Key Trends for the Quarter
China Hunkers Down for an Economic Storm
Time is running out for the United States and China to call another trade cease-fire ahead of the G-20 summit in Japan in late June, and both sides appear to be digging their heels in for the long fight. In an extreme and very plausible scenario in which the United States follows through with threats to impose additional 25 percent duties on nearly all remaining Chinese imports, China could suffer a 1 percent hit to its gross domestic product (GDP) and millions of job losses over the next two years. If the White House and Beijing fail to reach a truce, China will stoke nationalist fervor to withstand the economic hardship — at the risk of inciting anti-U.S. boycotts and protests that could escalate beyond Beijing's intent.
China will also boost domestic infrastructure spending and even employ risky property stimulus measures in rural areas and lower-tier cities to avoid social disruptions from unemployment ahead of the 70th anniversary of the People's Republic's founding. Enacting such measures also means Beijing will struggle to contain debt risks in the coming months as fiscal burdens rise for local governments and bureaucracies. The extreme tariff scenario will most likely see China's currency depreciate past 7 yuan to the dollar, creating more currency stress for emerging markets but also forcing the Chinese central bank to intervene to prevent sharp depreciation. Read more about why China will expand stimulus measures to ensure employment stability.
U.S.-China Confrontation Spreads
In the next quarter, the United States will maintain its strategic offensive against China in the Asia-Pacific through a more assertive security posture. It will also lobby support from allies and partners to counter Beijing's claims over the South China Sea and Taiwan as well as commit to regional infrastructure development. The risk of U.S.-China collisions — both literal and figurative — will increase as Beijing feels pressured to respond to Washington's intensifying maneuvers in the Taiwan Strait. Contentious activity in the South China Sea will also grow as the U.S. Navy increasingly challenges China's coast guard and maritime militias and vice versa. Separately, unrest in Hong Kong over an extradition law could provide an opportunity for the United States to exert targeted trade or sanctions pressure.
Hoping to muster waning public support ahead of the Taiwanese 2020 presidential election, Taiwan's ruling Democratic Progressive Party will lobby Washington for elevated security and diplomatic support while ramping up pro-independence narratives. Possible visits by senior U.S. Cabinet officials to Taiwan, completion of pending arms sales or a resumption of trade talks will draw Chinese military intimidation — including increased patrols and flyovers — risking escalation around the Taiwan Strait. Read more about Taiwan's position in the U.S-China competition.
Regional Powers Find Footing in the Middle
A number of countries in the Asia-Pacific region will be caught in the middle of the great power competition between the United States and China. Australia and Japan broadly align with the United States when it comes to restricting Chinese investments in each country's tech sector, but they draw the line at engaging in maritime Freedom of Navigation operations and overt support for Taiwan (though enhanced security cooperation with regional states is a given). Tokyo may aid Washington's efforts to counter Beijing's Belt and Road Initiative by financing and providing technical expertise to participants to help scrutinize projects underway. But Tokyo will not limit its own infrastructure and technological cooperation with China, seeking instead to set up a security mechanism with Beijing to manage East China Sea tensions.
Many countries caught between the United States and China in the Asia-Pacific region are choosing to play both sides, with varying degrees of success.
With the United States embroiled in a trade confrontation with China, and having struck a tenuous deal with Mexico, U.S.-Japan trade talks will proceed slowly, allowing Tokyo to focus first on elections before having to deal with Washington. Meanwhile, U.S. lobbying to block Chinese tech giant Huawei's 5G rollout and other infrastructure projects will face further constraints among smaller states in the Indo-Pacific region. Southeast Asian states — besides Vietnam — will avoid provoking Beijing out of necessity, despite cooperation with the United States. Read the latest Stratfor assessment on Japan's rising role as a regional third power.
The U.S. Muddles Through on North Korea
The U.S.-North Korea dialogue will remain open throughout the quarter. Although no major breakthrough toward a deal is expected, neither side is willing to fully derail the talks, thereby avoiding the risky escalatory cycle of previous years. Washington will deprioritize its outreach to Pyongyang to free resources to deal with Iran and Venezuela. To ensure that it remains on the U.S. radar, North Korea will continue missile testing only in a manner calculated to exert pressure but not run afoul of the Trump administration. However, a miscalculated weapons test could empower White House hard-liners. China and Russia will continue to support Pyongyang's outreach to the United States in the interest of stability. Amid trade tensions, China will be more willing to slacken enforcement of sanctions on North Korea, prioritizing economic lifelines. However, U.S. President Donald Trump's personal commitment to a North Korea deal leaves open the small possibility of the United States offering a compromise deal of incremental sanctions relief. To learn more about why the U.S.-North Korea outreach still has momentum, read Stratfor's assessment on the matter.
- Preparing for an enduring trade war amid important political anniversaries, China will expand stimulus measures this quarter, despite long-term financial risks.
- Japan will wait until after July upper house elections but will eventually make trade concessions to the United States.
- Washington will elevate its diplomatic and security support to Taipei in the lead-up up to Taiwan's January 2020 presidential election, potentially stoking cross-strait tensions at a time when China will be increasingly assertive in its claims over Taiwan.
Key Dates to Watch
- June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
- Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods.
- July: The United States will make a decision on whether to sell 66 F-16V fighter jets to Taiwan.
- July or August 2019: Japan will hold upper house elections with the potential for lower house snap elections.
- July 27: North Korea's Day of Victory in the Fatherland Liberation War holiday marks the signing of the Korean War armistice.
- September: Taiwan will conduct "Indo-Pacific Democratic Governance Consultations" with the United States.