initiatives by pursuing joint projects with middle powers, including Japan, the European Union and India. Take a more in-depth look at the resistance to the Belt and Road Initiative.

A global map showing China's port investments

A Japanese Awakening

Secure in his position through 2021, Japanese Prime Minister Shinzo Abe will aim to pass constitutional reforms before the end of 2019 while offsetting the economic impacts of a consumption tax hike through public works spending, incentives for private sector investment and tax exemptions for certain products. And though Russia and Japan will continue to negotiate over the disputed Kuril Islands, a larger standoff between Moscow and the West will scuttle any hopes of a deal. 

When it comes to trade, the United States and Japan have an arrangement for now, but much will depend on how far Washington pushes Tokyo.

Meanwhile, Tokyo will grant concessions that will partly placate U.S. trade concerns — so long as the U.S. push for agricultural access does not exceed the limits outlined in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU-Japan trade deals. If Washington pushes further, Tokyo will experience a backlash from its powerful farming lobby — although it will weigh whether to sacrifice its agricultural sector to avoid U.S. tariffs on its critical auto sector. Beyond that, Tokyo will also resist U.S. attempts to limit any future Japanese trade deal with China. Read more on Japan's calculations on automotive and agricultural trade in the face of U.S. pressure.

A bar chart showing Japan's agricultural imports

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • Early 2019: Release of a World Trade Organization panel report on China's challenge of the European Union's refusal to grant China market economy status.
  • Early 2019: Next Trump-Kim summit may occur.
  • Jan. 1: Date that the United States could possibly raise the tariff rate on $200 billion worth of Chinese imports to 25 percent.
  • Jan. 14: First day the United States can hold formal trade deal talks with Japan.
  • January: First round of CPTPP's tariff cuts will take effect.
  • March: Joint U.S.-South Korean military exercises Foal Eagle, Double Dragon and Key Resolve normally held.
  • May 18: Australia's Senate elections must be held before this date, with House of Representative elections due by November.
  • June 28-29: A G-20 summit is scheduled to be held in Osaka, Japan.
  • August: U.S.-South Korean Ulchi Freedom Guardian military exercise normally held.

section

Nov 27, 2018 | 20:43 GMT

8 mins read

Europe

To the west of Eurasia lays Europe, a region predisposed to division. It is surrounded on nearly all sides by islands and peninsulas that make it difficult for Europe to cohere. The northern half of the continent, moreover, sits on a plain whose short, meandering rivers tend to empower countries without forcing them to work with others. The southern half is situated on more mountainous terrain that has historically impeded the creation of strong, unified economies. As a result, Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.
Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.

Key Trends for 2019

Risk in the Eurozone

Italy will remain the main source of financial risk within the eurozone. Rome could make cosmetic changes to its fiscal policies to delay sanctions from the European Commission over its 2019 budget, but the real threat to the country's financial stability will come not from Brussels but from the financial markets. Rome's fiscal policies will create uncertainty among investors about the sustainability of its debt. 

If Italy's political and financial turbulence continues, Southern European countries could suffer increased borrowing costs.

The billions of euros in Italian debt held by its banks leaves them vulnerable. Should those banks require assistance, Rome may have no choice but to negotiate a rescue program with the European Union. At the same time, disputes within Italy's coalition government could prompt early elections, adding to political uncertainty. Italy's political and financial turbulence will increase the chances of higher borrowing costs and of banking uncertainty in other Southern European countries. Read more about what's motivating the Italian government's policies.

A chart showing Italian debt ownership
A chart showing Italian banks' debt

The Year of Brexit

While there is no shortage of disruptors around the Brexit process, London and Brussels will work to minimize the economic effects of the United Kingdom's exit from the bloc. London's first choice will be to leave with a comprehensive exit agreement, but it may take more than one vote to persuade the British Parliament to approve it. If lawmakers ratify the deal, the United Kingdom will remain in the EU single market in 2019. But even if Parliament rejects it, London and Brussels will still reach temporary agreements, or in some cases act alone, to contain economic disruptions as much as possible. Such measures could include extending the negotiation period under Article 50, to delay Britain’s exit. Still, a British parliamentary veto would throw the logistics of the bilateral relationship (from trade to commercial flights to migration) into flux

To make Brexit even more interesting, the sitting British government could fall at any point in the negotiations and a new election could be scheduled.

No matter how Brexit happens, the United Kingdom and the European Union will discuss a permanent post-withdrawal trade arrangement, and London will hold free trade talks with other countries, including the United States. Considering their complexity, those negotiations will likely extend beyond 2019. Read about why fragmentation in Europe's financial system will grow after Brexit.

