The Sign of the Times’s final Leader of the year provides a window onto the coming year. As in previous years, the paper presents the key themes or events with the potential to shape the world, markets and lives during the next 12 months and beyond. 2019 promises to be as turbulent a year as 2018 has been, which has seen a US government shutdown, senior US cabinet member departures, a US-China trade war. At this transition from the old year to the new, we would like to pause and examine more closely ten events in the coming year that will have a potentially significant impact on peace, prosperity and happiness around the world. The context is that of the world in the throes of several transitions, the decline of the western liberal order, the shift from industrial to information-based economies and societies and the geopolitical realignment arising from the decline in the West relative to China’s and other emerging markets growth. As a result, international institutions, nations, governments, corporations and individuals are suffering the overthrow of widely accepted rules and conventions which look set to continue to transform the world order. While it is uncertain what the cumulative impact of these changes on the world might be, it is clear that they represent fundamental risks to growth and stability and that the changes they are ushering in are set to be a painful one as irreconcilable division seems to be the norm within and across nations and communities, Accordingly, this month’s Sign seeks to identify the key events that look set to shape 2019 as well as the competing world views that are shaping them, and to draw out the potential implications for the year ahead. Wishing you a prosperous and happy 2019!
10 Key Issues Shaping 2019
- India’s 2019 General Elections: Decisive Victory vs Fractured Electorate
- The US – China Trade War: A Rebalanced Trade Order vs Economic Warfare
- The Trump-Russia Investigation and The Impact on US Legislative Agenda
- Brexit: Hard vs. Soft Exit (or Not)
- Realignment in the Middle East: Saudi Hegemony vs. Regional Rebalancing
- US Troop Withdrawals: Isolation and Escalation vs. Structured Engagements
- 2019 UN Climate Change Summit: New Leadership vs. Breakdown of Global Consensus
- North Korean Nuclear Disarmament: Engagement vs. Containment
- The Onset of Gene Editing Therapies: Acceleration of Acceptance vs. Unresolved Debate
- Russia in Ukraine: Further Escalation vs. Rapprochement
1. 2019 Indian General Elections
Potential Outcomes and Implications
Trajectory Set or Fork in the Road. The outcome of the 2019 election could play an important role in shaping India’s trajectory going forward. The country’s economic recovery and re-emergence since 2013 has been driven by a combination of strong macro-economic fundamentals, and the passage of a number of important reforms by a government with a strong majority and an aligned legislative agenda.
Coalition, but How Restrictive? If the BJP successfully replicates its success from 2014, it could build on its achievements over the last five years and potentially address some large-scale reforms (such as amending labour or land acquisition laws) and set India on the path towards double-digit economic growth. A decisive victory for a Congress Party, promising to learn from the mistakes of their last term in government, could yield similar benefits for the country and depending on the strength of whoever emerges as their leader and how the party organises its manifesto and legislative agenda. There is also a distinct possibility of a split mandate with a coalition government, and the Congress Party’s pre-poll alliance already consists of a number of regional parties. The BJP will no doubt look for a repeat of its decisive victory from 2014, but if it does fall short of an absolute majority, it may still be able to form the government with support from regional parties.
Growth Looks Set to Continue, Following a Bump in the Road. Both scenarios in a split mandate could increase the risk of short-to-medium term policy uncertainty with political parties jostling for power, and while India’s economic growth should remain robust in the medium-to-long-term due to its macro-economic fundamentals, a failure to implement key reforms due to political uncertainty could be the difference between 6-8% annual GDP growth and 8-10% annual GDP growth. This looks like a “high class” problem relative to the growth challenges of the developed world and other emerging markets, but India has in previous decades managed to mire itself in its internal affairs to the detriment of its people and the international community. The third scenario of a bump in progress, where a coalition learns to work or break-up and re-form, before stability seems remote but should not be ruled out.
