Summary
Global trade is currently in the middle of an exporters’ crisis. Countries whose GDP is dependent on exports find themselves with increased instability and insecurity as a result of stagnating demand. The countries most affected are those with exports accounting for a high percentage of GDP, consisting primarily of commodities, and relying on China as a top destination. Geopolitical Futures has identified and tracked how the exporters’ crisis has unfolded in what we consider the 16 most vulnerable countries.
- China, Russia, Saudi Arabia and Germany all yield a high degree of geopolitical power in the world and are the four most important countries affected by the exporters’ crisis.
- Five countries on the periphery gain more importance in the context of the exporters’ crisis. The fate of these countries could trigger new crises or exacerbate existing ones for nearby regional powers.
- Vulnerable Pacific countries have been the most capable of staving off the effects of the exporters’ crisis.
- The exporters’ crisis may help bring about regime change in the most affected African countries.
- As long as global growth remains sluggish, the exporters’ crisis will persist.
Introduction
Three major forces, derived from the economic and social fallout of the 2008 financial crash, drive the international system in 2017. The first is economic stagnation or relatively low growth in advanced industrial countries. The second is the rise of nationalism and its challenges to multilateral relations. The third is increased instability and insecurity in countries dependent on exports in a stagnating global system. This last scenario has manifested in what Geopolitical Futures frequently refers to as the exporters’ crisis, which we first wrote about 14 months ago. In this Deep Dive, we give an update on the crisis’s geopolitical consequences for the most affected countries.
Foundation for Crisis
The origins of the exporters’ crisis lie in the economic recessions that the United States and Europe experienced due to the 2008 financial crash. These countries were major consumers of imported goods, especially low-cost manufactured products. At the time, China specialized in producing low-cost manufactured products, so its economy was directly and negatively affected by a decline in exports. China not only lost revenue from exports (which were critical to its economic model), but also lost markets at a time when its massive growth surge was already slowing due to structural reasons. These losses combined to slow China’s economy, which resulted in lower Chinese demand for commodities and goods in general. This ultimately led to commodity prices plummeting and a decline in global exports. The ripple effects have been felt throughout the world.
Prospects for recovery remain bleak in that the traditional go-to solution of “just increase exports” is not viable. Until now, the contemporary global economy generally operated under the basic assumption that a direct correlation exists between growth in trade and GDP. Free trade also is assumed to have been the way to increase these types of growth. In other words, exporters depend on importers to usher them out of economic hardship. The problem is that importers are simply not buying enough goods to offset the effects or end the crisis. Without the option of increased consumption by importers, exporters’ alternative relies on domestic demand to aid recovery. However, generating this demand is extremely difficult. Therefore, export-dependent countries will find themselves in crisis for as long as the global economy remains lethargic.
One-Year Update
In January 2016, Geopolitical Futures published a report identifying the countries most affected by the exporters’ crisis. The first part of the report listed the 10 most economically affected countries, regardless of what they exported. The second part identified the five countries most likely to become victims of the crisis. Countries were selected based on the contribution of exports as a percent of GDP, as well as exposure to commodity prices or to key markets such as China and Russia.
This Deep Dive revisits these 15 countries (with the addition of Kazakhstan), where the exporters’ crisis has had serious ramifications for nations that are regional leaders and strategic countries belonging to the periphery.
The 2017 list aims not only to identify victims of the exporters’ crisis, but also to stress the geopolitical changes that are taking place and the stability risks that are developing as a result. While numeric data will be incorporated to help track the intensity of the crisis in each country, anecdotal evidence also has been heavily incorporated. The latter is vital for painting a picture of potential unrest or emerging conflicts that cannot be captured in statistics alone.