Trade in Focus

The European Union will not sign a comprehensive free trade agreement with the United States in 2019, but it will be willing to discuss a more modest agreement that covers industrial goods. Brussels will also be open to talking about the elimination of some nontariff barriers to trade. With these gestures, the bloc will try to dissuade the United States from introducing higher tariffs on vehicles produced in the European Union. Should the White House raise the tariffs, the union would retaliate with its own countermeasures. At the same time, it will try to keep the United States engaged in multilateral forums such as the World Trade Organization, and it will side with the White House when it pressures China on issues such as state subsidies and foreign investment limitations.

The EU will continue to seek opportunities with countries such as Australia and New Zealand, South America's Mercosur trading bloc, and even look to open new export markets in South and East Asia.

Brussels will also see Beijing as a counterbalance to the United States when it comes to defending multilateralism. But large economies such as Germany and France will resist China's penetration into Europe — especially in sensitive areas such as technology and infrastructure — while smaller states will welcome Chinese investment as an opportunity to boost their economies. In other trade issues, the European Union will hold talks with Australia and New Zealand, seek to complete negotiations with South America's Mercosur bloc, and look to open new export markets in Asia. Issues such as agriculture and geographic descriptors for food products will prove difficult to solve, but the union will try to make as much progress as possible in its trade talks. Read more on EU-U.S. trade disputes.

A graphic showing Europe's major car exporters

The Battle for the EU Leadership

Elections for the European Parliament in May will produce a fragmented legislature; pro-EU parties will retain control, but nationalist and Euroskeptic forces will have a strong following. These divisions will, in turn, make it harder to pass legislation. The selection of the new European Commission president will follow and lead to ideological disputes within the bloc. A conservative commission would probably focus on such issues as trade agreements and reducing immigration from outside the bloc, while a progressive one would more likely focus on ensuring greater economic cohesion within the bloc. 

Regional disagreements will slow the pace of policymaking and reduce the possibility of major reforms.

Southern Europe will push for a commission that promotes higher spending and deeper risk-sharing across the bloc, while Northern Europe will push for a body that promotes fiscal discipline and risk reduction. EU governments will also select a new European Central Bank president. The south will push to continue the bank's expansionary monetary policies, and the north will push to reverse some of them. The regional disagreements will slow the pace of policymaking, reducing the chances of significant reforms. Read more about the competition for EU institutions.

A graphic showing the battle between EU institutions

Trouble in Germany and France

As Germany's governing parties seek to set themselves apart, the country's politics will be stretched further to the left and right, hollowing out the center. Conflict within the government will reduce its efficacy and could lead to early elections. A new vote would again produce a fragmented parliament and lead to complex coalition talks, further reducing Berlin's EU leadership role. In France, the government's push for institutional and economic reform, including a drive to overhaul the pension system, will lead to protests, some of which will disrupt the economy. Paris will succeed in implementing most of its plans, but citizens will be increasingly vocal in rejecting their government's policies. Domestic issues and France's dependence on others to get things done in the bloc will limit Paris' influence on Continental affairs. Read more about the implications of political uncertainty in Germany

The East-West Divide

Countries in Central and Eastern Europe will take advantage of the global environment to preserve, and potentially deepen, their political and military ties to the United States. The White House will look to Poland and Romania to help increase its presence or even to serve as hosts for American missile systems as the arms race with Russia intensifies. At the same time, Poland, Hungary and Romania will selectively challenge EU institutions and rules, while also making sure not to do anything that puts their memberships in the bloc in jeopardy. These countries will also look to deepen cooperation with their neighbors on issues that vary from energy diversification to infrastructure, and they will get together to resist cuts in EU agricultural and development funds. Read more on Poland's geopolitical strategy

A chart showing European operating budgetary balances

The Push for Autonomy

EU countries will tighten cooperation on defense, through initiatives such as Permanent Structured Cooperation and the European Defense Fund. France will lead the push to enhance Europe's military capabilities, but disagreements between member states could slow progress. To streamline decision-making, the bloc will try to switch its voting system so changing foreign and taxation policies would require majority approval instead of unanimity. But that will probably fail, because changing the voting mechanism requires unanimous approval, and several countries will want to preserve their veto power. 

The European Union's ambitions will be hampered, in classic fashion, by convoluted leadership and the curse of consensus.

The bloc will also discuss ambitious plans to create international payment channels independent of the United States, replace the dollar with the euro as the world's reserve currency and increase capital market integration among member states. But a leadership vacuum at the Continental level and the complexity of their implementation will prevent the bloc from realizing them in 2019. Read more on Europe's push for strategic autonomy.

