Stratfor 2018 Annual ForecastPublished on EGF: 26.12.2017 Though the threat of war on the Korean Peninsula can't be ruled out, the United States will probably try to avoid a costly preventive strike against the North's nuclear weapons program that would plunge the global economy back into recession.
Overview Reckoning With North Korea: Though the threat of war on the Korean Peninsula can't be ruled out, the United States will probably try to avoid a costly preventive strike against the North's nuclear weapons program that would plunge the global economy back into recession. Instead, Pyongyang's demonstration of a viable nuclear deterrent next year will spawn a new and more unstable era of containment. Hedging All Around: Deepening collaboration between China and Russia will pose a strategic threat to the United States, spurring Washington to try to check the budding partnership by reinforcing its own allies in the Eurasian borderlands. The fluidity of alignments among great powers will increasingly define the international system as Moscow and Beijing balance against each other, just as many U.S. allies hedge their relationships with Washington. Putting Trade Ties to the Test: The White House will forge ahead with an aggressive trade agenda that targets China, Mexico, South Korea and Japan. While the U.S. trade agreement with South Korea hangs by a thread, congressional and legal checks on U.S. executive power will have a better chance of keeping the North American Free Trade Agreement intact. The United States' increasing unilateralism in trade will expose the weaknesses of the World Trade Organization, but it won't shatter the bloc or trigger a trade war. Revisiting Iran: North Korea's nuclear weapons achievements will fuel a hard-line U.S. policy toward Iran, jeopardizing the Joint Comprehensive Plan of Action. As the United States, Saudi Arabia and Israel close ranks against Iran, proxy battles across the Middle East will intensify. But Iran won't walk away from its nuclear deal with the West. Russia will nevertheless exploit the tension mounting between Washington and Tehran, as well as its advantage on the Syrian battlefield, to expand its influence in the Middle East at the United States' expense. Managing an Oil Exit Strategy: Major oil producers hope to stay on track to rebalance the global oil market in 2018. As the expiration of their pact to limit production and draw down inventories approaches, compliance will slip among OPEC and non-OPEC participants alike. Even so, Saudi Arabia and Russia may be able to work together to counteract an expected uptick in U.S. shale output. The Next Phase of China's Reform: Chinese President Xi Jinping will take on entrenched local interests as the central government tackles the next phase of its reform agenda: wealth redistribution. A slowing property sector and corporate debt maturities will compound financial pressures on China's northeastern rust belt in 2018, but Beijing has the tools it needs to prevent a systemic debt crisis. France Finds Its Voice: France will find itself on more equal footing with Germany next year as it defends Southern European interests and debates eurozone reform. The possibility of a more Euroskeptic government emerging in Italy will send jitters through financial markets, but the country won't leave the currency zone. Populism Persists in Latin America: Popular frustration with the political establishment will make for a more competitive election season in three of Latin America's biggest economies: Mexico, Brazil and Colombia. Should a populist president take office in Mexico, Congress will block him from enacting any sweeping policy changes. Meanwhile, Brazil and Argentina will have a narrow window in which to implement domestic reforms and push ahead with trade talks in the Common Market of the South before political constraints start piling up against them.
Global Trends In today's world, nations are becoming increasingly interconnected by air, land, sea and cyberspace. As globalization has knitted countries and continents closer together, the borders of the map and the barriers of geography have been rendered, in some ways, obsolete. Now events in one region can more easily have consequences in another, at times even rippling across the globe. We explore those with the greatest impact on international decision-making during the forecast period below.
