Eurasia Group's weekly selection of essential reading for the political risk junkie -- presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.
China has been all over the news this week, with the New York Times hacking episode dominating headlines. But recent stories related to China venture much further than cyberspace. This week's must-reads has a China theme.
1. "The resource race: China
dips toes in Arctic waters"
Christoph Seidler, Spiegel Online
This piece outlines China's new ventures to the Arctic -- and how China's diplomatic tactics are shifting.
2. "China's love affair with
cars chokes city air"
Louise Walt, Associated Press
Over the last decade, the automobile industry has skyrocketed in China. Last year, 13 million cars were sold. But what kind of environmental impact will such a rapid shift have?
3. "Making room"
In 2010, there were roughly 4,000 cities with populations of 100,000 or more. (China had about 400 of those). But between 2010 and 2050, the UN anticipates that the world's urban population will double. This piece reviews a new book by Shlomo Angel called Planet of Cities -- the book predicts how future urbanization will play out. Here's an interesting rule of thumb: usually, a country's biggest cities break down such that the largest city has twice the population of the second largest, three times that of the third largest...etc.
4. "Chinese labour pool
begins to drain"
Jamil Anderlini and Ed Crooks, Financial Times
China's working age population unexpectedly shrank last year -- a trend that wasn't meant to begin until later this decade. What do China's shifting demographics mean for the economy?
5. "Mexico: the new China"
Chris Anderson, The New York Times
Is cheaper always better? This piece highlights some of the advantages of using Mexican manufacturing from an American business perspective. Anderson argues that it allows for more product evolution, innovation, and customization -- and Chinese labor is getting less and less cheap.
Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
HOANG DINH NAM/AFP/Getty Images
Eurasia Group's weekly selection of essential reading for the political risk junkie-presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.
1. "Al Qaeda 3.0:
Terrorism's Emergent New Power Bases"
Bruce Riedel, The Daily Beast
In a world where international governance is breaking down, leaders are focused more on domestic than on foreign policy challenges. This trend extends to al Qaeda, an organization transitioning from global to local goals.
2. "India's African ‘Safari'"
Sudha Ramachandran, The Diplomat
We hear a lot about the US and China's conflicting investment approaches in Africa, but there's precious little written on Africa's fourth largest trading partner: India. With trade increasing by a factor of 17 over the last decade, India-Africa relations are becoming much more interesting.
3. "How Crash Cover-Up
Altered China's Succession"
Jonathan Ansfield, New York Times
How will Beijing's leadership manage the challenges that come with an era of more open information? What will the rest of us learn about the Chinese leadership's taste in cars, clothes and once-hidden power politics?
4. "Merkel's mastery of
Michael Fry, The Scotsman
Is Angela Merkel the most talented politician in the world? Her domestic political tactics shed light on her policies with regard to the Eurozone and beyond.
5. "A free-trade agreement
David Ignatius, The Washington Post
Though still on the drawing board, the Trans-Pacific Partnership has far-reaching security and economic implications for North America and the Asia Pacific region. Progress on an Atlantic equivalent seems beyond the horizon. But is an ‘economic NATO' already in the planning stages?
6. "The mother of all
worst-case assumptions about Iran"
Stephen M. Walt, Foreign Policy
Would a nuclear Iran carry "shattering geopolitical significance?" This piece overstates its case at times, but it's a question that demands consideration.
The Weekly Bonus:
"Floating Housing (And
Golf Courses) For Post-Climate-Change Island Paradises"
Co.EXIST blog, Fast Company
In a G-Zero world, don't expect political leaders to tackle climate change. An ineffectual climate summit meeting in Doha this week makes that all the more obvious. If climate change continues unabated, the Maldives will end up underwater. The government knows it, hosting a cabinet meeting on the ocean floor in full scuba gear in 2009, and inquiring about land purchases abroad. But even the most daunting risks come with opportunities, however whimsical they may seem.
By Roberto Herrera-Lim
It's easy to disparage Vietnam, whose reputation as the poster child for the economic potential of frontier market countries has taken a beating in recent years. Inflation is a persistent threat, growth is slowing, and the country's banks and state-owned enterprises (SOEs) are struggling with a potentially destabilizing level of bad debts. And to top it all off, Vietnam's political leaders are fighting among themselves when the situation calls for firm action. As a result, foreign investors are left scratching their heads and wondering if Vietnam will be able to build the institutions and capabilities needed to move into the ranks of the emerging market nations.
Vietnam's institutions were not prepared for strong growth. That much is clear from the crisis that has played out over the past few years during which Vietnam's institutions and leaders mismanaged capital inflows, resulting in inflation, bad investment decisions, and near-rogue banks and SOEs. All this occurred on Prime Minister Nguyen Tan Dung's watch, and while he has survived at least two challenges to his leadership, he is weakened and chastened. As a result, consensus decision-making will play a greater role in coming years, while Dung's competitors (including President Truong Tan Sang) reduce his control over policymaking and tighten oversight. The near-term consequence of this dynamic will be a greater likelihood that factional competition will result in uneven policies and conflicting signals.
But don't count Vietnam out of the game yet. Historically, crises have been effective at forcing effective policy choices from the government (such as the 2001 ouster of the party's then general secretary Le Kha Phiu). The current situation is unlikely to result in Dung's exit, but it will spur a serious reexamination of economic policy, especially when it comes to better allocating investment. There is, after all, still a broad consensus among Vietnam's elites that previous reforms should remain in place and that long-term growth and sustained, equitable improvements in the quality of life are needed to ensure the survival of the communist party. The country's economy could also benefit from structural factors that are encouraging investors to consider manufacturing locations other than China.
It may be tempting for manufacturers to look to other countries in Asia, but they should not discount Vietnam's reemergence as a viable investment destination. The country's leaders may be squabbling, but they understand that failure to reform is a larger threat to their primacy than the uncertainty that comes with change.
Roberto Herrera Lim is a Director in Eurasia Group's Asia practice.