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • March 29: The United Kingdom's scheduled exit from the European Union.
  • May 23-26: Elections across the European Union for members of the European Parliament.
  • Aug. 25-27: A G-7 summit is scheduled to be held in France.
  • Late October: Deadline for EU governments to select the presidents of the European Commission and the European Central Bank.
  • November: General election in Poland.
  • November: Selection of the new president of the European Council.

section

Nov 28, 2018 | 15:14 GMT

7 mins read

South Asia

Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders. The Himalayan Mountains form the northern border of South Asia, whose two main rivers, the Indus and the Ganges, support the region’s great population centers. India is the region’s dominant country, home to the world’s fastest growing economy. But its rivalry with neighboring Pakistan, a fellow nuclear power and growing consumer market, has made South Asia one of the world’s most dangerous nuclear flashpoints. The region is also a testament to how militancy and militarism can undermine the regional integration needed to unleash higher economic growth.
Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders.

Key Trends for 2019

India and the U.S.-Russia Balance

India will cautiously advance its defense partnership with the United States in spite of disputes over trade and sanctions. After all, their shared rivalry with China makes the U.S.-Indian partnership mutually beneficial. At the same time, to maximize its strategic autonomy, New Delhi will safeguard India's relations with Russia, which it depends on for arms. To support indigenous production, Prime Minister Narendra Modi will emphasize technology transfers from key U.S. and Russian weapons suppliers. All the while, he will resist U.S. pressure to lower tariffs — especially on dairy products and medical devices – and will seek expanded access for India's services sector ahead of the 2019 elections as he tries to protect jobs under his "Make in India" campaign. Read more on India's cautious approach to tightening U.S. relations.

A chart showing Indian arms imports

Managing Tensions With China and Pakistan

India and China will maintain their phase of managed tension during 2019. India is the reactive power in the relationship, and Modi's focus on winning re-election means that New Delhi will not provoke Beijing. But his stance doesn't preclude skirmishes or incursions along their disputed border. It does mean that neither country will deliberately escalate tensions to the point of a Doklam-style standoff

As long as the United States remains China's primary focus in 2019, Beijing will seek to maintain stable relations with the powers on its periphery, including India.

Once Indian elections conclude in May — and given that Pakistani elections took place in 2018 — the two rivals will have the space to restart negotiations stalled since 2016, even if the talks don't lead to a resolution of their dispute over Kashmir. Pakistan, in particular, wants to bring tensions to a more manageable level as its military focuses on securing the volatile border with Afghanistan and as Prime Minister Imran Khan's government explores the possibility of trade talks with New Delhi. For more on the what Indian elections will bring, read our latest assessment.

Contesting the Indian Ocean

Even as India manages tensions with China on the tactical level, its strategic competition with Beijing for basing rights, infrastructure projects and defense partnerships will play out across the Indian Ocean. To bolster its position in the Indo-Pacific, India will move to strengthen relations not only with the United States but also with Japan and Australia using a bilateral, more than a multilateral approach, with emphasis on building its relationship with Japan, especially. New governments in Bhutan, the Maldives and Bangladesh, all of which have signed on to China's Belt and Road Initiative will lead India to renew its engagement with them. This analysis explains more about India's strategic approach to China's growing presence.

A map showing India's periphery

The Spotlight on India's Elections

The Indian political opposition will focus on uniting in an effort to dislodge Modi and his Bharatiya Janata Party (BJP) from power. Although Modi will have the advantage going into the state and parliamentary elections, the BJP will fail to win as big a majority as it did in 2014 as frustration rises among voters over economic and job-creation problems. Ahead of the elections, the party will emphasize Hindu nationalist issues. Meanwhile, a strengthening dollar means the rupee will remain weak, and the persistent threat of inflation will compel the Reserve Bank of India to maintain a monetary tightening policy, which will be a key point of contention between the government and the central bank

If the Indian government attempts limited labor reforms after elections, the opposition will do its best to thwart them — meaning major legislation on the subject will fail to materialize.

Finally, India will delay concluding a deal on the Regional Comprehensive Economic Partnership (RCEP) until after the elections. India has a trade deficit with 10 of the 16 RCEP countries — China accounts for the biggest share — so New Delhi's acceptance of any deal will hinge on earning concessions that can protect its industry from a surge of Chinese imports that would threaten local jobs. India will also seek expanded market access for its information technology services sector to address the trade imbalance, a key part of its offensive trade strategy. Learn more about the ruling party's strategy as elections approach.

A chart showing India's interest rates and inflation

The U.S. Status Quo in Afghanistan

Despite limited success thus far, the United States will maintain its current strategy in Afghanistan, deploying a mix of military and diplomatic force to pressure the Taliban on the battlefield while urging Pakistan to bring the Taliban to negotiations. The U.S. pressure will continue to drive Pakistan toward a stronger security partnership with Russia and Iran as part of its regional foreign policy pivot. And Islamabad, Moscow and Tehran will use the threat of the Islamic State to strengthen their security partnership

The situation in Afghanistan is unlikely to change drastically in the year ahead.