We have divided our 2017 update into four categories: heavyweights, critical periphery, Pacific countries weathering the crisis for now, and African countries with potential for government regime change. The four heavyweight countries earned their titles because they are by far the most geopolitically significant players to be negatively affected by the exporters’ crisis. Each occupies the role of a regional power and has a large enough economy to create ripple effects in other nations’ economies. The second category, the critical periphery, includes countries that are not major geopolitical powers but could significantly influence or spark defining events. The fate of these countries matters due to their relationships with major powers; in each case, instability and economic collapse could trigger a new crisis or exacerbate existing ones for nearby regional powers. The last two categories are self-explanatory. A group of countries in the Pacific, or bordering it, is highly exposed to the exporters’ crisis but has yet to see the impact in full force. Finally, the African countries most exposed to the exporters’ crisis share the common potential consequences of serving as a catalyst for regime change after decades of consistent rule.
Heavyweights
China: In many ways, China’s economic boom in the 1990s and early 2000s helped drive the global economy. Its massive consumption of raw materials spurred worldwide production to meet the large demand. The country’s abundance of cheap labor and its stage of economic development also made it an ideal supplier of cheap, basic manufactured goods to the rest of the world. Fallout from the 2008 financial crash has now forced Beijing to normalize the growth patterns in its domestic economy and remedy drastic inefficiencies that had developed in the economy over the past two decades.
A Chinese worker loads steel tubes onto a truck at a logistics center in Lianyungang in east China’s Jiangsu province on Nov. 8, 2016. STR/AFP/Getty Images
The exporters’ crisis has laid the ground for potentially severe economic unrest in which China’s general population questions its relationship with the government. Severe wealth disparities between the interior and coastal regions have developed over the past two decades, and the government now faces competing demands from its population along regional lines. The threat of layoffs, while correcting inefficiencies, also serves as a fertile seed for potential unrest.
The country’s economic standing has worsened over the last year, and the Chinese government has taken several steps in an attempt to confront the exporters’ crisis. Steel capacity was reduced by more than 65 million tons, and coal capacity by over 290 million tons last year. As a result, an estimated 726,000 people lost their jobs. In 2017, production cuts and job loss are both expected to continue. So far, the government has effectively mobilized security forces to confront protests and deter future ones.
Russia: Russian territory spans the Eurasian landmass. As a result, Moscow’s geopolitical interests and area of action reach from Pacific Asia to the Middle East and Eastern Europe.
President Vladimir Putin and the Russian government have a precarious hold on power. Decreasing oil prices created an economic crisis that includes increasing wage arrears, localized banking crises, cuts to government spending and decreased purchasing power. This, in turn, precipitated social unrest. This unrest spread across Russia throughout 2016 and culminated in March 26 opposition marches across the country.
The government spent 2016 consolidating its power in anticipation of the country’s worsening economic problems. (Power consolidation has included replacing regional governors, creating a national guard and revamping both the organization and deployment of interior security bodies charged with maintaining public order.) Russia is projected to achieve 1.6 percent growth in 2017, which is not enough to provide relief for Moscow. At the end of 2016, Geopolitical Futures calculated that Russia needs oil prices to increase to $68 per barrel – well above the current $55 barrel price – just to break even on its budget.
Saudi Arabia: The Kingdom of Saudi Arabia is one of four contenders vying for regional power in the Middle East (the others are Iran, Turkey and Israel). Maintaining order domestically and in the Arab world is an imperative for Saudi Arabia, which also seeks leadership over Sunni Arabs. The growing alignment of American and Iranian interests has forced Saudi Arabia to increasingly take the lead in managing regional chaos instead of using its historical approach of relying on the U.S. for national security. In the past, Saudi Arabia’s petroleum wealth allowed the country to weather the anarchy spreading throughout the Middle East. That anarchy still reigns, but the kingdom’s ability to cope with it is now in jeopardy.
Saudi Arabia is the world’s largest exporter of oil, and oil revenue is hardwired into the kingdom’s political and economic system. For this reason, it has been among the countries hardest hit by the exporters’ crisis, which has worsened in the past year. The state is highly dependent on oil revenues, with the petroleum sector accounting for approximately 87 percent of its 2015 budget. Depressed oil prices in recent years have resulted in massive overhauls in government spending and practices. This included the kingdom’s debut in capital markets with a $17.5 billion bond issuance, a $20 billion cut in public sector benefits and the cancellation of $267 billion in planned development projects. Most notable are the measures to prepare the national oil company, Saudi Aramco, for an initial public offering that is expected to fetch an estimated $20-$100 billion. Considering that there is no culture of dissent, such bleak conditions are more likely to create a crisis of confidence within the political elite than force the public into the streets. Many in the royal family already are frustrated that the king’s inexperienced son has amassed disproportionate power.