Section Highlights
Geopolitics Is Back With a Vengeance Countries across the globe will kick off the new year with a bit of good news. A decade after financial crisis shook the world to its core, growth in the global gross domestic product has finally begun to pick back up. The Organization for Economic Cooperation and Development estimates that the global economy will grow more than 3.5 percent in 2018 — the fastest pace seen in eight years. But many of the deep structural problems that the financial crisis exposed have endured, signaling a more fragile recovery ahead than the cyclical rebounds of the past. Moreover, a number of geopolitical risks — looming conflict on the Korean Peninsula, threats of a global trade war, stark battle lines drawn in the Middle East, and anxiety over Chinese and Italian debt, to name a few — could cut the economy's comeback short. As U.S. national security adviser H.R. McMaster said recently, "Geopolitics are back, and back with a vengeance after this holiday from history we took in the post-Cold War period." By themselves, these threats will influence how governments and corporations adapt to a tenser international environment in 2018. However, the worst-case outcome of each risk isn't necessarily the most likely. And because the United States is the only actor with the ability to tip the scales of several scenarios in either direction, any forecast of the year ahead must start with Washington. By now the world has had a year to observe the presidency of Donald Trump. While there are some aspects of his term that are unique, and therefore more fleeting in their effects, many of Trump's actions stem from deeper forces that will last well beyond his time in office. With regard to the former, a handful of institutional checks on the executive branch made headlines throughout 2017. Congress worked to tie the president's hands in lifting sanctions against Russia. (Lawmakers may likewise try to block Trump from unilaterally withdrawing from the North American Free Trade Agreement in 2018.) The national security establishment has angled to preserve U.S. commitments to NATO while clearly defining the risks attached to instigating war with North Korea or abandoning a nuclear deal with Iran. Figures at the state, corporate and local levels have openly defied Trump's attempts to withdraw from the Paris climate change accord and to reduce state support for alternative and renewable energy sources. But Trump also doesn't consider himself beholden to the Republican Party or his national security advisers, and he has shown less hesitation than most American presidents to dismiss dissenters or appoint loyalists who adhere to his agenda. Thus, Trump has a wider margin in which to operate than many of his predecessors, which not only will raise the risk of rifts widening within the Republican Party in an election year but will also keep U.S. allies and adversaries on their toes as they try to distinguish between the rhetoric and reality coming from the White House.
Coping With a Nuclear North Korea Trump's most consequential decision in 2018 will be how to deal with North Korea's rapidly developing nuclear arsenal. The window for a U.S. preventive strike aimed at devastating Pyongyang's program is closing fast. Though a preventive strike can't be ruled out, its steep price tag — a messy war that shoves the world back into economic recession — will make the United States more likely to resign itself to the uncomfortable reality of North Korea's possession of a viable nuclear deterrent. This acceptance will mark the start of a new and unstable era of nuclear deterrence as the United States and its Asian allies adopt a policy of containment toward the Hermit Kingdom. The gradual degradation of arms-control agreements struck in the 20th century will only further complicate matters as Russia and China try to balance against the United States' expanding missile defense network.
North Korean Nuclear Tests In fact, lately Russia and China have found more reason to cooperate than compete with each other. Both countries are working to insulate themselves from U.S. pressure and reduce Washington's influence in strategic theaters around the globe. To that end, they have hashed out a division of labor of sorts: Where both states share interests, Russia addresses security issues as it deems fit while China takes the lead on economic matters. Moscow and Beijing also have deepened their cooperation in finance, trade, energy, cybersecurity and defense. Though this emerging partnership poses a strategic threat to the United States, it will also provide ample opportunity for exploitation as Washington tries to bolster its allies in Russia and China's neighborhood. (Taiwan, in particular, could become a source of contention between Washington and Beijing next year.) Still, today's international environment does not resemble the Cold War, when bolder lines defined alliances and great powers engaged in zero-sum contests. Economic interdependence, mutual distrust and unreliable security guarantees will encourage ostensible allies to hedge against one another for their own protection. Such fluid relationships will come to define the global order in 2018 and beyond.
An Unrelenting U.S. Trade Agenda The threat of North Korea will not spare China, South Korea or Japan from the United States' ire in the trade realm. The Trump administration is unique in its willingness to compartmentalize the North Korean crisis and its trade agenda. In keeping with the White House's decision to target countries with which the United States has large trade deficits, China, Mexico, South Korea and Japan will remain in Washington's crosshairs in 2018. (As the Trump administration quickly discovered, Germany is not easy to isolate from the rest of the European Union, which protects it somewhat from the White House's punitive trade measures.)