As the United States runs out of medium-pressure tactics (such as cutting off funding, revoking Pakistani officer training and curbing defense sales), it is more likely to impose harsher measures such as revoking Pakistan's non-NATO major ally status. The Taliban will express more serious interest in negotiations, but talks will only begin if NATO commits to a drawdown, which is unlikely next year given concerns that the Afghan army isn't strong enough to handle security on its own. Read more on the growing relationship between Pakistan and Russia.

Pakistan's Trade Deficit and Slowing Growth

As the prime minister implements austerity measures to strengthen Pakistan's economy, growth will slow and unemployment will rise, compelling him to focus on anti-corruption measures to demonstrate his administration's progress. He will also push China to emphasize agriculture projects in the China-Pakistan Economic Corridor while pushing for jobs creation and inviting third-party countries to invest in the country. 

Pakistani Prime Minister Imran Khan's focus on economic growth won't affect his deference toward the country's military.

But a strong dollar means that dollar-denominated purchases will maintain pressure on the trade deficit. On the political front, Khan will avoid tampering with the army, meaning its hold over foreign policy will endure. If the prime minister tries to assert his authority over the military, the army will either engineer parliamentary defections causing his coalition to collapse, or corruption cases will suddenly arise against members of his administration. Take a more in-depth look at Khan's balancing act in office in our latest assessment.

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • December: India and China hold military drills.
  • December: The Indian states of Rajasthan, Mizoram, Madhya Pradesh, Odisha, Chhattisgarh and Kashmir conduct elections.
  • Dec. 30: Bangladesh conducts national elections.
  • January: Deadline for International Monetary Fund bailout talks with Pakistan
  • January: Sri Lanka to hold snap elections.
  • April 1: Start of India's fiscal year.
  • April 20: Afghan scheduled to hold presidential elections.
  • April-May: Indian parliamentary elections and state elections in Andhra Pradesh, Odisha, Sikkim and Arunachal Pradesh are held.
  • July 1: Start of Pakistan's fiscal year.
  • Summer: India, Japan and the United States participate in Malabar naval exercises.
  • September: Deadline for Pakistan to complete Financial Action Task Force plan to be removed from anti-terrorism "gray list."
  • December: Preparations begin for Sri Lanka's 2020 presidential elections.

section

Nov 28, 2018 | 17:57 GMT

6 mins read

Eurasia

Eurasia is the world’s most expansive region. It connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia. Forming the borders of this massive tract of land are the Northern European Plain, the Carpathian Mountains, the Southern Caucasus Mountains, the Tien Shan Mountains and Siberia. At the heart of Eurasia is Russia, a country that throughout history has tried, to varying degrees of success, to extend its influence to Eurasia’s farthest reaches — a strategy meant to insulate it from outside powers. But this strategy necessarily creates conflict throughout Russia’s borderlands, putting Eurasia a near constant state of instability.
Eurasia connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia.

Key Trends for 2019

Military Buildups and an Intensifying Arms Race

The U.S. decision to withdraw from the Intermediate-Range Nuclear Forces Treaty (INF) will intensify ongoing military buildups by the United States and Russia throughout 2019, particularly in the European borderlands. Poland, Romania and the Baltic states will be the most willing to host additional U.S. assets, though it will be at least another year before the United States deploys intermediate-range missiles in the region. For its part, Russia will add to its military presence and assets in Kaliningrad, western Russia, Crimea and the Black Sea. Negotiations between Washington and the Polish government about building a permanent U.S. military base in the country will move forward, though construction will not likely begin in 2019. 

Beyond its saber-rattling, Russia will physically bolster its military footprint in the former Soviet periphery through 2019.

In turn, Russia will advance its own efforts to increase its military presence and infrastructure in Belarus, including the opening of an air base. Another front in the ongoing conflict between Ukraine and Russia will continue to develop in the Sea of Azov. Both countries will build up naval assets, and the United States will weigh in with security support for Ukraine. The U.S. withdrawal from the INF will put pressure on other arms control arrangements but will not cause a full break between Russia and the United States over New START, the strategic arms treaty signed in 2010 that limits the number of nuclear warheads each country can deploy. Read more about the ramifications of the U.S. withdrawal from the INF in this assessment.