Germany: Unlike the previous three heavyweight countries, the exporters’ crisis has not yet hit Germany. However, we have included it in this category both because of its importance to the global economy – Germany is the largest economy in the eurozone and the fourth largest in the world by GDP – and because of signs that the exporters’ crisis will likely hit some time this year. Germany’s economy is heavily dependent on exports, which account for 46.8 percent of GDP, according to the latest World Bank figures. The European Union has been the critical market for German exports, which have suffered due to stagnant growth in the region. The effect has been mitigated, to a degree, by increasing exports to the United States and China, but the increase is not enough to insulate Germany.
Amplifying the potential impact of the exporters’ crisis is the emergence of a German banking crisis. In the last year, the U.S. branch of Deutsche Bank, Germany’s largest bank, failed a stress test and earned the label “the most important net contributor to systemic risks in the global banking system” from the International Monetary Fund (IMF). Commerzbank, Germany’s second largest bank, announced that earnings had fallen by 5 percent in the last quarter of 2016. Bremer Landesbank also was rumored to need a bailout. Banking and exports meet in the shipping business, which integrates both trade and bank loans. Commerzbank expects its losses on shipping loans to be as high as 600 million euros ($639 million) this year, after losses nearly doubled last year to 559 million euros. Meanwhile Deutsche Bank’s 2016 losses on shipping loans nearly tripled from the previous year, to 346 million euros.
Critical Periphery
Azerbaijan: Located in the southern Caucasus, Azerbaijan sits at a crossroads of regional powers Russia, Iran and Turkey. The Caucasus region serves as a buffer that protects the Russian heartland from Turkish and Persian invasion. Historically, the Caucasus region has been a flash point for conflict between Russia and Turkey, and Iran and the United States are now interested in the area.
Azerbaijan fell victim to the exporters’ crisis due to its dependency on crude oil as a vital source of revenue. Fuel exports accounted for 87 percent of Baku’s merchandise exports in 2015, and total exports were 37.8 percent of GDP, according to the World Bank’s latest figures. The exporters’ crisis has intensified over the past year, resulting in a 2.4 percent economic contraction in Azerbaijan. In an effort to deal with the crisis’s effects on the domestic economy, the government cut funding for social programs, increased taxes, sold high-value assets, increased executive powers, and began to float the national currency. Despite marginal growth of 0.4 percent in the first two months of 2017, protests over economic hardship have begun to occur, and government opposition has started to appear.
Kazakhstan: Kazakhstan was listed in our 2016 report as susceptible to the exporters’ crisis, but not yet affected. Due to the country’s strategic location in Central Asia and its economic decline over the last year, we are including it in the updated version of this report. Kazakhstan is the largest Central Asian nation and acts as one of two buffer states between Russia and China. (The other is Mongolia.) Given the chaos engulfing Eurasia and the region’s geographic susceptibility to invasion, Geopolitical Futures’ model expects destabilization and crisis to take root in Central Asia.
Astana depends on hydrocarbon production as a major source of revenue. Oil and gas exports account for 76 percent of goods exports and roughly 18 percent of GDP. Oil and gas also provided just over 40 percent of the government’s revenues. The economy grew a mere 1 percent in 2016, and oil production declined from 79.6 million tons to 75 million tons. Throughout 2016 and into this year, Kazakhstan has experienced labor protests, particularly among oil workers, due to falling wages and unfavorable conditions. The government is also considering a $6.5 billion plan to bolster the banking sector, which is in the midst of a crisis.