HOANG DINH NAM/AFP/Getty Images
By Scott Seaman, Shaun Levine, and Divya Reddy
Major resource-producing countries are shifting economic levers in their favor, taking advantage of consumer countries' thirst for commodities. Producer countries are increasingly restricting exports of raw commodities so they can be processed at home, creating jobs and moving domestic industry up the value chain. For countries that import natural resources, export restrictions can translate into higher costs that industries, labor forces, and consumers find difficult to swallow.
Moreover, when facing off against developing countries whose economies are growing quickly and becoming more sophisticated, developed countries may find that threats or offers of traditional development aid and tit-for-tat trade actions are less effective tools to apply pressure. This will be especially true as the gains from implementing new export restrictions expand, adjusting the cost-benefit calculation in favor of new restrictions even in the face of potential trade conflicts.
A case in point is the row between Indonesia and Japan over Indonesia's imposition in May of a 20 percent export duty on unprocessed mineral ores, as well as Indonesia's plans to implement a total ban on such exports in 2014. Unsurprisingly, these restrictions have made post-Fukushima Japan even more skittish about the security of its commodity supplies, and are fueling a lively exchange: Japan has made references to potential WTO action and allegedly threatened to ban Indonesian imports of photocopy paper, while Indonesia has indicated it could retaliate by restricting LNG exports to Japan.
While a trade war is not likely, these tensions highlight a growing trend that countries like Japan will inevitably face. Recent efforts by countries such as Brazil and India to limit iron ore exports to promote domestic steel production, and by a local government in the Democratic Republic of the Congo to force domestic copper processing, pose worrisome precedents from Japan's perspective.
Not only is there a risk that Japanese smelters will be squeezed out of the market by these changes, but associated job and revenue losses will pose challenges for the government. For example, Japanese firms and the government will face domestic backlash if they invest in smelting facilities abroad while cutting jobs at home, especially at a time when the economy is fragile and the "hollowing out" of industry there has become such a hot-button issue.
At the end of the day, Japan and other countries dependent on raw materials imports will have little recourse to counteract producer countries looking to take a greater share of the value-added processing market. That said, many of these producer countries (including Indonesia) will take time to build up their domestic smelting capacity and may not prove to be cost-competitive in areas such as labor and electricity supply.
So Japan may be able to buy some time and avoid the immediate economic and political consequences of a shifting resource landscape. But the overall trajectory probably won't reverse course. At some point down the road, Japan and other countries accustomed to having more leverage will have to make painful adjustments.
Scott Seaman and Shaun Levine are analysts in Eurasia Group’s Asia practice. Divya Reddy is an analyst in the firm’s Global Energy & Natural Resources practice.
By Carroll Colley
While Russia will enter the WTO in late August, U.S. industry will be left on the sidelines until Congress removes the Cold War-era impediment to greater trade between the former foes. But it's a safe bet that Congress won't graduate Russia from the Jackson-Vanik amendment, which is necessary to grant permanent normal trade relations to Russia and take advantage of its accession to the WTO, before the November election. The reason? Russia is perpetually steeped in controversy, and U.S.-Russia relations have become a campaign issue in the race between Republican Mitt Romney and President Barack Obama. U.S. industry likely won't be able to take advantage of greater market access in Russia until the lame-duck session at the end of the year, and possibly later.
The White House is much more focused on November 6 (Election Day) than August 23 (the approximate date of Russia's WTO entry). Only after repeated requests from Republican lawmakers for senior level officials to testify on the Hill -- widely viewed as a Republican maneuver to force the administration to speak on the record about its Russian policy -- did the administration relent by sending the duo of Deputy Secretary of State William Burns and U.S. Trade Representative Ron Kirk to testify before the House Ways and Means Committee and the Senate Finance Committee. The White House calculates that a "yes" vote on graduating Russia from Jackson-Vanik (a 1974 provision that ties trade relations to freedom of emigration and other human rights considerations) would have little electoral upside, and might even harm Obama before the election.
Obama's meeting on June 18 with President Vladimir Putin on the margins of the G20 in Los Cabos seemingly failed to produce a breakthrough on Syrian policy. Headlines about ongoing arms shipments bound for Syria and the potential for continued Russian intransigence at the U.N. Security Council also represent potential political liabilities during the election home stretch, not to mention a host of domestic political issues. Romney, meanwhile, has called Russia the U.S.'s greatest political "enemy" -- and later changing that description to "foe" -- because he senses a potential weakness in an Obama foreign policy that has otherwise produced several notable successes.
It would be much simpler, politically, if supporters of graduating Russia from Jackson-Vanik could cast it as a vote for American business, as Secretary of State Hillary Clinton did in a recent opinion piece. But they can't. Passage is complicated by the Magnitsky bill, human rights legislation that targets government officials involved in the case of Sergei Magnitsky, a Russian lawyer who died in police custody in 2009. Largely viewed as a replacement for Jackson-Vanik, the stated aim of the bill is to deny visas to corrupt officials, freeze any U.S. accounts they have, and publish their names. The reality is that the Obama administration last summer instituted its own visa ban and any potential offenders have long ago transferred any funds from the U.S.. The net effect of the bill, therefore, is the "naming of names," which would represent a significant embarrassment to the Putin regime. The bill enjoys broad bipartisan support, with a number of lawmakers stating publicly that passage of the Magnitsky bill is a prerequisite for their vote on Jackson-Vanik.
The Obama administration has sent contradictory messages about its support for the Magnitsky bill. While originally opposing the bill, the administration seems to have accepted the inevitable and has been working with its primary author, Democratic Sen. Ben Cardin of Maryland. One recent Senate version provides for the public list as well as a confidential annex, which would largely allow the administration to circumvent the thrust of the bill by invoking national security exemptions. This is strongly opposed by a number of senior lawmakers, including Sen. John McCain, who was a co-sponsor of the effort to repeal Jackson-Vanik on the caveat of corresponding passage of the Magnitsky bill.
