By Stratfor
June 27, 2017
Based on the principle that transformative world events are not random, but are in fact predictable, Stratfor develops decade, annual and quarterly forecasts. These forecast are built upon Stratfor’s geopolitical methodology, our framework for identifying and forecasting the fundamental trends shaping the international system. Below are the global trends highlighted in Stratfor’s forecast for the third-quarter of 2017. The complete forecast is available at Stratfor Worldview.
The U.S. Exits Stage Left?
When world leaders gather in Germany for the approaching G-20 summit, they will no doubt make a slew of assertions — some alarmist, others justified — about a U.S. retreat from the global stage. Talk of leaders like German Chancellor Angela Merkel, French President Emmanuel Macron and Chinese President Xi Jinping stepping in to fill the void and uphold global governance on major issues such as free trade, climate change and security can be expected. But there is an underlying reality to that narrative that should be kept in mind.
Simply put, those hoping to fill the United States' shoes in leading the world still have their own existential threats to contend with at home. Germany and France are buying valuable time with their electorates to try to repair the European Union and make an example of the United Kingdom's departure, but the bloc's members still have vastly different visions of what European integration should look like and how nationalism might fit in. China, meanwhile, is not a globalist power with a model of governance to offer the world; it is a fiercely nationalist power with global clout, caught between the compulsion to operate as a market economy and the imperative to centralize political power under the ruling Communist Party. None of these countries come close to matching the U.S. military footprint or the country's ability to shoulder the burden that comes with superpower status.
Perhaps more important, though, is the fact that the United States may not be as able to relinquish its role in the world as it seems. U.S. corporations, interest groups, states and cities will all temper the moves made by the federal government, particularly on climate and trade matters.
Troubled, but Unbroken, Alliances
Washington's attempt to rebalance its priorities and compel others to help manage conflict is hardly new. But U.S. President Donald Trump's administration stands ready to brazenly challenge the conventional wisdom on the United States' role and responsibilities as a superpower. Whether driven by fear or opportunity, the shift in U.S. rhetoric alone will force Washington's allies and adversaries alike to adjust their behavior accordingly.
And the consequences will be clear in the Middle East this quarter. The White House's effort to whittle down its interests there to neutralizing radical Islamism and containing Iran has indirectly shattered its vision of propping up a Saudi-led "Arab NATO" to manage the region. Instead, Washington's heavy endorsement of Riyadh's agenda during the second quarter helped to spawn a spat within the Gulf Cooperation Council that laid bare the enduring fault lines among Sunni states amid intensifying wars by proxy in the region. The United States will not have the luxury of choosing sides in the dispute. Rather, it will have to balance and grapple with the divides crisscrossing the Gulf and the wider Middle East, all while keeping its fragile nuclear deal with Iran in place.
The United States' European allies have misgivings over its security commitments on the Continent as well. But despite their concern, and despite ongoing federal investigations into the White House's interactions with Russia, Washington will not forsake NATO. At the end of the day, the United States has an imperative to uphold the Western security alliance and contain Russia — a goal that will make itself known in Congress' pursuit of additional sanctions against Moscow, and in the maintenance of Washington's existing security commitments in Europe. Russia nonetheless will do its best to play off the discord in the West while playing to France's ambitions of charting an independent foreign policy course. In the meantime, Poland, Ukraine and the Baltic states will take what assurances they can get from the United States as they try to assume a more assertive approach toward Moscow.
U.S. partners in the Asia-Pacific will also be working to process mixed messages from the White House. The United States will maintain its military posture in the region amid a steadily growing threat in North Korea and China's persistent efforts to keep Washington out of its backyard. But vulnerable states caught in the middle of their contest will do what they can to balance between U.S. guns and Chinese butter in order to safeguard their own interests. Those in a position of greater strength, such as South Korea and Japan, will look for more autonomy in providing for their own security as they lessen their dependence on the United States.
Rhetoric and Reality in Trade
One source of nations' alarm and confusion in reading the intentions of the Trump administration are divisions within the White House itself. And given the ongoing struggle between the ideologues and professionals surrounding the president in crafting policy, the gap between aim and capability will stretch wide. Washington's trade policy is a case in point.
Trump and more ideological members of his team will continue to espouse an aggressive protectionist agenda that zeros in on countries with which the United States has large trade deficits. As we emphasized at the start of the second quarter, this doesn't mean Washington will abandon trade deals like the North American Free Trade Agreement, where the United States is already closely intertwined with its neighbors' economies, or destroy the global trade regime governed by the World Trade Organization (WTO). Instead it will rely on existing mechanisms to tighten trade restrictions in certain sectors. The process of renegotiating NAFTA, which will commence this quarter, will even take on a more moderate tone that emphasizes modernizing — rather than overturning — the agreement.
The United States' trade dialogue with China, on the other hand, is heading toward a rougher patch. By mid-July, the two countries' 100-day period for talks will end, and Beijing will have made some minor concessions to Washington, granting U.S. firms market access in select sectors. But as they tackle stickier issues that involve China's state-run corporations and heavy industries that the United States is already more stringently regulating, Beijing will try to leverage its cooperation against North Korea to mitigate the pressure building on it in trade.