A map showing the former Soviet periphery

The Hybrid Warfare Campaign Intensifies

Russia will vigorously pursue its hybrid warfare campaign against Western and Western-leaning countries by interfering in national politics, spreading propaganda and launching cyberattacks and covert operations in a bid to undermine European Union and NATO unity. EU parliamentary elections in May will give Russia an opportunity to support far-right and anti-establishment parties throughout Europe, particularly in Hungary, Italy and France. Russia will also target the Balkan states, especially Serbia, Macedonia and Montenegro, with a mix of political meddling, disinformation tactics and economic sweeteners to try to stymie their EU integration efforts. Russia will be most effective in its hybrid warfare efforts in Moldova, where parliamentary elections in February are likely to produce political gains for the pro-Moscow Socialist party. That result would drive Moldova to deepen its pivot to Russia while freezing — if not reversing — its integration efforts with the European Union. 

The West will counter Russian hybrid tactics by increasing sanctions pressure while intensifying and coordinating cybersecurity and counterpropaganda strategies.

The United States can be expected to impose sanctions on more Russian officials and entities and cut off trade channels and could perhaps downgrade diplomatic ties. The U.S. Congress could pressure the White House to take the more extreme option of targeting Russian sovereign debt or banning dollar transactions with its largest state banks. Sanctions will be more controversial in the European Union, but the bloc will maintain them throughout the year. Russia's efforts to insulate itself from sanctions by building up foreign exchange reserves and wealth funds, diversifying trade ties, and decreasing its exposure and dependence on dollar transactions will enable it to avoid a major economic crisis in 2019. As the United States increases security support for pro-Western states such as Ukraine and Georgia, Washington will also push back against Russian influence in states closer to Moscow's orbit, like Armenia and Uzbekistan. See our assessment of the U.S. outreach on Russia's former Soviet periphery.

A graphic showing Russian economic indicators, demonstrating how sanctions have impacted Moscow

Challenging the U.S. World Order 

Russia will seek to expand its ties and involvement around the world to peel back Western hegemony and challenge the U.S.-led world order. China, whose interests in challenging Washington within the great power competition align with its own, will be a key focus of Russia's efforts. Russia and China will ramp up their economic and energy ties this year, and Beijing will also increase its investment in building factories, pipelines, roads, railways and other infrastructure projects in Russia, especially in its Far East. The countries will also strengthen military ties, likely increasing the size and scope of their joint military exercises both bilaterally and multilaterally such as through the Shanghai Cooperation Organization. 

Moscow and Beijing will sustain their trade in weapons despite sanctions pressure from the United States and their competition for the same weapons markets.

Elsewhere in Asia, Russia will seek to strengthen its economic relationship with Japan, though their lingering territorial spat over the Kuril Islands will limit significant expansion of ties. Russia will sustain political and economic support for North Korea — including pushing for inter-Korean infrastructure projects — while resisting and circumventing U.S. sanctions against Pyongyang. In the Middle East, Russia will maintain its military support for Syrian President Bashar al Assad and increase ties with Iran as a source of leverage against the United States. Read our assessment for a more in-depth look at the deepening relationship between Russia and China.

A graphic showing weapons deals between Russia and China

Russia's Domestic Challenges

Unpopular economic reforms like the increases in the Russian retirement age and the value-added tax will drive domestic protest, spurred by opposition figures like Alexei Navalny. The Kremlin will respond to demonstrations with a mix of crackdowns, political reshuffles and selective concessions to public demands. The ruling United Russia party's dominant position will diminish as systemic (or Kremlin-friendly) opposition parties like the Communists, the Liberal Democratic Party of Russia and A Just Russia contest gubernatorial and parliamentary seats in regional elections in September. 

Russia can expect continued domestic turbulence in 2019, but political parties opposing President Vladimir Putin's rule will struggle to seriously challenge him.

Opposition parties will increase their cooperation with one another to form a more potent challenge to United Russia, a move that President Vladimir Putin will cautiously allow to prevent the rise of non-systemic opposition forces. On the security front, Russia will reshuffle the leadership of the GRU military intelligence agency following a series of controversial operations abroad and disperse some of its responsibilities and assets among other security organs, most notably the Federal Security Service (FSB) and Foreign Intelligence Service (SVR). Read our assessment of United Russia's recent political defeats for more on Russia's internal political shifts.

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • Early 2019: Japanese Prime Minister Abe is expected to visit Russia.
  • Early 2019: Russian President Vladimir Putin is expected to visit Washington, D.C.
  • Jan. 1: Russian pension and value-added tax reforms take effect.
  • Jan. 1: Russia is scheduled to resume natural gas imports from Turkmenistan.
  • Feb. 24: Moldova holds parliamentary elections.
  • March 31: Ukraine holds a presidential election.
  • June: Kyrgyzstan hosts a summit of the Shanghai Cooperation Organization.
  • September: Russia holds regional elections.
  • Oct. 27: Ukraine holds parliamentary elections.
  • December: The Power of Siberia natural gas pipeline from Russia to China is expected to come online.

