A Trade Truce Won't End the U.S.-China Trade War. A deal on trade between the United States and China is imminent. However, competition between two of the world's most dominant powers will continue this quarter, even broadening out to envelop other sectors — including but not limited to emerging technologies. Beijing won't sit idly by in the face of continued U.S. action and will attempt to counter Washington's activities using its economic heft, trade relationships, market access and considerable influence to compel other countries. Those on the sidelines will be increasingly drawn into the fight, and even countries trying to balance between Washington and Beijing will be pulled into the fray as harsher measures are applied to force a choice for one side or the other.
The United States is the Key Dynamic Actor on the World Stage. Washington will make a decision on whether or not to enforce its tariff threat against auto imports in Q2. Most major exporters to the United States will receive some type of exemption, though exceptions for Japan and the EU will not be indefinite. Because of this, Washington will wield the continued specter of tariff implementation to wrest serious concessions on pending trade deals from Tokyo and Brussels. The United States is also making tangible changes to its military posture and focus throughout the world, most notably in Syria and Afghanistan, forcing regional actors to take up the slack. The eventual U.S. departure from certain theaters, such as Syria, increases the potential for state-to-state conflict and could facilitate a resurgence of regional and transnational militancy.
Key Pillars of the Global Economy Will Experience Tremors. In the Asia-Pacific region, China's economy will slow throughout the second quarter, affecting a number of local trading partners in the short term. Europe is experiencing a similar economic malaise. Italy and Germany have both slashed growth estimates, and Rome's banking sector faces the most economic risk in the eurozone. On top of this, there is much uncertainty on the Continent surrounding exactly how the United Kingdom exits the European Union. Within the quarter, however, there will be no hard Brexit.
Nuclear Deals and Negotiations Hang in the Balance. Iran will be increasingly dissatisfied with the Joint Comprehensive Plan of Action (known as the JCPOA or the Iran nuclear deal) but will stay within the framework for now. European payment mechanisms such as INSTEX will keep an economic lifeline open for the Islamic republic and are contingent upon Tehran complying with the terms of the deal. Still, this will not be enough to offset the pain from continued U.S. sanctions, though Iran won't resume nuclear activities prohibited by the JCPOA this quarter. On the Korean Peninsula, the abrupt end of the nuclear summit between North Korea and the United States doesn't mean that negotiations are dead. They will, however, remain in a stalemate this quarter as regional stakeholders — primarily China and South Korea — work to reset the talks.
Venezuela Under Pressure From Within and Without. Starved by U.S. sanctions, Venezuela will experience increasing support for the country's political opposition over the quarter. The ultimate success of a forced political transition, however, will depend on the country's armed forces breaking from Maduro en masse. In the coming weeks, lower-level military personnel will continue to throw in with the opposition while crucial high-ranking officers debate their prospects. Protests will continue to grow and more violence is expected. The United States and its allies will exert influence from afar, but a foreign military intervention is unlikely.
EU Parliament Elections Will Suck All the Oxygen From the Room. The leadup to — and results of — the European Parliament elections will fundamentally delay decisions on significant issues beyond the quarter. Major structural reform initiatives will be put on hold until the end of May, when voting concludes and results are announced. Following the elections, a more fragmented body can be expected as Euroskeptic parties gain influence. Though pro-EU parties will ultimately maintain control, representatives of EU countries will be more heavily guided by domestic concerns when it comes to deciding matters of the Continent, leading to a political stalemate in Brussels.
Global Trends
China and the United States will ratchet up their competition in the second quarter, as Washington takes concrete steps to counter Beijing's emergence as an economic, military and political peer. Given the global stature of both countries, this quest will reverberate around the world in two ways. First, Washington's economic war against Beijing will grow to encompass more than just tariff threats. Second, the United States' global security posture will change as it reduces its presence in Afghanistan and Syria to direct its energies elsewhere. Read Synopsis
Section Highlights
The United States remains the fulcrum of the global system in the second quarter as it continues its aggressive trade policies, shifts its global security priorities and diverts its attention to China.
Washington and Beijing will reach a deal to lift some of their reciprocal tariffs, but their economic competition will persist as the U.S. strategy evolves beyond tariffs.
The United States is working hard to build a global campaign against China because of the economic, military and cybersecurity challenges the country poses. However, Washington will not achieve as much success this quarter as countries in the Asia-Pacific and Eastern Europe weigh the consequences of backing the U.S. push.
