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On NAFTA, US Engagement in the Middle East, and the China-Japan Competition

Checking the pulse of our annual predictions, every two weeks.

Forecast Tracker

GPF Staff |August 9, 2018

We start this week’s installment by calling your attention to something we underestimated: the domestic turmoil in Iran. We (rightly) expected Iran to attempt to fill the vacuum created by the Islamic State’s defeat by building an arc of influence through the Arab world and into the Mediterranean. We failed to predict how badly the strategy would stress the Iranian public – and how much U.S.-led countermeasures would aggravate the situation. Our forecast on this issue can best be graded as “incomplete.” How Iran handles newly imposed sanctions will tell us whether we whiffed completely or were right not to pay attention to internal Iranian political drama. As always, we’ll let you know.

Until then, we present you with three very different forecasts this week. They include updates on NAFTA, the budding competition between China and Japan, and the way in which the U.S. would engage the Middle East. As you may have noticed, Europe has been conspicuously absent from the first three installments of the Forecast Tracker. That’s only because it’s summertime and the living is easy in Europe. Expect forecast coverage of European affairs to pick up in September once leaders are done vacationing. Overall, the 2018 GPF forecast is performing decently, but as this week’s tracker will show, there is also room for improvement.

And now, without further ado, to the tracker.

Jacob L. Shapiro, director of analysis


From the Forecast: “NAFTA negotiations are ongoing, but the probability of the trade deal ending and tariffs being restored is extremely low. All parties need the relationship. In the U.S., too many states benefit from trade with Mexico or Canada. Mexico is the top export market for California and Texas, which means the two largest congressional delegations are opposed to ending NAFTA. Regardless of what the president wants, the deadlock holds.”

Update: It has been a rollercoaster year for NAFTA. Granted, most multilateral negotiating processes are susceptible to political vagaries, but NAFTA is especially so. In April, it seemed there was momentum for a deal to be struck. But by the end of May, that momentum was dead in its tracks. And it’s easy to see why. Mexico’s general elections in July threatened to bring a new voice to the negotiating table – one that might not go along with previous accommodations. The specter of U.S. midterm elections also began to haunt the negotiation process. Washington levied steel and aluminum tariffs without guaranteeing exemptions for its NAFTA partners. And Canada rejected an ultimatum issued by the U.S. on a stipulation that any deal reached would expire in five years.

Now that the negotiation hiatus is over, there is renewed momentum for a possible agreement in the next few months. The election of Mexican President Manuel Andres Lopez Obrador has not become the obstacle many believed it would. In fact, AMLO is working with the current Mexican administration on the trade deal and has suggested that any deal reached by Dec. 1 would be honored by his administration, removing a lot of the uncertainty surrounding U.S.-Mexico relations. On July 26, Mexico’s economy minister noted that he had “very positive” and “constructive” talks with the U.S. trade representative after the two sides restarted negotiations.

Since then, things have progressed relatively quickly. Reports suggest the U.S. and Mexico are much closer to a deal on one of the most contentious issues for both sides – new rules of origin on auto trade – though that still leaves difficult decisions to be made on dispute resolution and the sunset clause that helped derail negotiations in May. Despite these outstanding issues, Mexico’s economy minister has even suggested that Mexico and the U.S. may have solutions by the end of this week. Canada, which has sat out this round of negotiations, has said it is ready to resume talks once the U.S. and Mexico have resolved their issues. Canadian officials, including the ambassador to Washington, met this week to discuss strategy toward that end.

This is not to say the process will be easy. But it’s in no party’s interest to kill the trade agreement outright. Powerful political constituencies in each of the three countries want the talks to succeed, and all indications point to that happening before the end of the year as we anticipated.


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From the Forecast: “If the U.S. is unable to shape East Asia to its liking, preoccupied as it is with its domestic problems, then something will have to replace it as the center of gravity. That something will be the coming conflict between China and Japan … For the first time in centuries, Beijing and Tokyo are both strong – just not quite strong enough to dominate the other. Competition between them is therefore inevitable. In fact, it would have happened sooner had not the U.S. alliance structure after World War II been created to maintain the status quo in the region … now the U.S. is pulling back, looking to see what the return on investment is for the relationships it has put so much into. For the first time since 1945, Japan must consider the possibility that living under the U.S. security umbrella is not enough to guarantee Japanese interests.”