section

Nov 28, 2018 | 19:59 GMT

7 mins read

Americas

The Americas stretch from the Arctic Circle in Canada to the southern tip of Chile. This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world — an ascendance aided in part by bringing Mexico and Canada into its sphere of influence. Farther south, the nations of South America are like islands, separated by vast spaces of impenetrable mountains, rivers and jungles. Try though these countries may to integrate more closely, deeper ties such as those that characters North America will prove elusive.
This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world

Key Trends for 2019

In North America, Domestic Issues Are Front and Center

Now that they've put the finishing touches on the United States-Mexico-Canada Agreement (USMCA), the pact's three members will face less risk of trade upheaval in 2019. The divided political control of the U.S. Congress will be a key factor shaping President Donald Trump's policy agenda. Lawmakers will not significantly curtail the president's powers on foreign trade, especially related to the auto industry, given that White House actions will have less effect on the domestic vehicle sector. Still, the House of Representatives, led by the Democratic Party, won't cooperate with the administration's plans for foreign policy, military spending, immigration and tax reductions. Gridlock will hinder policymaking, meaning the White House will make little headway on immigration reform or tax cut plans.

A divided U.S. Congress reduces Trump's ability to taper foreign aid to Central American governments in response to illegal immigration from their countries.

Accordingly, Mexico's success in stemming the flow of people from Honduras, Guatemala and El Salvador to the United States will be crucial to the administration's immigration policy. To avoid a political confrontation with the United States, Mexican President Andres Manuel Lopez Obrador will not significantly alter his country's policy on countering illegal immigration or its domestic security policy against organized crime.

The United States, Canada and Mexico will continue to spar throughout 2019.

In Canada, Prime Minister Justin Trudeau's Liberal Party will face stiff competition from the opposition Conservative Party in October's federal elections. During the year, Trudeau will try to seal a trade agreement with China, although that will raise the ire of both Washington and the Canadian opposition, particularly as U.S., Canadian and Mexican lawmakers prepare to ratify the USMCA. Though that negotiation will irk Washington, it is largely powerless to prevent Ottawa and Beijing from pursuing the talks. For more about what changed and what remained the same in the NAFTA overhaul, see our most recent analysis.

A graphic showing Central American migration statistics

AMLO Makes a Left Turn in Mexico's Domestic Affairs

Now that he has formally assumed power, Lopez Obrador — popularly known as AMLO — will turn his attention to implementing his populist domestic agenda in 2019. Lopez Obrador's coalition will strive to obtain the congressional support necessary to raise wages, adjust energy legislation and amend the constitution to hold more frequent binding referendums. But his proposed changes to energy legislation, such as local content increases, will make Mexican oil and natural gas less attractive to foreign companies.

Will AMLO's populist agenda help or hinder Mexico?

Even without constitutional reform on referendums, the president and political parties in Mexico will promote a spate of informal votes to demand government action on certain issues, such as public works projects and fuel prices. More frequent referendums will raise the risk that Mexican courts or the government will side with voters against the private sector on controversial issues that are approved in nonbinding plebiscites. Read our analysis for more about how plebiscites could bring disruptions to Mexico.

Mercosur Takes a Cautious Step Toward Free Trade

Brazil's government will negotiate with other member states in the Common Market of the South (Mercosur) to eliminate restrictions on bilateral trade and lower the bloc's common external tariffs. To enact its desired changes, Brazil will require a unanimous vote from the bloc's members. 

Domestic political concerns among Mercosur's member states will once again influence the trading bloc's behavior in the coming year.

Argentina and Uruguay will be open to liberalizing the bloc's trade restrictions, but the prospect of a tight presidential election in Argentina will make President Mauricio Macri reluctant to agree to a deal. If Macri hesitates, negotiations are likely to stretch into 2020. And if a candidate from one of Argentina's populist Peronist parties beats Macri, he or she will favor more protectionist trade policies – which would put it on a collision course with Brazil. Read more about Mercosur and why the bloc won't suffer many effects from U.S. auto tariffs in our assessment.

A graphic showing GDP and populations of Mercosur countries

In Its Fight for Survival, Venezuela's Government Irks Its Neighbors

Running on empty amid a dearth of oil revenue, Venezuela's government desperately needs cash anywhere it can find it. The country's plight will force Caracas to seek revenue from illicit avenues, such as the illegal mining of gold and other minerals, as well as shady financial transactions. The shift will give illegal miners incentives to expand their activities in eastern and southern Venezuela and into western Guyana and northern Brazil. But the spread of such activities into Brazil will attract the attention of the new presidential administration, giving Brasilia direct leverage over Venezuelan economic interests. To prevent a greater spillover of Venezuela's crisis, Brasilia will coordinate with Washington and the new government in Colombia to ramp up financial and political pressure on Caracas, possibly through sanctions or greater scrutiny on Venezuelan financial flows.