As the August recess rapidly approaches, the window for graduating Russia from Jackson-Vanik prior to its WTO accession closes. Obama appears to have little room to maneuver in expending political capital on the matter without raising the risk of elevating Russia-and its collateral baggage including Syria, Georgia, Iran, and domestic protests-to a legitimate campaign issue. Unless Congress moves forward on its own prerogative-which appears unlikely-the repeal of Jackson-Vanik won't get passed before November, or later, leaving the world's largest economy unable to take advantage of the accession of the WTO's newest member.
Carroll Colley is the director of Eurasia Group’s Eurasia practice.
By Patrick Cullen
The international shipping industry and the governments that are ostensibly supposed to protect it have begun to radically rethink their long-held aversion to private armed protection at sea. The shift illustrates the inability and/or unwillingness of states to provide security, and presages potential ethical and legal controversy as the lines between commerce and state authority become increasingly blurred.
For decades, both the international shipping industry and the governing bodies that oversee it have been critical of the concept of putting armed guards on commercial vessels in order to protect them from violence -- and piracy in particular -- at sea. From the perspective of private industry, hiring armed guards has traditionally been viewed as a costly and risky move that creates more liabilities (financial, legal, and reputational) than it resolves. Furthermore, the shipping industry has also balked at the idea of paying for a service that it expects the world's navies to provide for them free of charge.
As recently as June 2010, a host of public and commercial maritime industry stakeholders -- including major shipping organizations -- explicitly stated that "the use of armed guards is not recommended" in a Best Management Practices maritime security document designed to offer shippers advice to mitigate the threat from Somali piracy.
States and international organizations such as the U.N. International Maritime Organization (IMO) and the International Maritime Bureau have long underscored the importance of maintaining the classic division between the state and the market, with the former maintaining a monopoly of the legitimate use of force, and the latter enjoying the privileges granted by this state protection.
The shift toward the acceptance of armed private security on ships has been recent and dramatic. In an unprecedented announcement last May, the IMO issued guidance to governments and shippers on how to engage with "privately contracted armed security personnel," and many states have followed in the IMO's wake, issuing similar policy announcements outlining their acceptance of armed private security teams operating onboard commercial vessels. And only weeks ago, on March 28th, BIMCO, the world's largest international shipping organization, issued a standardized guard contract (GUARDCON) intended to help shipping companies responsibly select and manage teams of armed guards provided by specialized maritime private security companies. The same maritime industry players that were traditionally averse to the idea of placing armed guards on commercial vessels have now positioned themselves as key players involved in legitimizing this practice. This includes maritime insurance brokers and Protection and Indemnity insurance clubs that have begun to accept, and even endorse, the use of private armed security at sea.
So what has changed? Somali piracy has shifted from a small-scale and purely regional risk to a mature threat from professionalized piracy syndicates extending beyond Somali waters into the Indian Ocean and beyond. And recognizing that the current multinational and unilateral naval efforts to curb Somali piracy are falling short, governmental actors have sought to harness and regulate this emerging practice rather than ban it outright.
However, due to the novelty of the armed maritime private security, as well as the transnational and multi-jurisdictional nature of the global shipping industry, navigating this legal environment remains difficult at best. Placing armed guards on board ships has proven to be an effective method of deterring pirate hijackings -- to date, no ship with an armed escort has been hijacked -- but the use of armed guards poses its own set of serious risks. Last month, two armed Italian sailors on board an Italian flagged commercial vessel were caught and charged with murder by the government of India after allegedly shooting innocent fishermen within India's exclusive economic zone. Many commentators point out that it may only be a matter of time before a similar incident occurs with a private security team.
The shift in attitudes among shippers and states is just another illustration of how the management of risk is evolving from the reactive to the proactive, and how the responsibility for providing security is becoming increasingly fragmented between states and the market.
Patrick Cullen is an analyst in Eurasia Group's Comparative Analytics practice. Patrick is an expert in maritime private security, and is the editor of "Maritime Private Security: Market responses to piracy, terrorism and waterborne security risks in the 21st century."
MOHAMED DAHIR/AFP/Getty Images
By Philippe de Pontet and Anne Fruehauf
The price of your favorite chocolate treat may not have gone up yet, but there is a real chance it will, despite the resolution to the impasse in Cote d'Ivoire, the world's leading exporter of cocoa. The arrest of former President Laurent Gbagbo after a four-month standoff significantly improves the prospects for a full resumption of cocoa exports. But there are still significant political and logistical hurdles that could affect how much you'll pay for a candy bar.
The immediate situation in commercial capital Abidjan is broadly reassuring. Gbagbo urged his supporters to stand down while the incoming President Alassane Ouattara struck a note of national reconciliation in his address to the country. These developments, together with the presence of about 10,000 U.N. peacekeepers, should limit regime-threatening instability, despite the charged atmosphere and the presence of armed militias that represent a potential source of unrest. There was further positive news on April 13 when the Ivorian government reported that the nation's two main ports would reopen and that cocoa exports would resume within days.
But there are several obstacles to the resumption of full exports that some observers may be missing. Even though the EU and Ouattara have lifted their export bans, cocoa revenues have long been funneled to Gbagbo's cronies. The incoming government will want to ensure that cocoa sales do not enrich the ex-president's associates at the expense of the state. That sets the stage for potentially disruptive reforms to the industry.
The other factor is the security situation both in Abidjan and in the restive western regions where most cocoa is produced. Cote d'Ivoire's west has been the scene of significant turmoil and ongoing retributions in recent weeks. This instability could threaten key transportation corridors from the cocoa fields to San Pedro, the port of departure for about a third of Cote d'Ivoire's exports.
Additionally, migrant farmers will need to travel back to the planting regions by the end of April in time for the May-July harvest that accounts for about a third of annual production. Instability, roadblocks, and bank closures could be a real deterrent. Commercial banks will need to resume operations for small traders to buy the harvest. Any delays or problems at this level could also influence international prices, despite expectations for a bumper crop.