Update: Last December, we made the case that Japan and China would enter a more competitive period in their relationship this year. The jury is still out on this one. Though there is plenty of evidence that China and Japan are indeed competing, there is an almost equal amount of evidence suggesting the opposite is true. More important, their bilateral relations are not being defined by the forces we thought would define them. Tension with the U.S., especially on trade, has in some ways brought Japan and China together. Their interests will remain somewhat aligned until China starts competing on the global stage with Japan for higher value-added industrial products. For now, though, Japan is as small a fan of U.S. protectionism as China is.

The developments of the past few weeks exemplify the forecast’s overall performance this year. On the one hand, China signaled it would welcome Japanese participation on some of the infrastructure projects Beijing has billed as part of its ambitious One Belt, One Road initiative. On the other, Japan has scrambled fighter jets to intercept a Chinese spy plane and launched its first Aegis destroyer fitted with a new, advanced anti-air system. Early reports of optimism for Japan-China relations – a nearly annual tradition at this point – have given way to the usual squabbles about territorial disagreements in the East China Sea. None of this is new; it’s just the continuation of a much longer-term trend playing out.

Theirs is a complicated relationship, and while their interests differ on issues like North Korea and territorial claims, they align on issues like economic linkages and trade. (Indeed, boosting economic cooperation may be a way for Japan to prevent China from gaining too much influence in the region.) None of the evidence we’ve collected so far suggests ties are definitely broken or fully repaired. Rather, it corresponds to a status quo in which specific disagreements are contained before getting out of hand. The long-term fundamentals of our forecast therefore remain in place even though we have not seen the level of competition we expected thus far this year.


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From the Forecast: “The U.S. has two interests in the region. One is to ensure that Sunni jihadist groups stay relatively powerless. The other is to prevent any country in the region from controlling the entire region. Threats aside, Washington will try to minimize the use of direct military force in pursuit of these aims. … This leaves the U.S. in a tough spot. On the one hand, Iran will probably be more successful at suppressing Sunni jihadists than the U.S. has been. On the other hand, in the long run, a consolidated Middle East under Iranian control would evolve in unexpected and dangerous ways, all of them almost certainly hostile to American interests. Therefore, U.S. policy is likely to focus on encouraging Turkey and Israel to work together while providing as much assistance to them as possible, all while looking for reliable partners in the divided Sunni Arab world.”

Update: Let’s start with where we’re on track. The U.S. is indeed courting Sunni partners in the Arab world. The U.S. is closer to Saudi Arabia in the Trump administration than it was during the Obama administration and has recently upped the pressure on Iran. But our forecast falls short because Washington has failed to organize a coherent Turkish-Israeli-U.S. bloc to cooperate in the region.

Much of the failure is due to a deterioration of U.S.-Turkey relations. The U.S. has levied sanctions against two Turkish individuals related to the detainment of a U.S. pastor in Turkey. Washington also passed a bill prohibiting the sale of F-35 fighter jets to Turkey. Turkey has retaliated against the sanctions. Aksam, a pro-government newspaper, also raised the possibility that Turkey might reconsider U.S. military bases in the country. According to the report, Turkey’s foreign minister brought this up in a meeting with U.S. officials on Aug. 3. There has been no confirmation of this threat, and in the past such rumors have usually turned out to be overblown – but that is the major tripwire in bilateral relations.

For the purposes of this forecast, it’s immaterial whether Turkey and the U.S. reconcile their differences. The larger point is that so far in 2018, we were wrong that one of the primary U.S. moves in the region would be to stitch together a partnership between three former Cold War allies against (a Russia-backed) Iran. Turkey is instead conducting its affairs more pragmatically, balancing between Iran and Russia while pushing back against what it considers unrealistic expectations from the U.S. about how subordinate to Washington it is supposed to be. Right now, neither Turkey nor Israel are especially interested in cooperating with the other, and it doesn’t seem that Washington can compel them to change their minds. There is little reason to believe, then, that our forecast will prove out in the remaining four months of the year.


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