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A Trade War Heats Up

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

Forecast Tracker

Jacob L. Shapiro |July 13, 2018

Editor’s note: The following report is our first Forecast Tracker, a biweekly checkup on the health of our annual forecast. We track its status in the normal course of our operations anyway, so we figured now was as good a time as any to share with you, our readers, the process by which we hold ourselves accountable.

First, a note about the graphics. The inputs are events that have happened in the world, many of which were the subject of separate analyses. (Example: Donald Trump and Kim Jong Un met for the Singapore summit.) We assess every event by giving it a letter grade relative to what we predicted, and plot it on our chart. The trend line approximates the trajectory of our forecast. Is it perfect? Certainly not. But in forecasting, deviation is the norm, and as soon as the situation changes, so too will our forecast.

We hope you enjoy this new feature, and please, as always, let us know what you think.

In the past two weeks, hostilities in the U.S.-China trade war escalated from token potshots to a major offensive. President Donald Trump’s administration is not the first to threaten China, of course. Several of its predecessors did, and some of them even made good on their threats. But they tended to enact isolated measures, often as negotiating tactics to net larger concessions in more strategic proceedings. Trump’s administration means to change the nature of the trade relationship entirely – only insufficient executive power and that pesky North Korea crisis prevented him from doing so. We predicted that 2018 would be the year the U.S. would move forward on these issues, and that forecast is playing out. The issue of executive power has, at least for now, been bypassed by the Commerce Department, and the North Korea issue has been put on ice.

The opening salvo was so small as to be meaningless. The U.S. imposed tariffs on $34 billion worth of Chinese goods, and China responded with countermeasures on a reciprocal amount of U.S. goods. That is a pittance when compared to U.S.-China trade overall; $34 billion represents just 8 percent of Chinese exports to the U.S. and just 1 percent of total Chinese exports. On July 11, though, the U.S. took the first step toward a much larger conflict by announcing plans for a new 10 percent tariff on $200 billion worth of Chinese goods – just under half of total Chinese exports to the U.S. in 2017 and 9 percent of China’s total exports.

China is battening down the hatches for an extended fight, censoring media coverage of trade issues, and pushing new and explicitly Marxist ideological understandings for the future of U.S.-China relations. In this regard, our forecast is on track. We now need to understand what the consequences will be for U.S.-China relations, China’s stability and the rest of the world.

Moving west, we note that one of our longer-term forecasts – the untenability of Germany’s economic position – is mostly on track. We did not predict any cataclysmic developments in Germany this year, and though it came close to dissolution in late June and early July, the German government managed to survive. Likewise, the economy is beginning to show signs of weakness but does not appear to be in any real danger anytime soon. Still, the political drama of the past few weeks underscores the fragility of Chancellor Angela Merkel’s government and thus Germany’s weakness. It also affects every facet of our 2018 Europe forecast, which predicted a continued deterioration of the EU and increased competition between nations inside the bloc.

The Middle East is in something of a holding pattern. Our forecast that Iran would attempt to fill the vacuum left by the collapse of the Islamic State has proved accurate so far. But we may have underestimated the intensity of the domestic unrest in Iran, as protests that began in January continue to break out in strange and unexpected ways. Despite the unrest, Iran keeps pushing forward, and now the hammer is falling on southern Syria. The Syrian army, backed by Russia and Iran, is trying to neutralize one of the two remaining rebel strongholds in the country. Israel, Turkey and the United States are following developments here closely, as all have committed forces to operations inside Syria in recent weeks. In two weeks, when we publish our next Forecast Tracker, a new phase of the Syrian civil war may have begun, sparked by Iran’s desire to secure Bashar Assad from even minor threats.

We end by noting a development we did not see coming but are starting to pay more attention to: Australia and New Zealand are taking a more active role in curbing Chinese expansion in the South Pacific. In our defense, we did predict increased cooperation among what’s known as the “Quad,” an informal grouping of Japan, the U.S., India and Australia. And we did predict the way some of these countries would shadowbox in the Indian Ocean and the South China Sea. But we did not predict what’s happening in the South Pacific, and that may have been a mistake.

With that in mind, let’s see how our 2018 Forecast is faring by looking at the trends that saw the most action.


From the Forecast: “There are significant issues between the U.S. and China on trade and monetary policy that were postponed as the U.S. tried to induce China to intercede in the North Korea crisis. Talks on these issues will resume in 2018, and they’re too important to the U.S. for Washington to let whatever happens in North Korea disrupt them again.”

Update: China followed through with countermeasures against U.S. tariffs. An independent refinery in China also stopped importing U.S. oil, corroborating reports that China may target U.S. energy imports. The Trump administration also announced new tariffs on $200 billion worth of Chinese goods.

