The next biggest risk facing the world is China’s decoupling from US technological reliance.
A week ago it seemed that the world was on the brink of World War III, as Iran launched missiles against US military bases in Iraq in response to the US assassination of its Iran military commander Qassem Soleimani.
Fortunately both sides stood down and the threat of war has receded. This, however, could be the start of US disengagement from much of the Middle East, after the Iraqi parliament voted to request the removal of US forces from its land. Sooner or later the US will pull out of Iraq.
One can’t help suspecting that US President Donald Trump, in an election year, sees the stock market as a proxy for his economic performance. A war would ruin that, and perhaps his chances of re-election.
Eurasia Group’s recently-released Top Risks 2020 report spells out the big threats facing the world. Top of the list is US politics – in particular the impeachment process against Trump, which will delegitimise the result of the upcoming elections.
Public opinion polls already cast doubts about the election result, nearly a year before the election due date. A 2019 poll by Ipsos shows that just 53% of the US public believe the presidential election will be fair. A close result is likely to be highly contested, and would perhaps even go to the courts. Any decisions made by Trump thereafter would be viewed as lacking authority. US allies and enemies alike wonder whether the US can lead itself.
“In the midst of a disputed 2020 election, many of those countries will wonder whether the US can govern itself. It’s a period of unusual geopolitical vulnerability to shock and escalation,” says the report.
An ‘American Brexit’ is unfolding as the US disengages from the world, overturning trade treaties and turning to hostile trade relations.
The next biggest risk facing the world is China’s decoupling from US technological reliance.
This all started with the US-China trade war, aggravated by the arrest in Canada just over a year ago of Huawei’s Chief Financial Officer Meng Wanzhou, for alleged violations of US sanctions against Iran. This was seen as an astonishing overreach by the US and Canada, and an interference in the trade relations of China and Iran.
“China will expand efforts to reshape international technology, trade, and financial architecture to better promote its interests in an increasingly bifurcated world,” according to the Eurasia Group report.
Cold war on the tech front
The result of this technology decoupling will be a ‘US-China tech cold war’ with heightened competition in artificial intelligence, quantum computing, 5G networks, supercomputing and semiconductors.
Other countries will find it harder not to get caught in the crossfire of the US-China trade war and souring relations between the two economic giants.
Eurasia Group doubts multinationals will step into a governance gap in the global order to lead in areas such as climate change, poverty relief and trade and investment liberalisation.
Nation states are reasserting themselves, presenting new risks to the capital and assets of corporations. In the European Union, governments are turning to industrial policies to promote domestic firms and act as a counterbalance to China’s statist approach to trade and investment. Governments are moving away from multilateral to bilateral agreements, and new regulatory risks will strain corporate reputations.
India
India, too, is retreating into a nationalist enclave, and recently implemented a system to identify illegal immigrants in the northeast of the country, stripping 1.9 million people of citizenship. The government also passed a law that makes religion, for the first time, a criterion for migrants from neighbouring countries.
Sectarian and religious conflict will grow, with Kashmir a potential flashpoint. Politicians from the area are under arrest and interest access has been cut, provoking mass protest in many parts of India.
Prime Minister Narendra Modi appears in no mood to back down, and will have to navigate a path through declining economic growth, weaker tax returns and spreading protests.
Europe is also buttressing the trade rampart, by challenging US tech giants on their soft tax arrangements in countries like Ireland.
A more independent Europe poses risks for the US.
Trump is no supporter of the EU and could impose retaliatory tariffs if Brussels goes ahead with the imposition of a Europe-wide digital tax. France has already imposed a 3% tax on sales by multinational companies like Google and Facebook. Internet companies are paying taxes of 8% to 9% in Europe, while more traditional businesses are paying an average of 23%.
China could face resistance from Europe and the US to its Belt and Road Initiative, a programme to connect Asia with Africa and Europe via land and maritime networks along six corridors.
Climate change politics
The politics of climate change is another risk facing the world, according to Eurasia Group. Countries are falling behind their carbon emission targets in terms of the Paris Accord, and the largest emitter, China, is unwilling to sacrifice economic growth to reduce its impact on global temperatures.
Complicating the picture is the emergence of an anti-elite backlash to climate action, as we have seen in France.
Though the world appears to have stepped back from the brink of a major regional conflict between the US and Iran, this conflict remains a deadly and destabilising threat.
Lethal skirmishes in Iraq between US and Iranian forces are likely. Iran will continue to disrupt tanker traffic in the Gulf. A more dangerous if still limited US-Iran regional conflict is less likely but possible. Iran tensions will put a minimum premium of $5 to $10 into the oil price this year and increase volatility, says the report.
Expect an incendiary year for Latin America
Public discontent in Latin America over corruption and declining public services reduces governments’ ability to impose austerity. Societies are becoming increasingly polarised and even the middle classes are taking to the streets to protest against cuts to public services.
Presidential approval ratings across Latin America are abysmal, with Venezuela’s Nicolás Maduro, at a bone-crushing 13%.
In contrast, Mexico’s Andrés Manuel López Obrador, barely a year in office, enjoys a support rating of 75%. Argentina’s Alberto Fernández was elected by angry voters and is under pressure to increase state intervention, and will try to boost growth by abandoning fiscal and monetary prudence. The same challenges are facing leaders from Chile to Colombia and Ecuador. It’s going to be an incendiary year in Latin America.
Other risks are Turkey’s growing independence from both the US and Europe, which could make life difficult for it in the coming year.
Britain faces the uncertainties of a post-Brexit world. Populist protests are on the rise, a measure of the discontent on the streets.
It’s not going to be an easy year, no matter where you live.