Philippe de Pontet and Anne Fruehauf are analysts in Eurasia Group's Africa practice.
PHILIPPE DESMAZES/AFP/Getty Images
By Heather Berkman and Sean West
U.S. Trade Representative Ron Kirk told the House Ways and Means Committee on Feb. 9 that the Obama administration is serious about progress on the South Korea, Panama, and Colombia free trade agreements. He wouldn't commit to a timeline, but we think Congress will pass all three deals this year -- though not without a round of serious political deal making.
Obama campaigned on the need to extract additional concessions from South Korea, Colombia and Panama before any of these deals, all of which were negotiated and signed by President George W. Bush, deserved ratification. For example, automakers and the United Auto Workers complained that the South Korea deal opened the U.S. auto market to Korean imports without securing reciprocal liberalization.
The United States took two years to tell South Korea exactly what it wanted changed, but the two sides have finally negotiated a side deal in which the Koreans made additional concessions. With the new agreement providing political cover, Obama now officially endorses the deal and will send it to Capitol Hill for ratification soon.
The path forward for the Panama and Colombia FTAs is a bit murkier. The Panama deal -- which, frankly, will have negligible economic impact on either country -- was first held up because Pedro Miguel Gonzalez, who later became leader of the Panamanian National Assembly, was indicted by a U.S. grand jury on charges he shot and killed a U.S. serviceman in 1992. When Gonzalez left government in 2009, U.S. trade skeptics shifted their criticism to Panama's alleged role as a tax haven, forcing the Ricardo Martinelli administration to reluctantly sign a Tax Information Exchange Agreement with the Treasury Department.
The Colombia deal faces a more difficult battle. U.S. labor unions loudly oppose the pact because so many Colombian trade unionists and labor leaders have been murdered by paramilitary organizations. The number of murders has fallen in recent years, and though Colombia probably still has the highest murder rate of union members in the western hemisphere, it probably also has the highest rate of murders of priests, schoolchildren, and bus drivers. In short, despite significant government progress in cracking down on armed groups and reducing the homicide rate, Colombia remains an intensely violent place -- for labor leaders and many others. There's no way to solve that problem in the context of a trade negotiation.
By pushing these trade deals forward, the Obama administration is making a political bet. The White House knows the left has a long list of gripes with the president, and that pushing hard on trade deals will add fuel to the fire. But presidents benefit from the economic boosts provided by trade -- and Obama views the deals as a way to reach out to the independent and moderate voters he'll need in 2012.
Aware that Washington can't expect much more from these countries, the Obama administration will court reluctant Democratic lawmakers by extracting relatively minor concessions -- like a pledge from the Panamanian government to ratify a tax treaty or from the Colombian government to put more of those who kill union leaders on trial.
What will Democratic lawmakers want in return? They may well call on the White House to work much harder to enforce existing agreements before moving forward with new ones. That means moving forward with antidumping and countervailing duty cases against China -- both at the World Trade Organization and through domestic remedy.
With so little expected from a divided Congress, the White House will trumpet these deals as important accomplishments. But it will have been the U.S. political context that changed -- not the content of the deals.
Heather Berkman is an analyst in Eurasia Group's Latin America practice. Sean West is a U.S. political risk analyst with the firm.
NICHOLAS KAMM/AFP/Getty Images
By Ian Bremmer and David Gordon
Amid a sluggish global recovery, China's return to go-go growth will generate plenty of resentment in 2011 -- and not just in Washington. Though China has become the world's second-largest economy, its leadership insists it must continue to manage the country's development at a measured pace. For some of China's biggest trading partners, that argument is beginning to ring hollow.
To rebalance the global economy, policymakers in both the developed and developing world have called on China to reduce its enormous trade surpluses by reducing the country's dependence for growth on exports and increasing Chinese consumer demand, both for foreign and domestically made products. Chinese policymakers would like to do exactly that. The Western financial crisis briefly created turmoil in China, not because Chinese banks were exposed to contagion from Western banks, but because reduced demand for Chinese products in Europe, the United States, and Japan hit local manufacturers hard and forced millions of Chinese from their jobs. Beijing scrambled to create new jobs, primarily by targeting massive state stimulus spending at infrastructure projects that required lots of manual labor. For the Chinese leadership, generating much greater domestic demand would make China less vulnerable to hard times elsewhere.
But China's plans for rebalancing will take a generation to accomplish, and a lot of its trade partners would like to see the change come much faster than that. In the near term, Beijing will offer only small adjustments to accommodate them because the leadership must negotiate demands from various interest groups within the leadership and because this transition will put many more workers on the street than the slowdown did, and the Chinese leadership knows it must manage that challenge carefully to avoid a dramatic surge in civil unrest.
Unsatisfied, outsiders will grouse that China's rate of export growth remains twice its rate of economic growth. In 2010, relations between the United States and China became much more contentious. In 2011, China will likely face increased pressure from Europe, Japan, and probably from emerging markets like India and Brazil. Further, China's security-driven assertiveness in East Asia will continue to provoke tensions with many of its Asian neighbors even as trade relations deepen.
In the past, China has taken the edge off international pressure by adjusting the pace of its reform efforts modestly just before major multinational gatherings -- for example, by depegging the renminbi from the U.S. dollar in advance of the June 2010 Toronto G-20 summit. But there aren't many "steam-releasing" events on the calendar in 2011. President Hu Jintao visits Washington later this month, but the North Korea crisis will occupy much of that conversation, decreasing the likelihood that China will see much value in any major moves on rebalancing.
The next G-20 meeting, this one in Cannes, won't be held until November. French President Nicolas Sarkozy has grand ambitions for this event, but frustration with China will build over the next 10 months and so too will the risks of market-moving international reactions to China's incremental, deliberate, consensus-driven policymaking process. At Cannes, tensions may come to a head as more countries than ever prove ready to confront Beijing on issues from industrial policy to intellectual property rights protections to currency valuation.