2. The US-China Trade War
Potential Outcomes and Implications
Trade War Ongoing with Proxy Conflicts. The current truce by the US and China has clearly not seen a cessation of trade hostilities, but a shift to proxy conflicts and actions that threaten to derail any bona fide progress on the key issues being discussed. The arrest of Chinese telecom equipment company Huawei’s CFO in Canada and potential extradition to the US for her company’s alleged Iran sanctions violations can be seen as an example of a US proxy move (at a cost to its proxy Canada, which has seen its own citizens detained in China as a result) , while the injunction banning Apple from selling its recent iPhone models in China (ironically based on a filing by another US company, Qualcomm) is an example of a Chinese counter-move.
Likely Outcomes Driven by US End Game(s). If the conflict is tactical or designed to achieve a one-off reset, trade negotiators will be empowered and able to overcome the distractions of proxy wars and 2019 will see a reduction of uncertainty and volatility as a trade deal calms global markets and reaffirms the core principles of the global trade order, while addressing some of the West’s concerns about China’s unfair trade practices. Should however, the US be playing a longer game of containment, 2019 is likely to see a significant escalation of conflict: with China’s direct exposure to the current tariffs limited to 4% of its GDP, the US will need to continue to turn up the heat, with potentially significant market and trade repercussions across the world, driving further volatility and uncertainty and creating collateral damage for both the US and its allies.
Domestic Priorities Driving Pace of Engagement, but a Long-Term Strategic Play has Begun. The alternative view is perhaps a cynical one in which the strategic containment of China is a legitimate high priority concern of the Trump Administration but winning the next election is more important and so no meaningful progress can be expected to be made until it serves the political purpose of showing the deal making capability of the president and so a series of “fake” deals can be expected before a “real” win is declared very close to the next US general election. Whatever is the short-term outcome, this initial containment and management of China’s rise looks set to be a cross-party and cross-presidency strategic objective.
3. The Trump-Russia Investigation and the US Legislative Agenda
Potential Outcomes and Implications
Baseline of Disruption and Controversy, as per the Promised Mandate. In his first two years in office, President Trump was able to play to his base and aggressively drive his ‘America First’ agenda , including on tax, trade, immigration and judiciary. This was particularly dramatic in the nomination of conservative judges who tilted the balance of the Supreme Court and federal courts, which was achieved without any serious congressional checks due to the Republican’s control over both houses of congress. Even with this level of political strength, the White House has been enveloped in near ceaseless controversy due to the ongoing Russia probe and its disclosures, constant turnover in senior officials and because of the President’s own tendency towards making controversial statements, and of course his ongoing war with the press.
Challenges Creating Potential Stalemate and Raising the Stakes. Facing what is now a far more hostile political environment, as evidenced by the recent very public confrontation with congressional leaders over a potential government shutdown, President Trump will encounter difficulties in passing any major legislation during the remainder of his term. Further, recent guilty pleas by his personal lawyer Michael Cohen and former-time campaign manager Paul Manafort (among others) appear to indicate that Mr. Mueller’s probe is reaching an inflection point and coming closer to the President’s inner circle (including his family) and himself, and with Democrats poised to re-open the congressional investigation into Russia, the administration may face existential challenges. Depending on the actions of the Democratic and the result of the Mueller probe, President Trump may find himself either boxed in and compromising with the opposition across a range of issues or bound into a corner and lashing out by firing up his base in an even more divisive manner than in the past in order to survive.
Electoral Politics Likely Drive Pace of Engagement. The alternative view here is also perhaps a cynical one in which the containment of President Trump is a legitimate high priority concern of “the resistance” and winning the next election is even more important and so no meaningful progress can be expected to be made on the Russia investigation until it serves the political purpose of undermining the president and so a series of “showpiece” confession and convictions can be expected to continue before a “real” win is declared very close to the next US general election.
4. Brexit
Potential Outcomes and Implications
Significant Economic Downside Under All Scenarios for Foreseeable Future. A “hard” Brexit may provide the country with the ability to implement tougher policies on immigration and border controls in the short term but would only be sustainable if it could fill the exiting migrant labour with productive local labour that enabled it to maintain its international competitiveness. The government’s own estimates indicate that a hard Brexit would severely handicap the UK economy for the foreseeable future, with GDP estimated to decrease by 5-9% over the next 15 years on account of the country’s withdrawal from the single trade market. In contrast, a “soft” Brexit would limit the economic blow to the country, with GDP forecast to decrease by a more moderate 3-4% over 15 years, but at the same time bind the country to a series of trade and customs regulations that it would have no say in going forward.