The United States must decide whether it wishes to proceed with auto tariffs. While Japan will likely succeed in avoiding the harshest measures, Brussels is in for tough negotiations with Washington over automobiles this quarter.
Although circumstances on the ground might delay the White House's plan to reduce the U.S. military presence in Syria and Afghanistan, the United States will prioritize its departure from the counterterrorism fight to free up resources to deal with Russia and China.
A Trade Truce Won't End the Economic War
The United States and China will reach a deal on trade issues, likely at a summit between Presidents Donald Trump and Xi Jinping. As part of the agreement, China will promise to purchase more U.S. goods, such as agricultural products and energy, and alter its stance on certain structural economic issues like technology transfers, intellectual property rights and service sector liberalization. But as always, the devil is in the details: China will try to bend the terms of any deals it signs, while Washington will not trust Beijing to abide by any agreement. Enforcement mechanisms will also spark heated debate. The United States retains the ability to immediately reimpose tariffs on China if the latter fails to attain specific milestones, or the United States could choose to lift certain tariffs only if Beijing fulfills certain promises. Ultimately, though, China and the United States are likely to disagree on the interpretation of any deal almost as soon as the ink is dry — for this reason, at least some tariffs will likely remain in place throughout the quarter.
Irrespective of any deal struck between the United States and China this quarter, Washington will craft other measures beyond tariffs to influence Beijing's behavior.
In the end, the United States' overall squeeze on China will endure as it fashions other tools beyond mere tariffs. As the United States and China enter a technological cold war, the United States will continue to scrutinize China's tech sector with quick-fire Justice Department investigations into alleged technology theft by Chinese companies and intelligence officers, while also targeting Chinese tech firms such as Huawei. Washington is unlikely to impose a wide-ranging export ban on the tech giant, although it is slowly developing export controls on emerging U.S. technologies. At the same time, the United States will closely screen Chinese researchers and companies working with American universities and research institutes. The White House, meanwhile, will also move to directly support increased U.S. research and development in the tech sector.
A World Divided Over China
Because the fallout from the Sino-American competition will be global, the rest of the world will endeavor to chart a course between the world's two largest economies. The United States will try to convince its allies to take active measures to counter China, but that strategy's effectiveness will be hit-or-miss as China attempts to drive a wedge between the United States and its alliance network. The United States will lean on its global partners to prevent the integration of equipment produced by Huawei Technologies into their 5G networks as the emerging technology sets a new mobile telecommunications standard. Although Washington will lobby hard to portray the company as a cybersecurity risk — threatening, in the process, to cease sharing intelligence with countries that use Huawei equipment — the United States will encounter difficulties in persuading allies to reject Huawei entirely, as evidenced by the United Kingdom's recent conclusion that the company does not pose a major risk.
While the United Kingdom, Germany and other European countries may not totally accede to the United States' wishes, European powers do recognize that China's economic and technological rise represents a threat, particularly as Beijing's ascendence has started to erode their own international competitiveness. With China and the United States locked in their own race to develop and field new technologies, Europe must provide a better foundation for its companies to compete.
To compete with China and the U.S. in the tech sector, European countries will galvanize domestic research and development efforts and initiatives.
France and Germany have proposed new antitrust rules to facilitate the creation of "European champions" that can compete with global American and Chinese conglomerates. Progress will be stalled, though, until the conclusion of European elections this quarter. The debate will continue, regardless, as France and Germany struggle to convince other EU member states, especially in Eastern Europe. (Some countries are less amenable to changes in EU competition laws and/or are willing to do business with China thanks to Beijing's trade and investment overtures.) In the meantime, France, Germany and other European countries will back domestic programs to boost competitiveness in strategic sectors, amping up research and development initiatives and related incentive programs.
Europe and the United States will implement mechanisms to counter China for their own reasons, but two key U.S. allies — Japan and South Korea — have remained on the sidelines. Because the two countries have deep economic ties with China, both harbor concerns about Chinese retaliation in the event they follow Washington's lead on opposing Beijing. Accordingly, Tokyo and Seoul find themselves in an uncomfortable position: They must appease the United States on security yet avoid alienating China when it comes to economics. Given that quandary, Japan and South Korea are likely to remain on the fence in the second quarter of 2019.
Decision Point for Auto Tariffs
At long last, it's decision time for the United States on whether to apply tariffs on auto imports. U.S. President Donald Trump has until May 18 to decide, and though he is likely to move forward on some tariffs, he won't apply them on all imports. Instead, the United States is likely to hand out initial exemptions to Japan and the European Union — including the United Kingdom — as the U.S. seeks to negotiate trade deals with both. Canada, Mexico and South Korea are also likely to receive exemptions. Whatever the case, the European Union and Japan will ultimately need to offer the United States significant concessions because any exemptions might only be temporary.
