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.
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.
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.
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 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.
Related Forecasts
- The U.S.-China trade war could benefit Vietnam economically but will complicate Hanoi's delicate balance between the two.
- China's large debt accumulation will hamper Beijing's efforts to stimulate the economy.
- China's tech sector will become an increasing concern for the United States, particularly as the two battle over artificial intelligence.
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.