A graphic showing illegal mining in Venezuela

Cash-strapped Venezuela's ability to defend itself from internal threats, such as coup attempts or protests, will diminish throughout the year. Complicating matters, the shift away from oil revenue toward illicit funding will increase competition among Venezuela's political elites, who will jockey for their share of national wealth. The government will try to generate more cash to satisfy the elites by diverting some oil shipments to cash-paying customers instead of using the money to pay down its debts. This makes it likely that Caracas will fall behind on debt repayments to Russia and China. In response, these lenders will slow funding to Caracas, exacerbating Venezuela's oil production decline and contributing to greater conflict and competition among political elites intent on grabbing some of the government's rapidly shrinking revenue. Take a closer look at how Venezuela's illicit activities are angering neighboring Colombia, Guyana and Brazil

A chart showing Venezuela's oil production

Brazil's New Ruler Gets Ready to Overhaul Security and Investment

Jair Bolsonaro, who will assume Brazil's presidency on the first day of 2019, is preparing big changes to his country's policy on Chinese investment and domestic security. Bolsonaro's government will aim to manage or curb Chinese investment in strategic sectors, such as mining and energy infrastructure. The president will also begin courting congressional votes to implement security policies like lowering the age of criminal responsibility. But even if Brazil's new government fails to find the votes for security reforms, it will deploy the armed forces and police to curb criminal activity, which will have short-term security benefits in Rio de Janeiro and Sao Paulo. Read more about the strategies Brazil's incoming president will use to try to enact his agenda.

A chart showing Mercosur trade percentages

The Argentine President's Difficult Path to Re-Election

Argentine President Mauricio Macri will face an uphill battle if he is to win re-election in October 2019. Though he retains enough popularity to advance to a second round, he faces uncertain prospects for success in a runoff. Because Macri's public approval is tenuous, any further currency depreciation or unhappiness over inflation will open the possibility that a populist challenger will defeat him in a second round in November. See more about the challenges awaiting Macri in 2019

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • Jan. 1: Jair Bolsonaro will take office as Brazil's president.
  • Jan. 3: The 116th U.S. Congress convenes.
  • Feb. 3: El Salvador will hold elections.
  • May 5: Panamanians will cast their ballots in general elections.
  • June: Guatemala will go to the polls.
  • Oct. 21: Canada will hold federal elections.
  • Oct. 27: Bolivia will conduct presidential elections.
  • Oct. 27: Uruguayans will elect a new president.
  • Oct. 27: Argentina will stage the first round of federal elections for president and members of Congress.
  • Nov. 24: Argentines will vote in a likely runoff election.

section

Nov 28, 2018 | 22:31 GMT

6 mins read

Sub-Saharan Africa

Sub-Saharan Africa is a study in diversity. Covering an area that spans the entire width of the continent beginning at the Sahara Desert and ending at the southernmost tip of South Africa, the region is home to countless cultures, languages, religions, plants, animals and natural resources. It’s no surprise that it captured the imagination of Europe’s earliest explorers — and that it continues to capture the imagination of current world powers eager to exploit it. And yet despite the region’s diversity, Sub-Saharan African countries have common challenges — transnational terrorism, rapid population growth, endemic poverty and corruption — that prevent them from capitalizing on their economic potential. The coming years will be critical for the region, especially as its political institutions mature in a rapidly globalizing world.
Covering an area that spans the entire width of the continent beginning at the Sahara Desert and ending at the southernmost tip of South Africa, Sub-Saharan Africa is home to countless cultures, languages, religions, plants, animals and natural resources.

Key Trends for 2019

Ethiopia's Rise in a Changing Region

Peace between landlocked Ethiopia and its erstwhile coastal province, Eritrea, allows for the reopening of transport routes and increased opportunities for foreign investment. Ethiopia is the region's rising economic giant, and its reform-minded government intends to partially privatize state-owned enterprises, hoping to attract money from countries including the United Arab Emirates and China

Ethiopia is a rising star in the Horn of Africa, but economic and ethnic factors could make 2019 a pivotal year for Addis Ababa.

Much depends, however, on the degree of transparency in the process — as well as the profit returns from completed megaprojects. Furthermore, the country's need for continued structural economic reforms, along with its shortage of foreign exchange reserves, will hamper growth in the short term. Ethiopian Prime Minister Abiy Ahmed will have to carefully manage these key issues, as well as enduring ethnic divisions, if his country is to become a potent driver for change in the region. Take a more in-depth look at the promise and peril of Ethiopia's economy.

