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WorldDecember 3 2018

Lather, rinse, repeat: why 2019 is set for a familiar feel

The themes set to dominate 2019 – Trump, populism, China, Brexit, trade wars – have a familiar ring to them. However, eyes will be cast towards Brazil's new president, and the tinderboxes in the Middle East and North Korea refuse to dampen. Peter McGill reports.
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Trump year ahead

The world stage is beset with political and economic dramas, each of which will jostle for attention in 2019.

The ‘America first’ protectionism of US president Donald Trump has led to a trade war with China and cast doubt on global supply chains. North Korea has refrained from firing missiles and Mr Trump has stopped threatening war, but leader Kim Jong Un, with whom Mr Trump says he “fell in love” after an exchange of letters and an historic meeting, has yet to abandon his nuclear weapons.

In the Middle East, militant group Islamic State (Isis) has been wiped from the map and the war in Syria has all but ended in victory for the government of Bashar al-Assad and his Russian and Iranian allies, but rivalry between the region’s major powers, Saudi Arabia, Iran and Turkey, has intensified. In South America, Mr Trump has found a new ally with the October election of Jair Bolsonaro as right-wing president of Brazil.

In November elections to the United States Congress, the Republican party of Mr Trump lost control of the House of Representatives while maintaining a majority in the Senate. Barely had the world taken stock of this convulsion when another broke out in the UK, as a painstakingly crafted deal on exiting the EU provoked uproar in parliament and resignations from the cabinet of prime minister Theresa May. Bankers fretting about what ‘Brexit’ could mean for the City of London and operations in Europe were confronted with a chaotic cluster of possibilities: a sudden change in government; a snap general election; a second referendum on EU membership; renegotiation of the Brexit deal, or a ‘no deal’ crashing out.

No repetition, no full recovery

A decade on from the financial crisis, the world economy has been spared any repetition but is still far from fully recovered. Balance sheets of the major central banks remain stuffed with trillions of dollars in assets, mainly government bonds, that were acquired through quantitative easing (QE) purchases intended to lower yields and increase asset values. So far only the US Federal Reserve has started to reverse QE; the European Central Bank is due to stop QE buying in January. Coupled with Fed hikes in interest rates, this end of 'accommodative monetary policy' naturally boosted the attractiveness of the US dollar.

An overhaul of US corporate taxes also prompted what Charles Dumas, chief economist at research provider TS Lombard, says was an “enormous transfer of liquidity into the US market out of the overseas dollar market” by American multinationals repatriating their foreign cash. At the same time, China’s long-awaited deleveraging has begun, cooling consumption and economic growth (now 'only' about 6% per year), while allowing the renminbi to weaken (down 6.3% against the US dollar in 2018).

This combination of a strong dollar, which Mr Dumas says has been trading close to its all-time ceiling since the collapse of fixed exchange rates in the early 1970s, with slowing Chinese demand, and a weaker and hence even more competitive Chinese currency, can be a lethal cocktail, especially for many emerging markets. “They have very large debts in dollars, and both the value and interest rates on those debts is going up at the same time as the cost of their imports,” says Mr Dumas. Even stronger exporting countries must now contend with lower demand and heightened competition from China, on top of the damage from punitive US import tariffs.

Another tumultuous 12 months?

Out of this crowded field, which themes will dominate in 2019 and beyond?

The rise of populism and nationalism, embodied above all in Mr Trump, dominates the political landscape. Globalisation, which prevailed between 1993 and 2015, has been forced into retreat by a relentless assault on its philosophy, values and institutions. “We reject the ideology of globalism and embrace the doctrine of patriotism,” says Mr Trump. He argues that other countries have taken advantage of the US, in economics and security, and it is time to put American interests first. Since taking office in January 2017, he has pulled the US out of international agreements on climate change, trade, nuclear proliferation and the nuclear deal with Iran, while castigating NATO, the UN and the EU. He has denounced almost every trade pact that the US entered into and imposed steep tariffs on imports of steel and aluminium and a wide range of Chinese goods.