On Monday, we'll examine the threat from North Korea, which hits our list of this year's top risks at No. 5.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
FREDERIC J. BROWN/AFP/Getty Images
I believe that intelligently regulated, market-driven capitalism is the worst economic system ever devised -- except for all the others. No system lifts every boat, but broader participation in a system that relies on market forces to determine what should be produced, in what quantities, and at what price has created a global economy that provides more opportunity for more people around the world than at any time in human history.
The skeptic then points to the financial crisis/market meltdown/global recession of the past 21 months and asks the same question posed to me by a Chinese diplomat in the opening of my book: "Now that the free market has failed, what is the proper role for the state in the economy?"
He's convinced that all this turmoil -- and the various state-driven responses to it in the capitals of supposedly free market countries around the world -- will prove that China's state capitalism is a superior system for market stability. Where's my evidence to prove him wrong?
Should I point to the $787 billion state-directed stimulus package that Washington has used to kickstart growth? Or to America's 17.1 percent real unemployment rate? Should I brag about the success of the eurozone, the world's largest-ever experiment in capitalism without borders? How about the dynamism of Japan's economy?
The jury is beginning to wonder if I'm actually trying to win this case.
We'll have to take a longer view. With the exception of developing countries in the very earliest stages of development, at no time in the past have political officials ever proven more effective than fundamental market forces at valuing assets and allocating resources over the course of several years. Market-driven capitalism is a game that can benefit all who participate in it, if the referees have the power to enforce intelligently crafted rules and if they're paying attention to the game. In America, for the past several years, the players have too often been allowed to rewrite the rules in ways that serve their short-term interests.
TORU YAMANAKA/AFP/Getty Images
One of President Obama's biggest foreign policy challenges this year will be working to contain growing pressure in Washington for a much more confrontational approach toward China -- on trade, currency policy, investment, and cyber-security issues. At best, he'll have limited success.
We've seen this game before. As a presidential candidate, Bill Clinton once referred to the Chinese leadership as the "butchers of Beijing." As president, he took a more circumspect approach, leaning on Congress to moderate its protectionist impulses toward China and signing Permanent Normal Trade Relations for China into law during his final days in office. George W. Bush supported moderate legislative pressure on China to divert bipartisan congressional support from onerous tariffs on Chinese products. Now it's Obama's turn to tug at the reins as the horse prepares to bolt. He's liable to have limited success, because the relationship has changed.
China has rebounded strongly from the global slowdown. Washington is much slower to regain its footing. China is again headed for strong growth this year, America's unemployment rate is still at 9.7 percent, and it's an election year. This is a recipe for more trouble in a relationship already suffering from a growing list of well-publicized problems.
In the near-term, the news will look deceptively positive. On April 15, the U.S. Treasury Department will probably announce that it will again resist pressure to formally brand China a currency "manipulator," a finding that China manages the value of its currency to secure an unfair trade advantage. There's unprecedented momentum behind a get tough approach, but Chinese President Hu Jintao is expected to visit Washington on April 12. That's a clear signal that the White House and Beijing have an understanding that this is not the year. Obama is hardly likely to allow for such a public humiliation of China's leader. (Obama's no Netanyahu.)
Beijing will allow the value of the yuan to rise modestly ... for its own reasons. The Obama team will talk tough, but mainly to dissuade Congress from a more aggressive approach in hopes of keeping the world's most important bilateral relationship moving in a more or less constructive direction.
But things have changed in recent years. Gone are the days when tough talk from the White House and a conciliatory gesture from Beijing can persuade the China hawks on Capitol Hill to take their eye off the ball. Given the growing fear across the country that the balance of power in the relationship has shifted toward Beijing, China is fast becoming the issue for American labor, for the American media, and most critically, for America's private sector (as made abundantly clear by a survey of U.S. executives released last week by the American Chamber of Commerce in China which found that the number of member companies who felt "unwelcome" in the country jumped from 26 percent to 38 percent since December 2009.
In 2008, we saw the last U.S. presidential election in which most voters neither knew nor cared where the candidates stood on China. As November's mid-term elections loom, we'll get our first look at one of the biggest emerging wedge issues in American politics.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
FREDERIC J. BROWN/AFP/Getty Images
Thus far, the Obama administration isn't making much of a showing. Undersecretary of State Bob Hormats did a strong job on yesterday's U.S.-China panel. But there's little coordination and not much of a message. If Secretary of State Clinton is too busy, why not send Vice President Biden? Combined with perfunctory foreign policy mention in the State of the Union, I'd suspect it's a feeling that anything but domestic issues isn't going to play well politically. That's not the strategy I'd be going with.
So for the American delegation, it's the U.S. private sector that's leading the charge here. And the omnipresent Barney Frank -- who yesterday told a private industry group to stop listening to what congress says, and look at actual policies ... do they have anything to complain about? Heads nod reasonably sagely.
Meanwhile, criticism of imminent political explosion grows as the nights wear on. Rogue economist/historian/documentarian Niall Ferguson, distinctly unshaven (proffered excuse--he forgot his razor on his flight from Delhi), wagered me $100 that the United States would have a new Secretary of Treasury by June 1st this year. Wager accepted. Howard Lutnick of Cantor Fitzgerald said he'd go $100 for Sept. 1. The bankers are always pushing it.
Ian Bremmer will be blogging from Davos this week sending reports and commentary from inside the World Economic Forum.
ERIC FEFERBERG / AFP / Getty Images
By Ian Bremmer
The most obvious long-term effect of the financial crisis is a shift in economic decision-making power from capitals of finance to capitals of politics. We see this trend in the United States, where decisions on how best to value assets and allocate capital are now made in Washington on a scale unthinkable until about this time last year. Outside the United States, nowhere is this development more obvious than in the United Arab Emirates, where power and wealth have shifted at startling speed from Dubai (until recently a financial powerhouse) to Abu Dhabi (the seat of political power). But the American trend is temporary; the UAE's might not be.