U.S. Trade Balances: Top 10 Partners, 2016 Should negotiations reach an impasse, the United States is more likely to abandon its trade deal with South Korea than other agreements on the table. The ties that bind the U.S. economy to South Korea's are weaker than those linking it to countries like Mexico. And though Trump could choose to pull out of NAFTA next year, the bloc's proponents — including U.S. lawmakers who will weigh the risks of withdrawal as they head into midterm elections — will try to legally block moves by the president to keep the trade pact from falling apart. By and large, the role of the U.S. Congress in regulating foreign commerce and legal disputes will continue to curb executive action in trade in the year ahead. The separation of national security and trade may be unique to the Trump administration, but protectionism and a willingness to flout the rulings of the World Trade Organization (WTO) existed in Washington well before Trump arrived at the White House. The United States has long held the opinion that the WTO is ill-equipped to hold China accountable for the free trade violations that its particular brand of state capitalism perpetrates. Although the European Union and Japan share the United States' desire for stricter enforcement of WTO regulations, Washington will not bank on the slim chance that the unwieldy trade body will push reforms through its ponderous, consensus-based bureaucracy. With China squarely in its sights, Washington will slap Beijing with punitive measures on trade, investment and intellectual property enforcement that it can argue are within or outside of the WTO's jurisdiction, depending which designation best suits its needs. The United States already has dusted off two important trade tools at its disposal: A Section 301 investigation of intellectual property theft and forced technology transfers, and a Section 232 investigation into whether imports of Chinese steel hurt U.S. national security and are thus subject to tariffs. (A review of the first case is due in August, and a review of the second case is due in January, at which point the president will have 90 days to act on it.) Washington also will keep lobbying the European Union to withhold market-economy status from China in the WTO — a label Beijing claims the organization promised it in 2016 that would make it more difficult to impose anti-dumping measures against China. Though a verdict for the legal challenge on this matter won't come until 2019, a WTO panel will review the case in 2018. The Trump administration's trademark bluntness and unilateral pursuit of its trade agenda will continue to raise alarm worldwide, leaving the impression that the White House is intent on dismantling the WTO and razing the global trade order that it has underpinned since the end of World War II. But such concern is likely unwarranted. Though the United States will be more willing to act independently outside the bounds of the WTO, it will not incur the economic risk of withdrawing from the bloc. Instead Washington will rely on it as an enforcement body, even as it compensates for the institution's weaknesses with measures of its own. Despite the escalation, the White House will stop short of triggering a trade war. While U.S. trade partners will watch its moves with apprehension, they will respond mildly for the most part. Some, like Japan, will try to deflect Washington's advances by highlighting their strategic relationship with and investments into the United States. Others that come into the White House's direct line of fire will challenge its trade attacks at the WTO and in U.S. courts, where litigation could outlast Trump's current term. As for China, some punitive U.S. trade measures will even neatly intersect with Beijing's domestic reforms and will not pose an existential threat to the Chinese economy.
A Crude Recovery Barring a major shock to the global economy, OPEC and non-OPEC oil producers hope to meet their goal of rebalancing the oil market in 2018. As the world's inventories continue to decline in the first half of the year, political divisions in Iraq and capacity constraints in Libya and Nigeria will mitigate the risk of oil producers extending their agreement to limit output into 2019. Signatories will hold a critical meeting to review their progress in June.
Oil Production Cuts Offset by Production Increases The biggest question next year is how well Saudi Arabia and its Gulf allies will see the pact through to its conclusion. They will try to shoulder the bulk of the burden of maintaining production cuts as compliance starts to slip among other members eager to exit the agreement. And as its expiration draws near, U.S. shale production will likely ramp up amid higher oil prices. Determined not to incentivize a strong recovery in U.S. shale output, Saudi Arabia and Russia may continue to collaborate in energy long after the current quotas have ended. For instance, Saudi Arabia can use Russian assistance to diversify its energy sector while working with Moscow to restrict production. But this cooperation in energy will do little to defuse the competition intensifying in the Middle East. The Trump administration's vow to prevent Iran from following in North Korea's footsteps will bring Tehran and the fate of its nuclear deal with the West back into the spotlight. Saudi Arabia and Israel, keen to roll back Iranian influence while they have the blessing of the White House, will revitalize their campaign to weaken Iran and its allies, including Lebanese militant group Hezbollah. Backed by Russia, Iran will have the resources to hold its ground as the war among regional proxies builds. But it will take care to avoid alienating Europe, which will be necessary in checking any effort by the United States to shred the Joint Comprehensive Plan of Action. The European Union, along with China, Russia and India, won't fully comply with U.S. attempts to reintroduce sanctions against Iran's energy sector. But if the nuclear deal collapses, oil producers may abandon their production cuts early as Saudi Arabia and Russia move quickly to account for the loss of Iranian supplies on the market. Much of the urgency behind Saudi Arabia's reform agenda and preoccupation with the global oil market's recovery stems from a longer-term challenge that the kingdom and other oil producers face: the expansion of the electric vehicle market. Over the past year, Europe, China and India spearheaded policy initiatives that aimed to boost the adoption of alternative-energy vehicles. Industry reports, moreover, point to growing demand for such cars in the short and medium term. As demand rises, so, too, will demand for the vehicles' batteries and the lithium they are made of. Though this trend will take decades to unfold, investment in the production of electric cars and related technology will increase next year. Because lithium resources are concentrated among only a handful of countries, including Argentina, Chile and Bolivia, several producers will be well positioned to take advantage of mounting interest in lithium — especially Argentina, since the Common Market of the South, to which the country belongs, will liberalize its trade policies in 2018.
