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.
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.
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.
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).
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.
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.
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.
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.
- Amid a high-stakes race for technological supremacy, global powers will grapple with the challenge of establishing artificial intelligence governance and ethical norms.
- The United States, China and Russia will accelerate efforts to militarize space in the absence of international standards to regulate space conduct.
- Even as the great power rivalry with China and Russia pushes the United States to downgrade its military commitments in Africa and the Middle East, a U.S. campaign against Iran along with persistent terrorism and proliferation concerns will fight for U.S. attention and resources.
- Anti-corruption is an increasingly popular and potent political weapon that can be harnessed by Western governments and strongmen alike to shape policy at home and abroad.
- Great powers will compete over lucrative arms contracts around the world.
- A divided and less accommodating Congress will have mixed results for U.S. foreign policy.
- A longer-term global energy transition toward renewables will continue in 2019, with corporations assuming more leadership in this shift.
Key Dates to Watch