Other populists who have come to the global fore may share similarities with Mr Trump in outlook and rhetoric, but the national context and causes that gave rise to their prominence are often markedly different. For instance, there are few commonalities in the political soil of prime minister Viktor Orban of Hungary, and prominent UK Brexiteers Boris Johnson or Nigel Farage, with Mr Bolsonaro in Brazil, who owed his election win in October, with about 57.7 million votes, to widespread revulsion against the economic incompetence and rampant corruption of previous left-wing Brazilian administrations.

A former army captain, Mr Bolsonaro has promised to combine “traditional family values” of the Roman Catholic church with economic liberalism. He has expressed nostalgia for Brazil’s military dictatorships, and disparaged women, ethnic minorities and homosexuals. Like Mr Trump, he is antagonistic to China’s economic growth, has lambasted Venezuela’s left-wing government for the country’s economic meltdown, and promised to move Brazil’s embassy in Israel to Jerusalem and withdraw from the UN Human Rights Council.

“You can be sure Mr Trump will have a great ally in the southern hemisphere,” Mr Bolsonaro told supporters in 2018. Ernesto Araújo, Brazil’s new foreign minister, has stated this his goal is to “help Brazil and the world liberate themselves from globalist ideology”. This includes, Mr Araújo says, the “dogma” of climate change that is part of a plot by “cultural Marxists”. The possibility that Mr Bolsonaro may follow Mr Trump and pull Brazil out of the global accord to limit climate change, as well and lifting protection of the Amazon rainforest, has understandably raised international concern.

Trouble for Trump?

Only time will tell if the global tide of populism and nationalism in democratic countries has started to recede, but there is no doubt that the result of the November mid-term elections in the US spells trouble ahead for Mr. Trump. A record number, 113 million, of Americans voted, and the number of Democratic Party representatives in Congress is the largest since the ‘Watergate Class’ of 1974, elected two months after Richard Nixon’s resignation as president.

It is no surprise that Mr Trump was reported to be already in a bad mood when he travelled to Paris to mark the centennial of the end of the First World War. Mr. Trump sat stony faced during a gathering of world leaders at the Arc de Triomphe as French president Emmanuel Macron denounced self-interested nationalism and extolled globalism.

“Patriotism is the exact opposite of nationalism,” Mr Macron said in a speech. “Nationalism is a betrayal of patriotism by saying: ‘Our interest first, who cares about the others?’." He warned that “old demons” were resurfacing and declared that “giving into the fascination for withdrawal, isolationism, violence and domination would be a grave error that future generations would very rightly make us responsible for.”

On his way back to Washington, Mr Trump mocked Mr Macron’s low approval ratings and France’s near defeat to Germany in two world wars. Mr Macron’s spokesman retorted by accusing Mr Trump of lacking “common decency” for unleashing a barrage of tweets on the anniversary of the 2015 terror attacks in Paris that left 130 people dead.

France is the oldest ally of the US, and the hostile exchange underscored the transatlantic rift that has opened up. Mr Trump’s pressure on European members of NATO to increase their defence spending and lessen the financial burden on the US was well received and effective. However, when taken together with other US policies, and the loss of its veto if the UK leaves the EU, it has encouraged France and Germany to once more urge the creation of a ‘European army’.

A house divided

What constraining effect will the Democratic surge at the polls and control of the House of Representatives have on the remainder of Mr Trump’s term? Grassroots Democratic pressure for the impeachment of Mr Trump will likely be ignored, as it would fail to pass the Senate and could inflame popular sympathy for Mr Trump. Instead, what the Democrats will do is to attempt “death by 1000 subpoenas and investigations with the purpose of undermining his candidacy in 2020”, according to Steven Blitz of TS Lombard. Big legislative victories for Mr Trump appear to be out of reach, as he can no longer get any major domestic legislation through Congress without the co-operation of Democrats in the House.

Two areas that enjoy bi-partisan support and where co-operation may be possible are infrastructure and what Mr Blitz terms “bashing China”.