Remember when newspapers, magazines, and TV business reports produced feature after feature on lavish investment in Dubai's newest architectural marvel and the corporatist management style of its ruler, Sheikh Mohammed al Maktoum? As foreign investment stopped flowing into Dubai, large-scale infrastructure projects ground to a halt. Thousands of foreigners lost work permits in the construction sector. Thousands more saddled with loans they could no longer repay simply abandoned their property and left the country. By January 2009, local police complained that about 3000 cars had been abandoned at the airport. Dubai found itself buried beneath a mountain of IOUs, and for a few days in February 2009, the financial world lost faith. The emirate's credit rating tanked, and foreign investors began to plan for the once unimaginable risk that Dubai would default on its sovereign debt.
Faced with that, Dubai announced a $20 billion bond program to raise the needed cash. In February 2009, Abu Dhabi moved in with $10 billion bailout, underwritten by the UAE's central bank. So far, Dubai has yet to find the other $10 billion, and Abu Dhabi may have to step in again. But the bursting of Dubai's real estate bubble and the sudden collapse of its economy have already allowed Abu Dhabi's ruling al Nahayan family to buy a big share of the al Maktoum's assets.
On a recent
visit, I saw the evidence for myself. Abu Dhabi is bustling as the city
state prepares for its first Formula One championship this Sunday. In Dubai, the traffic jams
are gone, the hotels are struggling, and everyone's waiting for something to
change. What a difference a year makes.
There's plenty of reason to fear that things won't get better soon. Real estate prices are now at about half their peak, but overbuilding on many projects continues because the state controls many of the emirate's largest construction companies. Many of Dubai's biggest construction projects are still underway, because the government wants to minimize further job losses. That's likely to continue through 2010, leaving the emirate with large amounts of unused commercial space.
In many cases, local firms haven't paid their employees in weeks,
and there have been some moderately violent protests. The government
appears aware of the seriousness of the problem and is working to improve
healthcare and living facilities for the laborers. Dangerous levels of unrest
are unlikely given that most guest workers can't afford to risk
But there's another cloud on the horizon. If the United States moves to intensify sanctions on Iran next year (a good bet given the low likelihood that the current diplomatic optimism will last), Dubai will be vulnerable. Much of Iran's financial flows move through Dubai, and sanctions would hit the emirate especially hard.
Ian Bremmer is president of Eurasia Group.
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By Ian Bremmer and Willis Sparks
To mark 60 years in charge, China's Communist Party threw a lavish party last week, a triumphalist pageant with enough military hardware on parade to fill the nightmares of would-be "dragon slayers" for years to come. It was a reminder that China has developed advanced fighter aircraft, military satellites, the Dong Feng 21 missile (also known as the "aircraft carrier killer"), and has been working toward production of a first aircraft carrier of its own -- an asset that would enable China to project naval power further from its shores than ever before. As if the visuals weren't enough, the celebration included a 2,000-member military marching band.
So will China one day pose the 21st century equivalent of a Soviet-scale military challenge to America's geopolitical dominance? That's unlikely. China wants to extend its influence throughout East Asia, protect the commercial traffic that provides the oil, gas, metals, and minerals that feed China's growing economic appetite, and project national pride. It will one day pose a broader military threat than it does now, but its economy has grown so quickly and its living standards have improved so dramatically over the past two decades that it's hard to imagine the kind of catastrophic, game-changing event that would push its leadership to upend a profitable status quo and confront American leadership outside Asia. China's leaders know their government won't be ready anytime soon to bear a superpower's burdens. Their primary goal is to bolster their political control by generating prosperity for the Chinese people. Why would it allow anything short of the most dire and immediate threat to its territorial integrity to ignite a military conflict that would sever its web of commercial ties with countries all over the world -- and, in particular, with its three largest trading partners: the European Union, the United States, and Japan?
Beijing's primary military concern is the risk of a direct or proxy conflict with the United States over Taiwan. But the Chinese leadership knows that no U.S. government will support a Taiwanese bid for independence, and why should China invade the island when it can co-opt most of Taiwan's business elite with privileged access to investment opportunities on the mainland? Globalization has been good to China's Communist Party, and wars are bad for business.
Certainly, China has ambitious military modernization plans. With 2.3 million soldiers under arms, the People's Liberation Army (PLA) is already by far the world's largest. It has reportedly invested considerable time, effort, and money in cyber-warfare technology. Its total military budget probably doubled between 2003 and 2009 to about $70 billion. But that's still only about 12 percent of what the United States now spends on its military each year -- and an even smaller percentage if supplementary U.S. spending on the wars in Iraq and Afghanistan is included.
The problem for U.S. policymakers over the next several years is not that the unipolar world order will give way to a multipolar but to a non-polar system. In other words, it's not that America has company on the global stage but that it must continue to carry so much weight on its own-and at a time when pressing problems at home will limit the American public's appetite for ambitious foreign-policy commitments.
Over the past 20 years, U.S. analysts have scanned the horizon in expectation of potential challengers to America's great power advantages. The European Union was already struggling to manage the latest round of expansion before the financial crisis gave EU leaders another reason to avoid potentially onerous new commitments abroad. Russia's leaders may be unhappy with the geopolitical status quo, particularly when it comes to the balance of power within several former Soviet republics. But they're far too preoccupied at the moment with the protection of domestic markets, banks, and companies from the worst effects of the financial crisis to embark on any long-term plan to build a threat to U.S. power outside its immediate neighborhood. India has market reform issues to manage and security worries flowing across the border from Pakistan. Within the Western hemisphere, Brazil appears to have no grander near-term aspirations than to promote stability in Latin America, jumpstart an economic recovery, find new ways to profit from its recent oil discovery, and to play a broader leadership role among developing states.