Turkmenistan: In terms of geopolitics, Turkmenistan’s most significant borders are shared with Iran, Afghanistan and the Caspian Sea. Its Caspian coastline ties Turkmenistan’s energy projects to those of Russia, Iran and Azerbaijan. Furthermore, its shared border with Afghanistan also makes both Russia and the United States interested in the country’s security because of the potential for Islamic State expansion and possible spillover of jihadist and extremist activity.
Among Central Asian countries, Turkmenistan is the most susceptible to the exporters’ crisis because its economy centers on exporting hydrocarbons to one main buyer, China. Mineral fuels, oils and distillations account for just over 90 percent of the country’s total exports, of which 85 percent go to China. Furthermore, exports account for 70 percent of the country’s GDP, according to the latest figures from the International Trade Center’s Trade Map. Despite Turkmenistan’s high exposure to low commodity prices and lower Chinese demand for its exports, Turkmenistan’s GDP grew 6.2 percent in 2016. This sounds promising at first glance. However, the figure is significantly lower than the 14.1 percent growth rate registered five years earlier. In the second half of 2016, reports of food shortages, Cabinet changes, and civil servants not being paid on time indicate that the crisis has worsened in the last year.
Mongolia: Like Kazakhstan, Mongolia is a buffer state between Russia and China. In the past 25 years, the country has become of increased strategic interest to both Japan and the United States, especially after the void that was left by the Soviet Union’s fall. The U.S. and Japan are allies, and they share a common mistrust of and antagonistic relationship with both China and Russia. Tokyo and Washington both see good relations with Ulaanbaatar as an opportunity to influence a nation that borders two countries they would like to keep in check. While there are many ways to achieve this influence, the more options that are cultivated to do so, the better.
Mongolia’s susceptibility to the exporters’ crisis stems from its relationship with China and its dependency on mining as a main economic activity. According to the World Bank, 45.7 percent of the Mongolian economy is made up of exports. The biggest products in its export markets are copper ore at 45 percent, gold at 16 percent, and iron ore at 11 percent. Much of these exports go to China, which comprise 75 percent of Mongolia’s total trade. The country managed to grow 1 percent in 2016 and appears to have weathered the crisis so far. While some mining projects did experience delays last year, there are no reports of massive protests in Mongolia. Since the start of 2017, however, small protests have contested air pollution and cuts in government subsidies for herders and farmers.
Nigeria: Nigeria is the most populous country in Africa and is home to the region’s largest jihadist group, Boko Haram. Though based in Nigeria, the group has pledged allegiance to the Islamic State and can orchestrate attacks outside Nigerian borders. Maintaining stability and economic viability in Nigeria is necessary to conduct effective operations against this group. Violence in the Sahel causes local populations to flee north and eventually into Europe, which already faces a refugee crisis.
Oil accounts for about 90 percent of Nigeria’s export revenue. Nigeria was Africa’s leading oil exporter until it was overtaken by Angola in 2016. Last year, Nigeria experienced its first recession in 25 years when the economy contracted by 4.4 percent from 2.7 percent growth in 2015 to -1.7 percent. Other economic consequences that directly affect the Nigerian population include the emergence of a parallel currency market, decreased food imports, an 8-point rise in inflation in 2016 (to 18 percent total) and a 4 percent rise in unemployment to 14 percent at the end of 2016. Protests over high food prices have already begun, and the crisis is expected to worsen.
Pacific Countries Weathering Crisis
South Korea: Since its independence, South Korea has maintained a defense relationship with the United States to guarantee its protection from both China and North Korea. Over time, this relationship with the U.S. has also yielded technology and skills transfer as well as foreign aid and investment. This rapidly transformed South Korea into a high-income country with the world’s 11th largest economy. In turn, South Korea provides the United States with military and security cooperation in the Pacific to protect U.S. interests in both shipping lanes and containing China.