Japan has an easier path to avoiding auto tariffs than the European Union. When it comes to talks, the United States will demand increased access to Japan's agricultural markets, as well as certain quotas on its auto exports. The pair, however, already did most of the legwork on many issues as part of the Trans-Pacific Partnership negotiations. For the European Union, it's a different story. As we noted in our 2019 Annual Forecast, Brussels and Washington are clearly not on the same page regarding the purview of their trade talks. At present, the biggest bone of contention is agricultural goods — Washington wants to include them in an agreement despite the bloc's objections. Though Brussels and Washington will not resolve their core disagreement, their differences will not necessarily be enough to scuttle talks this quarter. The United States and Europe could very well reach an accord on less contentious issues related to nontariff barriers.
Clouds Loom On the Global Economic Horizon
As a whole, the global economy is in store for some turbulence this quarter, particularly in two places: Europe and China. On the Continent, Germany and Italy — two of the eurozone's three largest economies — have slashed growth estimates in recent months. This is particularly concerning for Rome, where slow growth will compound the problems of a weak banking sector and high public debt burden. A hard Brexit, meanwhile, could foment other troubles for the European Union, though it appears that Prime Minister Theresa May will ask Brussels for an extension to negotiate a new Brexit deal, thereby preventing another crisis in the bloc — at least in the quarter ahead.
In the Asia-Pacific, China's economic slowdown will continue to cast a pall over its major trading partners. For now, Beijing is taking sufficient steps to prevent the United States from imposing more tariffs on exports, but the country's own raft of domestic challenges, such as a fragile banking sector and high levels of corporate debt, will put the brakes on growth.
The U.S. Reconsiders Its Military Posture
Over the past year, the United States has shifted its security focus away from counterterrorism efforts in the Middle East and elsewhere and onto emerging threats, particularly from Russia and China. Washington's announcement of imminent troop withdrawals in Afghanistan and Syria fit into this pattern. In our Annual Forecast, we did not anticipate the extent of Trump's desire to reduce his country's presence in both theaters. Although the United States will maintain a presence in both countries, Trump has served notice that he will deliver on his campaign promises by withdrawing troops from Afghanistan and Syria in some form or fashion.
And as we laid out in our 2019 Annual Forecast, the intensification of the great power competition has accelerated the collapse of arms control pacts, as evidenced by the United States' withdrawal from the Intermediate-Range Nuclear Forces (INF) Treaty. The updated U.S. Missile Defense Review has directed the Pentagon's efforts toward missile defense systems that could also counter China and Russia's arsenals. The new arms race among the three will center not only on strategic weapons, including hypersonics, but also artificial intelligence, automation and cyberspace. These are all long-term issues, but the rest of the world will continue to demand that the trio establish global cybersecurity norms this quarter. None of the three, however, are likely to heed the calls, choosing instead to continue developing cyber tools for offensive purposes.
Washington Changes Middle Eastern Priorities
Another major priority for the United States is its global and regional campaign against Iran. Although European powers have not backed the White House's aggressive strategy, they have begun taking a harder line on Iran, demanding that Tehran make concessions on its regional strategy and ballistic missile program in exchange for Brussels' resistance to Washington's sanctions. That trend will continue this quarter as the United States turns the economic screws on Iran by granting the Islamic republic's oil customers fewer waivers from sanctions in May. For this quarter, however, Iran is unlikely to become more assertive in its nuclear program.
The decline of the Islamic State militant group in Iraq and Syria has also pushed the center of global jihadist activity toward Africa, ensuring that regional battles against al Shabaab, Islamic State-West Africa Province (ISWAP), Jamaat Nusrat al-Islam wal-Muslimin (JNIM) and other jihadist groups in Africa will be the primary focus of global counterterrorism operations. While the United States will play a significant role in facilitating regional counterterrorism operations in places like Somalia, its gradual shift away from a counterterrorism focus means that other countries, namely France, will be front and center in the fight against Islamist militants. Paris will continue its operations in Mali, Chad and Niger.