It's not a challenge for dominance, but a growing vacuum of power that should worry Washington. The more important questions for the next decade are: Who will take the lead on building a new global financial architecture that reflects 21st century realities? Who will take the lead on multilateral efforts to address climate change? Who will create a new (and more credible) nonproliferation regime? Who will provide momentum behind Middle East Peace talks? Who will provide the leadership to ensure that G20 summits don't simply turn into G8-style photo opportunities with a wider angle lens?A decade from now, who will carry that weight?
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It's reasonable, then, that politicians in Beijing are worried that the decision on tires will lead to China being singled out as the target of future trade actions. What's more, the simmering nationalism of the Chinese public forces the leadership to be more aggressive in its responses. A poll on a state-run news site found that 90 percent of Chinese citizens believe that China can go toe-to-toe with the United States in a trade war. Thus, every time Section 421 is used, it will engender fiery retaliation from the Chinese. If the door the administration has cracked open is thrown fully ajar, trade tension could theoretically spill over into WTO-incompliant responses or responses that have nothing to do with trade. Thus, there is a chance -- though not a likelihood -- that section 421 could lead to a trade war if the United States repeatedly uses it and China responds through escalation.
The administration's recent demonstration that it is willing to apply section 421 and China's aggressive reaction moved the US-China relationship one step closer to that scenario. But it was a small step in a robust trading relationship with two sides that understand what's at stake. Top Chinese leaders have little interest in engaging in a trade war with the United States because they know it would hurt their heavily export-dependent economy. Washington is trying hard to make China a willing partner on a host of global issues, and China has been receptive to the idea if only for the recognition of its increased international stature.
During the first Strategic and Economic Dialogue in July, the two countries pledged to move toward a more mature relationship. In Washington, Obama -- despite how he appeared on the campaign trail -- remains committed to open markets and the national economic benefits the United States gets from trade. While a potential trade war is scary stuff, there is little reason to believe it is forthcoming.
By Eurasia Group analyst Courtney Rickert
Amid headlines that the global economic crisis has stabilized, an important question arises: Which countries' economies will recover most quickly, and which recoveries will be the most sustainable? The key to finding an answer lies in understanding how countries were exposed to the global downturn and assessing their policy responses. Countries that choose to adjust to the changed global economic environment will come out on top in the long term.
While all internationally integrated economies have suffered growth declines, some economies entered the recession in a better position than others. Part of this divergence is a result of the quality of government policies, such as balanced fiscal positions and low inflation. Other key factors in determining a country's exposure to the crisis are trade imbalances and overinvestment in select sectors, such as real estate, in the period leading up to the global financial crisis.
Countries that had persistent trade deficits -- such as the US-financed them by borrowing heavily from abroad. Frequently, international borrowing fed domestic consumption far more than investment. This excess consumption contributed to bubbles during the boom years -- notably in financial assets and real estate-that have since popped. These economies have been slower to stabilize, but the housing and retail markets are naturally adjusting as home prices fall, banks become more prudent, and consumers buy less. In these cases, there is little need for long-term adjustments to macroeconomic policies.
On the other hand, government policy choices will play an important role in countries that sustained trade surpluses, such as China, Germany, and Japan, because these surpluses were a result of government policies that promoted exports. Their economies have been hard hit by declining global demand-particularly in the US. Although government stimulus spending has propped up their economies in the short term, China, Germany, and Japan will face a fundamentally different global market in the long term -- one that is unlikely to revert to the pre-crisis status quo levels of global demand. Governments in these countries will have to choose whether to reorient their economies away from export dependence or try to muddle through and hope for a return of foreign demand.
Effective policy responses in all countries have required crisis stabilization, the cleanup of sectors that experienced overinvestment, and adjustment to the rapidly shifting global flow of funds and goods. Even the best-run governments will face difficulty managing these activities smoothly, but many are demonstrating the ability and willingness to do so. Below are snapshots of policy responses in the four largest economies: the United States., Japan, China, and Germany.
The United States had a large trade deficit during the expansionary period, allowing it to adjust relatively easily to declining global demand. However, as a result of international capital inflows, it also had significant overinvestment in financial assets and real estate. The Obama administration responded relatively aggressively to the crisis by taking action to clean up the financial sector and implementing a $787 billion fiscal stimulus plan, but spending has been slow to materialize. The US economy is forecast to contract by 2.6% in 2009 and show only minimal growth in 2010, as individuals and firms paying down their debts remain a drag on economic growth. But compared to the major trade surplus countries, the United States' relatively fluid economy will likely to adjust to the new global environment more smoothly and rapidly.
Japan's exposure to the current crisis has been exacerbated by its efforts to sustain trade surpluses, but its economy had already been adjusting before the crisis began, with production increasingly moving overseas. Moreover, when the global decline in demand hit, Japanese firms decreased production and rapidly leveled off at much lower output. In addition, the 30 August elections are expected to displace the long-ruling Liberal Democratic Party (LDP), bringing to power a government that is more interested in protecting the interests of consumers rather than producers. This situation is reducing Japan's dependence on exports, providing a more stable base for growth.
The global slowdown has hurt demand for Chinese goods and threatened the vitality of China's export-oriented economic growth. While exports are unlikely to return to their previous levels in the near to medium term, Beijing's massive stimulus spending, relaxed monetary policy, and export promotion will partially counter the collapse in demand. If China is to secure long-term growth, however, efforts to rebalance the economy toward greater domestic consumption -- by putting more income in workers' pockets-must be considered.
The export orientation of the German economy and tight integration with the wider European economy limits the government's ability to stimulate domestic demand. Moreover, liabilities in the banking sector are worrying. While the government has fiscal room to maneuver, focus on the upcoming election and fears about the cost of potential interventions in both the real and financial sector have constrained Berlin. Most importantly, the government is averse to policies that would lead to a structural change in the country's export orientation. While this could begin to erode after the 27 September elections, any shift in German policy will be limited by concerns about government debt levels.
YOSHIKAZU TSUNO/AFP/Getty Images
By Ian Bremmer
Sometimes there's less to a story than meets the eye. Take Venezuelan President Hugo Chávez's announcement last week that he would freeze diplomatic and commercial relations with Colombia. There's nothing new about tensions between these two governments, but markets responded badly to what sounded like a drastic step. This story is much ado about almost nothing.