South Korea’s vulnerability to the exporters’ crisis lies in its dependence on China as the largest market for its exports. South Korea exports nearly half of its GDP, making its economy susceptible to a decline in global demand for goods. In 2016, South Korean exports fell by 5.9 percent, driven primarily by integrated circuits, automobiles, refined petroleum and ships. In addition to decreased Chinese imports, the combination of low oil prices and overall weak global demand has decreased demand for container ships and slashed South Korea’s profits from petroleum exports.
Domestic political instability, rather than the exporters’ crisis, has caused economic uncertainty in the country. Allegations of corruption among the “chaebols” (South Korean business conglomerations), which account for an estimated 75-80 percent of the country’s economy, as well as impeachment proceedings and domestic structural issues including high youth unemployment have come to the forefront of South Korean politics.
Taiwan: Taiwan is located 110 miles from the Chinese mainland, separated by the Taiwan Strait. Beijing has seen Taiwan as a breakaway province since Mao Zedong’s 1950 victory in the Chinese Civil War. However, both Taiwan and China consider themselves the rightful governors. They square this difference with the concept of “One China,” a rhetorical trick concocted during the administration of U.S. President Richard Nixon in 1972. “One China” allows countries seeking diplomatic relations with one of the nations to deny the other’s existence. Though the U.S. does not officially recognize Taiwan, the two have a formal military alliance meant to protect Taiwan against any Chinese attempt at a forceful takeover.
Despite frosty political relations between Taipei and Beijing, China and Hong Kong are Taiwan’s largest trading partners. Taiwan is heavily dependent on exports, which account for over half of its GDP. Approximately 40 to 50 percent of these exports go to China and Hong Kong. Decreased demand from Taiwan’s trading partners caused its GDP growth to decline to 1.4 percent in 2016 from an average annual growth of 4.4 percent between 2008 and 2015. Despite this downward trend, Taiwan’s unemployment rate has remained low, at 4 percent. However, the Taiwanese government has aggressively moved to counter the economic slowdown, announcing in March 2017 an eight-year stimulus plan. The plan, valued at $29 billion, aims to boost the Taiwanese economy in conjunction with the newly elected president’s plans to improve green energy and infrastructure and encourage innovation. For now, Taiwan has managed to deal with the exporters’ crisis rather than fall victim to it.
Chile: Chile is isolated by the Pacific Ocean to the west, the Andes Mountains to the east, and the intense Atacama Desert to the north. Therefore, it remains rather isolated from most of its South American neighbors and must look globally, especially across the Pacific, for export markets. Approximately 30 percent of Chile’s GDP is made up of exports, with copper and iron ore comprising approximately half of all exports. Chile depends on China, which receives 28 percent of Chile’s total exports and is by far its biggest trading partner, as a market for its copper and iron ores. Chile also trades heavily with the Pacific Alliance, a trade bloc consisting of Chile, Colombia, Mexico and Peru.
Copper prices have increased since the last exporters’ crisis update, from about $2 per pound in early 2016 to $2.65 now. The average cost per pound of copper production in Chile was approximately $1.30 in 2016. (The cost per pound varies depending on the mine’s location.) That leaves some profit available for copper miners. For now, Chile has managed to weather the crisis of low commodity prices, but it is still susceptible to any potential declines in copper prices spurred by a drop in demand from China.
Australia: Australia is a critical United States ally in the Pacific. It relies on imports and exports for survival and needs the U.S. Navy to ensure safe passage of cargo through Pacific straits and waters. In return, Canberra supports Washington’s interests in a variety of ways, most notably by committing troops to U.S. military operations.
Australia remains a borderline case in terms of whether it is being affected by the exporters’ crisis. Approximately 20 percent of its GDP is generated by exports. Of these exports, 54 percent were either ores or mineral fuels in 2016, making the economy heavily vulnerable to fluctuations in commodity prices. Australia was able to withstand the pressure from declining commodity prices and demand for imports in 2016 by increasing exports to the United Kingdom. Ultimately, however, Australia cannot continue to grow exports to the U.K. at a rate that will offset its declining exports to larger markets, such as China and Japan. Individual purchasing power has declined in Australia despite a growth in GDP. This decline has sparked a concern of greater problems to come among some economists. For the moment, however, the country is not experiencing strong effects of the exporters’ crisis.