Increasing Risk of ‘No Deal’. In the event that Mrs. May is unable withstand the challenge to her leadership or build the internal consensus required to finalise a Brexit deal with the European Union, the country currently would still be required to leave the EU in March 2019. This “no deal” scenario could prove to be even more catastrophic for the UK than the “hard” Brexit would be, as the country would not only lose access to the single-market, but also no longer benefit from a 21-month transition period that has currently been envisioned by all parties. As a result, businesses, consumers and government bodies would have to adapt almost immediately to the country’s withdrawal from the EU, and the ensuing uncertainty could result in the UK economy shrinking by up to 8% in 2019 alone.
Structural Downgrade Likely given Lack of Credible Positive Options for the UK Post-Brexit. All three scenarios – the “hard”, “soft” and “no deal” Brexits – seem to indicate a UK that would fall from its pre-vote position in Europe and the world in terms of economic and geo-political status. Given that the UK is an important trading partner of the EU, there would of course be an impact on the Union itself, too. However, while the EU will remain one of the biggest and most powerful trading blocs in the world, the UK would be a relatively small, declining and weaker nation seeking trade deals in a world that is populated by major power blocs (the US, EU, China, India and the ‘Quad’ ). Thus far, contrary to the promises of the Brexit camp, major trading nations such as India and China have shown no interest in providing the UK with a deal that would in any way compensate for the loss of its EU advantages and certainly not in any period that would make a difference. President Trump has said the US would be ready to provide a trade deal to the UK if it implements a hard Brexit. Clearly, this would be a highly skewed negotiation between the world’s most powerful trade negotiator and a severely handicapped UK with no deals in hand. Alternative scenarios include a general election and a withdrawal from the Brexit back to the fold in the EU; recent polls indicate that if the vote were held again, demographics favour staying in.
5. Saudi Realignment of the Middle East
Potential Outcomes and Implications
Swing in Perception of Crown Prince. MBS’s actions began as a reforming campaign with the promise of bringing modernity, women’s rights, rolling back restrictive religious practices and economic opportunity to the masses. Following a series of more aggressive acts of war, conflict and assassination, Saudi Arabia’s standing in the world as well as MBS’s own reputation has been damaged.
US Support Continues Without Positive Impact. At the recent G20 meeting in Argentina, only Russian President Vladimir Putin was enthusiastic about greeting the crown prince, with even President Trump, who had strongly defended him following the murder of Jamal Khashoggi, appearing reluctant to interact with MBS. Further, the US Senate has voted to end support for the Saudi coalition in Yemen, which if successfully followed through would effectively hamper the country’s ability to intercede in the country’s civil war. The Trump Administration on the other hand continues to argue that downgrading US-Saudi relations would jeopardise national security and US interests in the region. However, given that Saudi Arabia to date is perceived to have not ‘achieved’ much more than destabilisation in the region, it is unclear whether continued support by the Trump administration will lead to better outcomes in the absence of significant strategic and policy changes on Saudi’s part.
Uncertainty and Longer-Term Rebalancing Likely. The alternative scenario is a coordinated withdrawal of support of Saudi Arabia, coupled with constructive engagement with Iran, with the aim of weakening the autocratic regimes of both countries and enabling bottom-up reforms over the short term, and to potentially reshape the political and security structure of the region over the longer term, as stronger civil societies and more inclusive future governments redefine national priorities to focus on peace and prosperity. This is clearly a long term and multi-generational endeavour but one in which a US administration that is willing to sponsor regime change, as America has done the world over a number of times since World War II, could make a quick impact. Such a dramatic move while possible, seems unlikely given the alternatives, but President Trump has surprised the world before.
6. US Military Withdrawals
