Fourth-Quarter Forecast 2016

Oct 10, 2016 | 09:30 GMT

If the study of geopolitics focuses on the structural forces shaping the international system, then domestic elections only rarely matter. Leaders tend to bend to their environment, not the other way around. And yet in the final months of 2016 the United States, still the world's only superpower, will choose a president in an election that will shape U.S. foreign policy more than usual.

This is because of the stark differences between the approaches of the two candidates. Both agree that the United States should preserve its hegemony, but they disagree on how to go about it. One argues that the United States should play the role it inherited after World War II, one in which U.S. power is more effectively wielded through alliances, global trade linkages and selective interventions. The other argues for self-reliance over globalism, the idea that the United States and its allies should defend their own interests instead of unnecessarily handcuffing themselves to security umbrellas and global trade pacts.

Our purpose is not to predict the result of the election but to forecast how it could alter the behaviors of other states. For those accustomed to living under U.S. scrutiny, political distraction in Washington can create opportunities. North Korea, for example, has already accelerated its efforts to develop a nuclear weapon and delivery system, and in the next three months it will have a chance to try to complete the final phases of its test cycle without risking pre-emptive military action. Regional security concerns over North Korea, meanwhile, will bring Japan, China and South Korea into much more active dialogue, even as tensions escalate with Japan's increased involvement in the South China Sea dispute.

For others, like Russia, the remaining three months of the year will be spent setting up negotiations with the next U.S. president. With Barack Obama on his way out, leaders in Russia understand there is little chance of striking an 11th-hour bargain in Ukraine or in Syria.

But there is still plenty of work for Russia to do in both theaters. In Ukraine, Russia will incrementally work to de-escalate the conflict in the east while lobbying the Europeans to ease up on sanctions. Moscow will expect political concessions from Ukraine in return, but since Kiev is not under enough pressure to capitulate, talks will stall again.

In Syria, on the other hand, Russia will rely more on military tactics than diplomatic wrangling to strengthen its negotiating position. Since the beginning of the year, Russia has tried to show that it can be both a disruptive and cooperative force on the battlefield. But the limitations in enforcing a cease-fire have been exposed, and the United States will not be in the mood for creative bargaining in the final months of Obama's presidency. The United States will forge ahead with offensives against the Islamic State in Mosul and Raqqa, focusing its efforts on managing competing forces on the ground and maintaining at least a minimal level of cooperation with Russia to de-conflict the Syrian battlefield. Russia, meanwhile, will concentrate its efforts on reinforcing the loyalist offensive against Aleppo to improve its leverage on the battlefield and thus its negotiating position with the next U.S. president. As the United States reinforces Sunni rebels in Syria and deprioritizes its dialogue with Moscow, the potential for clashes will rise going into the fourth quarter. Complicating the situation is Turkey, which now has boots on the ground in Syria. As it pushes farther south, it will have to rely on U.S. protective cover to avoid colliding with Russia. But trouble between the United States and Russia means less insulation for the Turks.

Then there are Washington's restless allies, watching and waiting to see if they can continue to count on U.S. commitments to protect them from their stronger neighbors. With the Trans-Pacific Partnership on ice and with U.S. reliability in question overall, Southeast Asian partners like the Philippines and Vietnam will hedge their bets by cooperating with Beijing on economic issues, if only to ease tensions on security issues. European divisions will deepen as political factions throughout the Continent call for changes to the EU treaty to assert their national rights. Smaller groupings will band together more tightly, particularly the Visegrad Group and the Baltics, as they try to hold their ground against Russia and await clarity from the United States on its security commitments. At the same time, Gulf allies in the Middle East will take advantage of friction between the United States and Russia to reinforce their Sunni proxies in their regional competition with Iran.

But proxy wars need funding. Though they have taken incremental steps to cut government expenditures like public sector salaries, Saudi Arabia and its Gulf allies have spent the year waiting to see if the oil market would rebalance itself. Moving into the fourth quarter, however, the Saudis are monitoring the potential for additional oil to come online in Libya, Iraq, Nigeria and Kazakhstan. If Riyadh believes prices will decline further, it will consider cutting production to match pre-summer surge levels, using the opportunity to try to persuade others to agree to a production freeze. But even if its members do reach an agreement, OPEC still faces severe limitations in influencing the price of crude so long as U.S. producers are able to respond quickly to even modest price increases.

As for the rest of the world, poor economic conditions will make for messy politics this quarter. The global economy will remain in the quagmire it's been in for the past nine months as markets wait for a interest rate hike from the U.S. Federal Reserve, however modest it may be. Uncertainty around the U.S. election will forestall trade negotiations and possibly lead to currency fluctuations for countries that trade heavily with the United States, with Mexico in the spotlight.

An aversion to risk could also result in sell-offs of more precarious stocks, leaving already stressed banks even more exposed in a world of low, and in some cases negative, interest rates. As Japan's monetary authorities try to incrementally repair bank balance sheets through new and untested methods, Europe will be particularly skittish this quarter as political instability in Italy threatens to draw scrutiny on troubled banks throughout the eurozone. That's not to say the next U.S. president will have to deal with a global banking panic, but it is to say that whoever wins the election will have a hard time finding the political consensus needed to manage a more enduring and uncomfortable structural shift in the global economy.

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