African Nations and Government
Angola: Angola is now the largest oil exporter in sub-Saharan Africa. Its position in Western Africa has made it of strategic interest for Eurasian powers – such as Russia during the Cold War and China in contemporary times – to gain a foothold in lands adjacent to the Western Hemisphere. Having a strong presence here not only provides strategic reach into the South Atlantic Ocean, but also serves as a source for oil.
Approximately 34 percent of Angola’s GDP comes from exports, of which crude oil comprises 91 percent. Angola’s largest market is China, which makes up 42 percent of total exports. This makes the country double-exposed to the exporters’ crisis, both in terms of declining value and declining volume of its main export. In 2016, Angola’s GDP decreased from 3 percent growth in 2015 to 0.4 percent. Additionally, inflation doubled in 2016, finishing the year at 40 percent. The IMF expects public debt to exceed 70 percent of GDP in 2017. Angola’s Soviet-educated president, José Eduardo dos Santos, has declared his intentions of stepping down after 37 years in light of the worsening economic situation, though the opposition is skeptical that this will happen. If the economic crisis forces his resignation, Western nations and powers will have more space to enter, participate in and influence the Angolan economy and extend Atlantic security guarantees further south.
South Africa: South Africa is the most developed economy in sub-Saharan Africa, and its economic development and success have set the benchmark for the rest of the region’s emerging economies. Its location at the southern tip of the landmass gives it access to both the Atlantic and Indian oceans, although its southern latitude reduces this advantage to an extent.
South Africa’s economy began to turn downward in 2009, immediately after the financial crash. The exporters’ crisis further exacerbated problems in an already weak economy. South Africa’s GDP is composed of exports, predominantly precious metals, iron ore and coal. Its biggest trading partner is China, but its exports are diversified across a number of countries.
In 2016, the exporters’ crisis began to transcend the economy and manifest in the political sphere. The African National Congress (ANC), South Africa’s governing social democratic political party, has often been criticized as being archaic and for abusing its monopoly on power. This criticism finally bore out in August 2016 elections in which the ANC lost its political hold on Pretoria and only won a plurality in Johannesburg. Mining, student and general labor unrest persisted throughout the year. President Jacob Zuma’s government now faces an internal crisis amid a lack of support from its ANC party and calls for all major government officials to step down.
Zambia: Of all the countries on this list, Zambia has the least geopolitical weight. In part, this is because the country is landlocked and therefore faces inherent geographic barriers to economic development via direct trade routes. The country’s conflict-ridden northern borders along with Zambia’s size – including land, population and economy – are inferior to its more powerful neighbor Angola.
Zambia exports approximately 37 percent of its GDP and is the second largest exporter of copper behind its neighbor, the Democratic Republic of Congo. From the early 2000s through 2014, foreign investment – especially from China – flooded into the country. Once the effects of low copper prices took hold in Zambia, however, financial and subsequent political crises followed. Protests erupted in August 2016 as opposition supporters contested the government’s victory after the announcement of election results was delayed. The popular rejection of the government was blamed on rising poverty and problems with copper prices and exports.
Conclusion
The exporters’ crisis can be solved in one of two ways. The first is if an affected country uses domestic demand to replace foreign consumption. The second is if global growth resumes and thus spurs exports. The former is particularly difficult. Most exporting nations do not have population or consumption levels to replace exports lost to countries like China. As for global growth, the latest IMF report projects global GDP growth for 2017 at 3.4 percent, with emerging markets growing 4.5 percent and advanced economies growing at only 1.9 percent. Geopolitical Futures has stated that global growth – and especially developed economies – need to surpass sluggish levels. Growth needs to be at 2 percent or higher for trade to have an impact on the exporters’ crisis. At these levels, the exporters’ crisis will not inherently worsen in 2017. Rather, the status quo is likely to be maintained since global growth levels will prevent the crisis from deteriorating. But they will be far from high enough to spur large-scale, rapid recovery.