Over the next few months, China will be only one of several countries closely monitoring the Trump administration's protectionist bent in the steel and aluminum sectors, where the White House has a little more leeway to protect industries under duress from imports. The findings of several trade reviews the executive branch has ordered will soon clarify the limits of the president's powers in trade — particularly the ability to cut down on steel and aluminum imports for the purpose of protecting national security, a tactic that could prove a slippery slope if other countries respond to such moves in kind. The farther the White House proceeds down this path, the more it will encounter hard barriers to its proposed actions. The Trump administration will be constrained in trying to unilaterally impose sweeping protectionist measures on a bilateral basis; the WTO, the U.S. International Trade Commission, the possibility of legal challenges and pushback from states and interest groups will each act as a significant check on the White House's trade policy.
The same will not be true of Germany, whose ideological battle with the United States will once again be in the international spotlight this quarter. Though some countries have found creative ways to temper the White House's trade ire (for example, by emphasizing their investments in the United States) Berlin will not get a pass from Washington. Instead, Merkel and Trump will square off at the G-20 summit in early July over the merits and dangers of open markets, even if little of substance comes from their rhetoric. After all, Germany's trade policy is not formulated in a vacuum; it is conducted through the European Commission, and there is little the United States can do to stop German companies from selling cars within its borders. While Germany advocates free trade on the G-20 stage, an embattled United Kingdom will quietly work to stay in the United States' good graces, a new French government will brace itself for rising popular demand to protect its own industries, and a determined China will keep prodding an apprehensive Europe to recognize it as a market economy in the WTO.
The G-20 summit will serve as a snapshot of the dysfunction currently afflicting globe trade negotiations. Over the past year, China and Germany have tried to ensure that investment facilitation is the next item that the WTO approves at its December ministerial meeting in Buenos Aires. But the divisions among the world's countries will be made clear at the conference, underscoring the unlikelihood of this milestone being reached within the desired time frame.
Still, just because the United States may give the cold shoulder to free trade doesn't mean other states' trade initiatives will stall. In the coming quarter, the European Union and Japan will reach a political deal on the free trade agreement they have been negotiating since 2013. Overcoming this roadblock won't be the end of the road, of course; more sensitive details about investment and data flows still need to be hammered out before a final agreement can be struck, and new EU rules requiring such deals to be ratified by regional parliaments could make it more difficult to reach a consensus on investment.
The remaining members of the Trans-Pacific Partnership (TPP) will likewise work to salvage their pact in the wake of the United States' withdrawal in January. Countries with advanced economies such as Japan, Australia and New Zealand will be the driving force behind the talks, while their developing peers, Vietnam and Malaysia, may prove more reluctant. The group's intent is to design a menu of options by November for pushing the deal forward. But New Zealand's Sept. 23 elections could sap some of the initiative's momentum if the opposition Labour and New Zealand First parties — which stand against the TPP's current format — enter government.
Oil Producers Stick Together, For Now
Meanwhile, the world's major oil producers will continue to comply with their agreement to extend production cuts until March 31, 2018. But that doesn't mean high oil prices are in the offing. In fact, oil prices have fallen since the deal was implemented in January. U.S. output will continue its rapid climb, and by the end of the third quarter, the country could have added another 200,000 to 300,000 barrels per day, bringing total U.S. production close to 9.5 million bpd. The downward pressure these added supplies will put on oil prices will be reinforced by strong production growth in Libya and Nigeria, which combined could add on roughly the same amount of output as the United States. So far, rising U.S. production has capped Brent crude, the international price benchmark for sweet light crude, at $45 to $55 a barrel this year, a ceiling that is unlikely to change in the months ahead.
Despite the wrench that increasing U.S. output has thrown in other producers' plans to try to nudge oil prices back up, their deal to slash production will not be jeopardized this quarter. Nor will Qatar's dispute with the Gulf Cooperation Council cause the agreement to fall apart; at only 30,000 bpd, Qatar's contribution to the production cuts is small, and Doha has already promised to uphold its end of the bargain. As a result, overall compliance with the deal will likely stay steady through the quarter as OPEC (led by Gulf producers) accounts for nearly 100 percent of the cuts and non-OPEC states lag behind. Beyond the quarter, however, it is unclear how long producers will hold firm. It is possible that they will reach their goal of reducing global oil inventories to the five-year norm by the end of the current agreement, even as U.S. output rises. But the closer producers get to achieving their objective, the more likely countries that are under considerable financial pressure, such as Venezuela and Iraq, will break ranks and cheat. Major producers like Russia, moreover, are already trying to plan a more orderly exit strategy for themselves beyond the quarter's end.
Central Banks Loosen Their Monetary Policies
As China's producer price inflation continues to fall, so, too, will the outlook for global reflation. This will be accentuated by a shift in U.S. policy away from expectations of a sweeping tax reform — which has been increasingly watered down and now likely won't come before the end of the year — and toward trade, where uncertainty persists. The resulting retreat of the rising inflation that appeared in the developed world at the start of the year will alleviate some of the pressure on central banks to tighten their monetary policies. In the United States, the pace of interest rate hikes will slow, while across the Atlantic and Pacific, the European Central Bank and Bank of Japan will face less pressure to end their quantitative easing programs. A recent split in the United Kingdom's Monetary Policy Committee, moreover, showed a growing desire to raise interest rates and stave off inflation, despite the blow those moves could deal to an economy already stumbling amid the uncertainty surrounding a new minority government and signs of a drop-off in consumer activity. That the committee may boost interest rates in the next few months anyway, however, cannot be ruled out.
The complete 2017 Third-Quarter Forecast is available at Stratfor Worldview, along with expanded forecasts by region, including:
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