The "Uncertainty Factor" Grows
Uncertainty stemming from geopolitical risk is one of the chief drivers of stagnant economic conditions in much of the world. After all, how can businesses make reliable investment decisions when they don't know whether tariffs will go up or down, or what export controls they might face? From Brexit to the potential for war in the Persian Gulf to the White House's trade wars, the "uncertainty factor" weighing on the global economy will be accentuated in the fourth quarter. Under such jittery economic conditions, major central banks, already strapped for options, will attempt monetary stimulus at a time of historically low interest rates. Governments meanwhile will face pressure to temper deficit concerns and provide fiscal stimulus to boost their economies.
This will also be a quarter of diplomatic experimentation. With the 2020 U.S. presidential election in mind, the White House will struggle to translate its multiple maximum pressure campaigns into tangible deals. The biggest targets of U.S. policy will not be interested in doing U.S. President Donald Trump any political favors. But they will be testing whether the nearing election and a more worrying economic outlook will make Trump any more pliable in negotiations.
Brinkmanship in the Persian Gulf
With a drone and missile attack that took out 5 percent of the world's oil supply, Iran has demonstrated a highly credible threat to regional energy producers and the global economy at large. At the same time, following a summer of brazen attacks on oil tankers, Iran has exposed Trump's extreme reticence to enter another messy war in the Middle East and the degree to which front-line Gulf Arab states are vulnerable to Iranian retaliation in a military confrontation. Moreover, as a wider industrial slowdown, Brexit tensions and uncertainty over the U.S.-China trade war weigh on the global economy, European and Asian stakeholders in the Persian Gulf will continue to favor mediation over confrontation with Iran. It can be reasonably confident, therefore, that even a sharp escalation will lead to a rapid de-escalation in which an array of mediators will help it barter reduced tensions in the Persian Gulf and a pause in nuclear activities for sanctions relief. The White House will try to exhaust its nonmilitary options in dealing with Iran. But Tehran has also likely factored in the cost of a limited conflict with the United States and its Gulf allies when planning its attacks and threats.
In the immediate term, Saudi Arabia will be able to eat into its spare capacity to cover the shortfall in supply and to mitigate the disruption to energy markets. Reduced demand from slowing economic conditions overall has also dampened much of the impact from the most significant attack on Gulf energy supply in history. That said, Saudi Arabia and other Gulf states cannot rule out additional attacks on critical energy chokepoints that could lead to lengthier disruptions at a time when Saudi redundancy has been reduced as it works to repair damage at the Abqaiq and Khurais oil installations. In the event of escalation and further damage to Gulf infrastructure, coordination among OPEC and non-OPEC producers in managing global oil supply in the face of depressed demand and persistent U.S. shale production will falter.
Ripe Conditions For Another U.S.-China Truce
Stratfor's Third-Quarter Forecast stated "While there is a small window for a truce between U.S. President Donald Trump and Chinese President Xi Jinping, there is a stronger likelihood that the White House will follow through on its threat to impose tariffs on remaining Chinese imports." That proved to be the case as a temporary truce from Trump and Xi's meeting at the G-20 summit in June quickly wore off, Beijing hardened its position and the White House lashed out with a broader set of tariffs covering all Chinese imports. Once again, conditions for a truce are building in the lead-up to high-level trade negotiations in early October. With Trump under more political pressure to deliver results from the trade war and China under heavy economic pressure, there is potential for a narrow, preliminary deal to emerge to break the impasse. That could entail the White House suspending further tariffs and easing Huawei export restrictions in exchange for China resuming purchases of U.S. agriculture and perhaps energy. A more substantial interim deal could encompass a rollback of some tariffs in exchange for some of China's earlier commitments on issues like intellectual property protections and expanded market access.
Even with a narrow deal — which is by no means guaranteed within the quarter — stickier issues surrounding China's industrial policy, national security concerns and the White House's preferred means of enforcing any deal will remain outstanding. As such, the resumption of tariff threats in response to another standoff cannot be ruled out. So long as the U.S. economy remains relatively stable and the Chinese economy continues to sputter, Trump may calculate that he still has some room to escalate the trade war — and drive the U.S. Federal Reserve to lower interest rates in the process. If the talks go south again, Beijing will selectively retaliate and hold out on substantial concessions until 2020 before reassessing whether Trump will be more willing to strike a deal with election pressures mounting.
So long as the U.S. economy remains relatively stable and the Chinese economy continues to sputter, Trump may calculate that he still has some room to escalate the trade war.
With the trade war already at an extreme stage and the White House eager to demonstrate some trade wins, some of Trump's other trade targets may be able to breathe easier this quarter. The White House will seal a limited trade deal with Japan that neutralizes the U.S. threat of auto tariffs and expands market access for U.S. agricultural (mostly corn and pork) exporters. Vietnam, the biggest Asian alternative for companies looking to divest or reexport from China, and India, already facing a number of big sticking points in slow-moving trade talks, will highlight purchases of U.S. goods and security cooperation to try to keep trade tensions calm. Mexico will also be able to avoid tariffs this quarter as migrant flows to the United States remain at manageable levels and as the White House avoids creating a major disruption to U.S.-Mexico trade that would carry significant electoral consequences.