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From the Forecast: “Russia has been somewhat isolated from the rest of the world since 2014, when it responded to the Ukrainian revolution by annexing Crimea and supporting uprisings in eastern Ukraine … Russia cannot afford to be isolated any longer. It has almost spent all the money in its Reserve Fund, and it must begin the process of economic transformation now if it is to have a chance of taking root. Put simply, Russia needs to rejoin the world. It is open to compromises as long as the compromises don’t make Russia appear weak. Appearances are more important than ever for Russia as it manages difficult times at home.”

Update: Trump’s meeting with Putin next week will have major ramifications for this forecast, one of our most important for 2018 and one that had seemed off-track. Now the trend line for that forecast is edging slightly positive, but the fallout from the Trump-Putin summit will offer more definitive conclusions. In the meantime, even if Russia’s intentions are not yet clear, Russia is ready to talk. Russian officials said Moscow was prepared to normalize relations with the U.S., and it said it was amenable to any country’s ideas on the Syrian constitutional committee. Granted, these are just words, not actions, but considering how important it is for Russia to save face, they shouldn’t be dismissed.

Still, when we say Russia is open to compromises, we don’t necessarily mean surrendering something to the U.S. or the EU. (Relations are still frayed, and the EU just extended sanctions on Russia for another six months.) Russia can just as easily back off other issues with other countries. And indeed, that is exactly what it has done in resuming negotiations with the Syrian opposition and in ending its milk war with Belarus.

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From the Forecast: “The cold logic of geopolitics dictates that the U.S. will not attack North Korea. The U.S. would recognize North Korea’s pursuit of nuclear weapons as defensive, not offensive. The U.S. would know that North Korea would not use its nuclear weapons because using them would trigger a counterattack and thus ensure its own demise. The U.S. would assemble a coalition of partners to isolate and manage North Korea while creating a nuclear deterrent just strong enough to persuade Pyongyang to never use the weapons it has spent so long pursuing … But the North Korea crisis does not strictly abide by the cold logic of geopolitics. It is unclear whether Trump would have enough support to authorize a military strike against North Korea if he wanted to. The North Korea crisis is notoriously difficult to predict, but in this context, the status quo is the most likely outcome.”

Update: U.S. Secretary of State Mike Pompeo’s recent visit to Pyongyang exposed the political divisions in both the U.S. and North Korean governments. In doing so, it confirmed our suspicions that North Korea has no intention of abandoning its nuclear program anytime soon. Pyongyang’s plan is to bait the U.S. into a protracted negotiation over minor, peripheral issues, while stonewalling U.S. demands for rapid unilateral denuclearization. And since no one really wants to go to war, the U.S. has little choice but to follow North Korea’s plan. Meanwhile, new reports show that Pyongyang has continued to expand nuclear facilities and to develop its submarine program. The U.S. and Japan have committed to keeping sanctions intact, but the pressure to maintain Chinese sanctions is weakening.

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From the Forecast: “The task of containing Iran will thus fall to Turkey and Israel, the region’s major non-Arab powers. Both have a similar problem: They’re uncomfortable with the growth of Iranian power, but they’re also worried about the fragmentation of the Arab world and the rise of terrorist groups. They have neither the desire nor the means for an extended military conflict with Iran in all three areas of the proxy war – Syria, Yemen and Lebanon – in which it has substantial influence, and tackling just one area doesn’t solve the problem.”

Update: Turkey continues to lash out against Israel, but the government in Ankara has not yet taken any meaningful action against it. Jordan, the Palestinian territories and Saudi Arabia reportedly all warned Israel about Turkey’s regional ambitions – a sign that Israel is growing wary of Turkey’s presence, not more inclined to work with it. In short, there have been no explicit signs of frayed relations between the two, but neither is there much evidence of enhanced cooperation.

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From the Forecast: “Subtle but more important developments, meanwhile, will take place in and around the Horn of Africa, which includes Somalia, Ethiopia, Djibouti and Eritrea. It … has become coveted real estate for aspiring powers such as Iran, China, Turkey and India, and it retains every bit of its importance for more established powers like the United States, Russia and Europe. The competition for this prize will intensify in 2018 as Iran, China, India and the U.S., which have been only modestly interested in the area heretofore, dedicate more resources toward military, trade and political ties there.”

Update: In the past few months, China has expanded its facilities in Djibouti, and Ethiopia has begun to assert itself in the region, brokering a peace between the Sudans and attempting to resolve its own conflict with Eritrea. Iran condemned a terrorist attack in Ethiopia, and though it is deeply involved across the Bab el-Mandeb in Yemen, it has yet to involve itself in the Horn of Africa. To be sure, there is a competition materializing in the region, but it features countries like China, India, Iran and the U.S. less than we thought it would. Historically, competition between Red Sea littoral states almost always draws in distant powers. This time is somewhat different, at least for now.

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