A Rising Tide Buoys Eritrea, Somalia, Djibouti and Sudan

Ethiopia's rise is generating interest in neighboring Eritrea, Somalia, Djibouti and Sudan from China, Russia and the United States. Somalia and the breakaway republic of Somaliland will try to harness that interest to strengthen trade and supply chains. For Eritrea, peace with Ethiopia means it can devote more resources to its economy than in recent decades, with manufacturing, mining and tourism most likely to attract investment. The lifting of U.N. sanctions will increase investment and security interest from Washington and others, but human rights concerns will prevent any investment rush. 

Great power competition over countries in the Horn of Africa will be a feature of 2019.

Powers such as Russia are likely to increase ties with Eritrea, with Moscow promising to construct a logistics center at one of the country's two ports. Meanwhile, Sudanese President Omar al Bashir will cooperate with Washington on counterterrorism measures to ingratiate himself as he seeks to extend his time in office beyond 2020. Even so, he will maintain balances by deepening ties with Moscow and Beijing, which are seeking greater influence across Africa. Djibouti will continue to leverage its geostrategically important position on the Bab el-Mandeb strait for influence and financial gain. China holds roughly 80 percent of Djibouti's external debt, however, which gives Beijing a significant degree of influence. Read more about the United States' growing interest in the strategic Horn of Africa.

South Africa's ANC Braces for Elections

Ahead of South Africa's 2019 general election, a weak economy will compel President Cyril Ramaphosa to pursue populist policies such as land expropriation without compensation to shore up electoral support among the traditional base of the ruling African National Congress. The impact will scare away some foreign investment, increase currency volatility and induce fears about the country's direction. 

Efforts to root out corruption, particularly in state-owned enterprises, will feature prominently in South Africa's electoral run-up.

Ramaphosa's administration will focus on reforming businesses such as the public power monopoly Eskom to tackle endemic corruption and improve services. Ultimately, however, if Pretoria fails to overhaul key state companies, it will become more inwardly focused, hindering its efforts to project influence across the continent. For a more detailed look at Ramaphosa's political calculations ahead of national elections, see our analysis

Buhari's Last Stand?

When Nigerians vote in February, they will choose between two northerners battling it out for the country's top office — a development guaranteeing that region's hold over the south's lucrative oil industry. President Muhammadu Buhari will continue his efforts to institutionalize the country's struggle against corruption, but his challenger, Atiku Abubakar, will likely put the issue on the back burner if elected. Regionally, the next president will finally sign the African Continental Free Trade Agreement, whose largest non-signatory is Nigeria. Despite pressure from the domestic manufacturing industry and unions to steer clear of the deal, Abuja fears it will fall behind if it doesn't ratify the agreement, which will significantly boost intra-African trade.

Nigeria's general election in mid-February will be important to watch, but irrespective of presidential appointment, there are things the country needs to do in 2019.

On the security front, the Islamic State West African Province, which showed signs of resurgence around Lake Chad in 2018, will struggle to conduct attacks beyond Nigeria's northeast in 2019 as its supply lines remain stretched and the government prepares more effective strategies to counter the group. Meanwhile, militants in the oil-producing Niger Delta remain dormant thanks to Abuja's successful appeasement strategy, and both Buhari and Abubakar will avoid aggression against the fighters to maintain peace in the country's most lucrative industry. Read more about the issues dominating Nigeria's upcoming elections.

A graphic showing Nigeria's energy infrastructure

The Kabila System Fights for Survival

Whatever its result, the Democratic Republic of the Congo's Dec. 23 election will be flawed as outgoing President Joseph Kabila seeks to maintain a system that maximizes the political and economic spoils for his family and minimizes the weaknesses of his hand-picked successor, Emmanuel Ramazani Shadary. The ruling alliance's control of the security services and other state institutions will enable it to win a tightly controlled contest despite opposition pressure. Subsequent stability in the key commodity producer will ultimately depend on the internal, regional and international reaction to the vote.

With the results likely to be dubious, opposition protests will result in violence and a government crackdown that will prompt the European Union and the United States to enact targeted sanctions. Elsewhere, Kinshasa will stick with the hard-line measures it implemented against international mining companies in 2018. After all, the government, which controls a significant chunk of the global cobalt supply, maintains the advantage — and Chinese producers will be only too willing to step in if Western producers push too far. Read more about the strategic importance of cobalt

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • Dec. 23, 2018: The Democratic Republic of Congo holds its long-delayed presidential election.
  • January: The heads of state of the African Union will hold a summit in Egypt.
  • February: A conference of the heads of state of the Group of Five Sahel alliance will be held in in Ouagadougou, Burkina Faso.
  • February: Senegal conducts presidential elections.
  • Feb. 16: Nigerians go to the polls to elect a new president.
  • Oct. 15: Mozambique organizes a general election.
  • Aug. 4: Deadline for South African general elections (date to be confirmed).
  • August: The Southern African Development Community summit is set to convene in Tanzania.

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