A High-Stress Quarter for Europe
U.S.-EU trade relations are bound to worsen in the fourth quarter. A new and even more hard-line EU trade commissioner will not budge on U.S. demands to include agriculture in trade talks. This will raise the threat of U.S. auto tariffs on the European Union at a time when the heavily export-dependent German economy is heading toward recession. In addition, the United States will impose tariffs on the European Union as part of a long-running trade dispute between Airbus and Boeing and will sustain a tariff threat against France over its new digital tax policy. The European Union will be prepared to retaliate against U.S. tariffs, and U.S. agriculture will remain a prime target.
U.S. trade blows to Europe will pale in comparison to the drama that Brexit brings.
U.S. trade blows to Europe will pale, however, in comparison to the drama that Brexit brings. Fears over a no-deal Brexit will spike ahead of the Oct. 31 deadline for the United Kingdom to leave the European Union. In the end, a disorderly Brexit will likely be avoided. British Prime Minister Boris Johnson's Brexit brinkmanship could result in a last-minute compromise on the Irish backstop to allow the United Kingdom to leave by the Oct. 31 deadline. Barring that, Johnson's resignation or a no-confidence motion against his government will leave the task of requesting another Brexit delay and electing a caretaker prime minister to the eleventh hour. The heavy economic pressure piling up on the European Union will compel the European Central Bank to return to stimulus measures, providing a boost to a beleaguered Italy while creating more political discord in Germany.
The WTO Reaches an Existential Point
Trade battles and elusive deals are already a source of great uncertainty for the global economy, but this quarter, the Trump White House will drive the global trading system further away from the rules-based system the United States helped create to one based principally on power. On Dec. 10, the World Trade Organization's appellate body will fall below the required three members it needs to function because the United States has blocked appointments to the body, effectively paralyzing the appeals process.
The White House is operating on the assumption that a shift from a multilateral system to bilateral negotiations to resolve trade matters will allow the United States to wield its immense power to settle disputes in its favor.
The ad hoc system that the European Union has formulated to arbitrate trade disputes in this period of limbo will operate on a voluntary basis, and rulings will not be binding. More likely, countries will simply agree either not to appeal their cases, or try to settle them bilaterally or through mechanisms in free trade agreements. The White House is operating on the assumption that a shift from a multilateral system to bilateral negotiations to resolve trade matters will allow the United States to wield its immense power to settle disputes in its favor. As we can see from the White House's array of trade battles, however, that is easier said than done.
Great Power Courtship in the Borderlands
An intensifying arms race among the United States, China and Russia will bring more attention to key middle powers in the Western Pacific and Eurasian borderlands. The United States will be busy this quarter trying to persuade South Korea, Japan and possibly the Philippines to host its land-based intermediate-range missiles. China and Russia will use a carrot-and-stick approach to try to dissuade them from drawing deeper into the U.S. security orbit. Beijing's growing economic engagement with Manila and a deepening trade war between South Korea and Japan will work in China's favor as it uses economic sweeteners to try to undermine the U.S. network of Pacific allies. In Europe, the United States is unlikely to take the first step of deploying land-based intermediate-range missiles on the Continent. Russia will quietly ramp up and deploy its own intermediate-range missiles at a more incremental pace as it tries to uphold the narrative that the United States is to blame for fraying arms control frameworks.
Key Dates to Watch
- October: High-level U.S.-China trade talks expected early in the month.
- Oct. 15: The White House will increase tariffs from 25 percent to 30 percent on $250 billion worth of Chinese goods; these tariffs could be suspended if an interim deal emerges.
- Oct. 31-Nov. 1: U.S. President Donald Trump and Chinese President Xi Jinping will have an opportunity to meet on the sidelines of the Association of Southeast Asian Nations summit in Bangkok.
- Nov. 16-17: Trump and Xi will have an opportunity to meet on the sidelines of the Asia-Pacific Economic Cooperation summit in Santiago, Chile.
- Nov. 20: The deadline for Trump to decide whether to impose tariffs on automobiles and auto parts will pass.
- Dec. 5-6: OPEC and non-OPEC meetings will occur in Vienna.
- Dec. 10: The World Trade Organization's appellate body will fall below the required three members it needs to function, throwing the dispute settlement body into paralysis.
- Dec. 15: The White House will impose 15 percent tariffs on $160 billion worth of (mostly consumer) Chinese goods will take effect on this date. Chinese retaliation will include a 25 percent tariff on U.S. autos and auto parts. These tariffs could be suspended if an interim deal emerges.