Mr Trump’s campaign speeches have often highlighted the disrepair and backwardness of the US's highways, bridges, airports and railways, and in 2018 his administration unveiled plans to spend $200bn over the next 10 years on improvements. However, while both parties agree on the general need for better infrastructure, there is as yet no accord on how it is to be funded, or which projects will receive priority.

China crisis?

Sankar Krishna, executive vice-president for banking and capital markets at business consultancy Capgemini, is of the firm belief that Chinese president Xi Jinping and Mr Trump will “take care of business” and “good things will come out of their meeting” on the margins of the G20 summit in Buenos Aires on November 30 and December 1, 2018. Others are far less optimistic.

“We don’t think it is a trade war anyway. We think it’s basically a competition for primacy between the two countries and is not going to stop. In addition, we can’t see the issues of intellectual property getting sorted out in a quick, Trump-style fashion,” says Mr Dumas of TS Lombard.

Frustrated by a trade deficit with China that reached $305.4bn in the year to September 2018, and the systematic “theft” of American intellectual property, Mr Trump imposed escalating tariffs on $250bn-worth of Chinese imports.

Mr Dumas predicts that Chinese manufacturers will relocate to “accommodating locations” throughout south-west Asia to avoid American tariff barriers against made-in-China goods. This will only further a new “regionalisation of the world” into “three massive trading blocs” made up of North America, Europe and a “China-centred eastern Asia”, he foresees. “If I am an American CEO making a decision on where to locate a plant, I am going to be heavily biased in favour of North America, for fear of tariffs. Similarly, if I am a Chinese manufacturer, I will be looking to somewhere friendly with the US to set up a plant,” he explains.

Spreading Chinese influence

Alarm has been mounting in Washington not just over China’s avowed goal of technological supremacy, but also around a foreign policy that aims to build Chinese influence through massive infrastructure investment, the Belt and Road Initiative (BRI) credited to Mr Xi. The US has accused China of using the BRI to trap weaker countries in debt dependency.

The China-Pakistan Economic Corridor (CPEC) is a core BRI project to build $60bn-worth of roads, pipelines, power plants and industrial parks, as well as a port, Gwadar, on the Arabian Sea. Pakistan’s powerful armed forces, which strongly back the CPEC, have provided a 15,000-strong security force to protect the construction and the Chinese workforce. About $20bn-worth of projects are said officially to have been completed. The new Pakistani government, headed by prime minister Imran Khan, has questioned the emphasis on infrastructure over poverty reduction and invited Saudi Arabian participation. Pakistan’s application to the International Monetary Fund for another bailout may also be used by Washington as a lever to lessen Chinese involvement and influence.

A major aim for China is to build pipelines for Iranian gas and oil through Pakistan to Xinjiang Province. 

“Part of it is Chinese hedging, seeking to develop alternative routes and sources of supply that are not so vulnerable to hostile intent. There is fear of containment, if all their eggs are in the basket of passing through the Malacca Straits, then in theory it might be possible for a hostile power, the US, to choke off China’s energy supply,” says Roderic Wye, a former head of Asia research at the UK’s Foreign and Commonwealth Office. “It makes some sense to have plans B and C, alternative sources of supply and alternative means of delivery, for something as utterly strategic as oil is at the moment.”

China exerts even greater influence over North Korea, and the convergence of a negotiating stalemate between Pyongyang and Washington with the fraught state of its own relations with the Trump administration works to its advantage. “As his G20 meeting with Trump approaches, it is in Mr Xi’s interest to encourage a controlled escalation of tension, which would allow China to resume its position as chief North Korea handler,” says Rory Green of TS Lombard. China could then use this leverage to soften North Korea’s position in talks in exchange for a lessening or removal of US tariffs.

The share price of some South Korean construction companies has doubled in anticipation of big government contracts to rebuild North Korea, but such reunification euphoria looks as premature as Mr Trump’s expressed desire to build resort hotels beside North Korean beaches.

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