A New Reality for Oil Producers
For oil producers like Russia and Saudi Arabia, the new reality is continued cooperation. North American oil production is relentlessly rising, and the United States will continue to export crude oil at record levels. Such a shift in the oil market could finally force Moscow and Riyadh to form an alliance on oil production, formalizing a de facto affiliation that has overseen oil supplies since the start of 2017. While this bloc will be able to manage oil prices to a degree, the United States will make a convincing argument to keep production high to prevent any price hikes. The oil price issue will dog Saudi-U.S. relations, which are plummeting amid efforts by the U.S. Congress to reduce cooperation with Riyadh. As a result, the kingdom is looking to improve economic ties with the United States' rivals — China and Russia.
Additional Forecasts
These Stratfor assessments provide additional insights for the Quarter
With less than two years until the 2020 presidential elections, Trump has made it a priority to fulfill his campaign promises, but he has unfinished business on trade, Iran and North Korea.
A ratification process fraught with difficulties awaits the United States-Mexico-Canada Agreement. Given the demands by the Democrat-led House, the United States is unlikely to approve the deal in the second quarter.
Rifts at the World Trade Organization could widen this quarter over two critical rulings, including one on whether countries can invoke national security to defend their trade actions. If the ruling states that members cannot engage in such activity, the U.S. reaction could create trouble for the WTO.
As the global economy slows, Trump will work to prevent the United States from entering a recession by 2020 — limiting his threats to impose more tariffs globally.
The standoff between Venezuela's two self-declared presidents is likely to result in Nicolas Maduro's eventual exit, and the United States is hoping that increased sanctions will be enough to help oust the long-time leader.
Key Dates to Watch
Spring: Presidents Xi Jinping and Donald Trump are expected to hold a summit regarding a deal on certain China-U.S. trade issues.
March 29: Brexit deadline for the United Kingdom.
April 17-18: Meetings between OPEC and non-OPEC members in Vienna.
April: Semiannual U.S. Treasury report on currency manipulation due.
April: Possible timeframe for a partial U.S. withdrawal from Syria.
May 4: Expiration date for waivers for Iran's oil customers.
May 18: Deadline for Trump to make a decision on auto tariffs.
June 28-29: G-20 Summit in Osaka, Japan.
Section
Mar 10, 2019 | 21:56 GMT
7 mins read
Asia-PacificThe Asia-Pacific is home to more people than any other region. Centered on the western rim of the Pacific Ocean, this region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. Several of these countries, most notably China, experienced rapid economic growth in the second half of the 20th century, giving the region a new sense of global economic relevance that continues today. That relevance, however, depends largely on China, a power in transition whose rise is testing the network of U.S. alliances that have long dominated the region. How effectively Beijing manages its transition will shape the regional balance of power in the decades to come.Read Synopsis
Key Trends for the Quarter
China Weathers a Trade Storm
This quarter, China has set its sights on convincing the United States to cut a trade deal. Beijing will maintain its offer of increased purchases of U.S. goods and greater market access while making measured structural changes in the realms of forced technology transfers and intellectual property protection. These efforts, however, won't be enough to satisfy the full extent of Washington's demands. Still, Beijing will use Western pressure to spur domestic reforms — particularly when it comes to easing market access restrictions and giving preferential treatment to state-owned enterprises. For example, Beijing will try to fast-track the process to shut down problematic state-owned zombie companies at the local level and cut overcapacity in China's coal and steel industries. The process — which broadly entails trimming economically unproductive capacity from the economy — will last far beyond the quarter because the overall cost to China's slowing economy and effect on the jobs market will weaken Beijing's resolve to enact far-reaching reforms. For more background on Beijing's approach to dealing with the U.S.-China trade dispute, read our latest assessment.
Asia Embraces China's Economic Discomfort
An extended U.S.-China trade truce or easing of tariffs will lessen China's economic pain, albeit only to a limited degree. Stress in China's coastal economic powerhouses — including Guangdong and Zhejiang — liquidity constraints in the private sector and employment challenges will compel Beijing to shift toward pro-growth policies. In the coming months, Beijing will expand credit and government bonds to spur infrastructure spending while introducing more drastic tax cuts that will benefit individuals and the private sector. Although Beijing will refrain from pumping up the real estate market — which could increase the number of people living in mortgage debt, thereby constraining their purchasing power — it may selectively loosen restrictions in small and midsize cities.
As the effects of the U.S.-China trade dispute ripple across the Asia-Pacific, some countries stand to gain, and others to lose.