Coping With a Nuclear North Korea North Korea became the center of gravity in the Asia-Pacific region in 2017 as it passed the year with 16 missile tests and the underground detonation of a nuclear device. There will be no difference in 2018 as Pyongyang tests its weapons' re-entry and guidance capabilities, launches missile salvos over Japan, considers testing intercontinental ballistic missiles near their maximum range or conducts an atmospheric nuclear test over the Pacific Ocean. Though estimates vary, many experts predict that North Korea will achieve a viable nuclear deterrent in 2018. Within this tight window, the United States will have to decide whether to curb North Korea's nuclear capabilities by force or manage them through a strategy of deterrence. This weighty decision will be at the forefront of global leaders' minds next year, ultimately resting with U.S. President Donald Trump and his advisers. The first (and less likely) scenario of crippling Pyongyang's nuclear program would require a preventive military strike. Should the United States choose this course, North Korea's response would have devastating consequences, including a massive disruption to regional trade that would heavily damage the electronics, automotive and appliances industries and send shockwaves throughout the global economy. South Korea would bear the brunt of North Korea's retaliation, though Japan may suffer attacks as well. China, meanwhile, would have to decide whether to intervene on the Korean Peninsula to secure a territorial buffer on its doorstep and to stem the outflow of refugees that would likely ensue — raising the specter of confrontation between it and the United States. If Washington begins leaning toward a military strike, several signs will warn of its coming. First, the United States will pull out all the stops in its campaign to pressure Pyongyang into cooperation, perhaps even leveling harsh sanctions on some of China's core financial institutions and economic entities that do business with North Korea. These measures would come at a time when China is already undertaking a difficult overhaul of its economy, creating economic fallout in and beyond the region. Second, the United States and its Asian allies would begin moving their military hardware. Washington would order the long-term deployment of two or three carrier battle groups to the waters around the Korean Peninsula; regional intelligence, reconnaissance and surveillance assets would increase; land-based air power, such as stealth fighters, would relocate nearby; submarine deployments would become more frequent; and South Korean troops and reserves would mobilize. Of course, the absence of any or all of these developments wouldn't rule out a preventive strike, since the United States is capable of launching a limited attack on North Korea with its existing presence in the Asia-Pacific. Moreover, an attempt to shoot down a North Korean missile, successful or not, could spark a war. Barring the unlikely event of a coup in Pyongyang, any measures short of military action won't sway North Korea from its path toward a credible nuclear deterrent. Despite agreeing to a severe U.N. sanctions package against the country in 2017, neither China nor Russia wants the North Korean government to collapse. As a result, they will avoid any action that jeopardizes its stability unless they believe the measures would forestall a strike by the U.S. military. Even if the international community deepens its sanctions regime to an oil embargo or trade ban, North Korea has many tools at its disposal for insulating its leaders and achieving its not-so-distant nuclear goals.
What a North Korean Nuclear Test Over the Pacific Might Look Like Given the massive costs that a military strike against North Korea would carry, as well as the short time frame in which it must be executed, the United States is more likely to choose its second option: containment and deterrence. The former might entail the economic isolation of the North Korean government, with the intent of limiting the growth of its nuclear arsenal. The latter would involve the gradual buildup of ballistic missile defenses, the permanent monitoring of North Korean activities and the compression of military decision-making channels among the United States and its allies. Still, a strategy of deterrence carries its own long-term risks, including a heightened threat of miscalculation, similar buildups by Russia and China, and the nuclearization of South Korea and Japan. Furthermore, the fortification of a U.S.-aligned defense infrastructure around North Korea could undermine the missile architecture of Russia and China, bringing their mutual interests further in line, just as the deployment of the U.S. Terminal High-Altitude Area Defense system to South Korea has. As tension mounts on the Korean Peninsula, the United States will work to renew the resolve of its most important regional allies. Over the past year, its ties with South Korea and Japan have strengthened. Though Seoul firmly opposes the idea of a preventive military strike against Pyongyang, neither it nor Tokyo would be able to stop Washington from launching one. Even if the United States rejects that route, a pre-emptive strike meant to interrupt an impending North Korean attack would still be on the table.
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