Some Southeast Asian economies, such as Vietnam and Malaysia, are positioned to capitalize on the low-end manufacturing opportunities created by the U.S.-China trade war. But weak global demand and the residual strength of China's export sector will drag down these smaller countries. Electronics-driven economies such as Taiwan, South Korea, Japan and Singapore will continue to be hard-hit this quarter, reviving the call for Association of Southeast Asian Nations (ASEAN) countries to diversify away from China in the long run. Meanwhile, Indonesia will struggle to manage increased trade volatility due to its dependence on commodity exports and its current account imbalance. To learn more, have a look at our assessment on the impact of the U.S.-China trade dispute on the wider Asia-Pacific region.
China, Infrastructure and Great Power Politics
Amid the U.S.-led global campaign against Chinese tech companies, such as Huawei, and efforts to counter China's regional territorial claims, Beijing will use its economic and diplomatic leverage to coerce Washington's allies. China has used intimidation to influence Canada, the United Kingdom and Australia in the past. Closer to home, Beijing will play the economic card to encourage Taiwan's supporters to veto Taipei's bid for World Health Assembly observer status and any attempts to apply for membership in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
China will not sit idly by and allow the United States to corral it. Instead, Beijing will use its significant economic heft to influence perceived U.S. allies and potential regional partners, charming or coercing them to accede to its ultimate desires.
China's overseas infrastructure projects will encounter local obstructions and increased competition from the United States and its partners. This will not, however, discourage Beijing from redoubling its efforts on the Belt and Road Initiative. In the coming quarter, concerns over enduring financial sustainability will result in a review of the initiative's projects in countries such as Pakistan, Indonesia and the Maldives. An increasing number of countries will try to negotiate better terms, much to Beijing's consternation. Yet, as the Belt and Road Summit in April will show, China's approach is flexible, particularly given its interests in making its state-owned investors more financially prudent in their spending. Read our most recent assessment of China's cat-and-mouse approach to dealing with overseas investment opportunities and challenges.
Progress on North Korea Remains Elusive
Following an abrupt end to the Hanoi summit between the United States and North Korea, the two countries will spend much of the second quarter attempting to tailor expectations and demands. Washington and Pyongyang will both attempt to push the other beyond its current position, but a return to a default stalemate is always likely. Other countries will take a more prominent role in attempting to put the two sides back on track, with China and South Korea — two neighbors that are acutely aware of the stakes — stepping up.
It remains to be seen just how far the United States and North Korea are willing to go diplomatically, given the entrenched mistrust between them.
The United States will not fully dismiss sanctions against North Korea, and Pyongyang will not do anything to jeopardize the completion of its nuclear deterrent. Washington will, therefore, prioritize mitigating the perceived nuclear threat to the continental United States. North Korea will focus on sanctions relief to ease its ailing economy and open up prospects for inter-Korean cooperation. But any U.S. sanctions relief will be tethered to direct concessions from North Korea, and even then, the respite will be incremental and provisional in nature. In spite of setbacks, we will not see a return this quarter to the spiraling escalation that typified 2017. Learn more about the next steps in the ongoing U.S.-North Korea dialogue.
Additional Forecasts
These Stratfor assessments provide additional insights for the Quarter
In an attempt to manage a tough economic quarter, China will temper infrastructure spending and credit expansion while offering financial incentives to drive consumption.
In the U.S.-China trade war, Vietnam stands to gain a share of the region's low-end manufacturing industry, but the country's lack of skilled labor and mature industrial base will continue to hamper its bid to attract value-added investment.
In an attempt to mitigate the effects of the U.S.-China trade conflict, Asian economies will advance regional free trade agreements such as the Regional Comprehensive Economic Partnership (RCEP). The self-imposed deadline for ratification is this fall, but because India remains wary of China and is resistant to the RCEP, Beijing will likely grant concessions to New Delhi to encourage it to join the partnership and finalize the deal sooner, rather than later.
An opposition victory in Indonesia's nationwide presidential elections could result in Jakarta following in Kuala Lumpur's footsteps by initiating its own re-examination of Belt and Road projects with China.
Despite Tokyo's best efforts, a peace treaty with Moscow to formally acknowledge the end of World War II — along with any resolution on the status of the disputed Kuril Islands — will encounter Russian resistance.
Key Dates to Watch
April 17: Indonesian presidential and parliamentary elections.
April: Second Belt and Road Summit.
May: U.S. President Donald Trump may pay a state visit to Japan to meet the new emperor, who will assume the throne in April.
May 18: Last possible date for the U.S. president to make a decision on the Section 232 U.S. national security report on auto tariffs.
Before May 18: Australian federal elections.
May: Philippine Senate midterm elections.
June 28-29: G-20 Summit in Osaka, Japan.
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