Chávez is angry that Colombia has invited a few hundred additional US troops into the country, granting them access to three Colombian military bases. (There are currently about 300 American soldiers in the country. Colombia's government insists it will not amend an existing bilateral agreement that caps the total of US troops at no more than 800.) Colombian President Alvaro Uribe insists the troops are there to help target narcotics trafficking, but Chávez has warned his people of an impending Yanqui invasion. Meanwhile, Uribe accuses the Venezuelan government of selling military materiel to FARC guerillas inside Colombia.
There's nothing new about any of this tension. Trade between Venezuela and Colombia briefly shut down in 2005 after Colombia captured a FARC spokesman in Caracas. It happened again in 2008 after a Colombian bombing raid killed FARC's second in command inside neighboring Ecuador, a Venezuelan ally. In both cases, trade between Colombia and Venezuela briefly halted but was quickly restored.
That will happen again this time, because the two governments need the commerce more than they need the conflict. About 14 percent of Venezuela's imports come from Colombia. Venezuela needs these products, particularly processed food, because the tight price controls Chávez has ordered and his ongoing threats to nationalize companies and entire industries have depressed production levels inside his country. Closing the door to inexpensive and easily accessible Colombian imports would worsen already significant shortages and put extra pressure on inflation and fiscal accounts.
The dependence works both ways. About 18 percent of Colombia's exports go to Venezuela. President Uribe has fewer political vulnerabilities than Chávez, and with an election next year, some fear he might take a tougher than usual line -- rallying core supporters, riding out protests from the export sector, and boosting his chances of securing a third presidential term.
But Uribe will probably abandon hopes for a third term, since he's unlikely to win support from lawmakers to launch the referendum he would need to remove constitutional term limits. Uribe already faces criticism that he hasn't done enough to refloat the country's floundering economy. It makes little sense for him to make economic matters worse, just as he's moving into retirement.
It's one thing for Chávez and Uribe to stir up nationalist fury in a bid to change the subject from tough economic times. It's quite another to launch a mutually damaging trade war that can only make matters worse.
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By Eurasia Group analyst Sean West
Earlier this month, the G8+5, the world's leading industrial states plus some other important developing states, committed to finishing the Doha Round of trade talks by the end of 2010. U.S. and Chinese officials paid lip service to finishing Doha this week during the inaugural bilateral "Strategic and Economic Dialogue." World Trade Organization chief Pascal Lamy will likely cite both announcements as cause for celebration. Healthy skepticism is in order.
Overblown fears of oncoming protectionism were all the rage just weeks ago. But as Ian Bremmer wrote in this space back in March, the financial crisis need not trigger as many new trade barriers as some feared. Still, the global liberalization envisioned by a completed Doha Round by the end of next year is likely a bridge too far.
Pledges aside, there's not much reason to be optimistic that a deal can be concluded in the near future. Personality conflicts may have receded, as both Susan Schwab and Kamal Nath -- who banged heads last year -- no longer represent the United States and India respectively. But domestic conditions in the wake of the financial crisis won't help much with trade liberalization. While there's ample reason to be skeptical that neither China nor the EU are any more ready conclude an agreement than in the past, all other countries can play wait-and-see unless and until the United States shows serious leadership.
Obama has yet to lay out a clear strategy for the Doha Round. U.S. Trade Representative Ron Kirk has said several times that the United States considers Doha completion as critical, but there's no evidence yet that he'll have the political support he needs to set policy and to bargain. Comments from Obama himself on Doha have been ambiguous at best, warning of an "imbalance" in potential trade-offs on the table in current negotiations. It's also not yet clear how much political capital Obama will put at risk at a moment when he needs the support of organized labor for a host of other domestic priorities. And in a nod to agricultural interests, he allowed his budget proposal to cut farm subsidies -- a critical sticking point in the Doha negotiations -- to die on arrival.
Real movement on trade policy remains on hold until the president explains publicly how trade policy fits into his administration's broader agenda -- a speech he might give in advance of the September G20 meeting in Pittsburgh. But he'll have to use that speech to persuade an anxious American public -- and many trade skeptical US lawmakers -- that trade deals can spur growth without killing jobs. Obama has an advantage. His history suggests that he believes in the benefits of trade, and in a Nixon-goes-to-China way, he can spend political capital earned on the campaign trail to bring trade-wary Democrats along with his initiatives. But he has so far provided no indication that he's ready to accept the political risks that come with the push needed to get Doha done within 18 months.
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By Ian Bremmer
Believe it or not, there is an emerging bit of good news from Washington's efforts to address the financial crisis: The Obama administration and Congress are unlikely to stumble into the global trade war that some continue to fear.
The swing toward large Democratic majorities in Congress of the past two election cycles, some of Obama's campaign-trail rhetoric, and the financial spiral of recent months have stoked fear of a trend toward a level of protectionism that might trigger a belligerent international reaction.
It's not that we haven't seen U.S. lawmakers surrendering to a few protectionist temptations. In fact, the financial crisis has pushed governments all over the world to bolster their political capital by throwing up barriers meant to protect local industries and companies. In fact, the World Bank has noted about 50 trade restrictive actions and only a dozen liberalizing ones taken by G20 countries since they promised to avoid protectionism last November. Several countries have doled out low-cost (or no-cost) cash to domestic automakers; the United States has restricted stimulus procurement to a subset of countries under a "Buy American" provision; Mexico has slapped more than $2 billion in tariffs on trade with the United States in response to U.S. cancellation of a Mexican trucking program.
But thinking about the (limited) magnitude rather than the (large) quantity of these actions reveals that this is more a predictable, populist response to tough times than the opening salvos of a trade war. In the United States, the highest stakes for protectionism are around the automotive sector. That's not surprising, given that the loss of millions of jobs that would follow a total industry collapse would undo the Obama administration's job protection plans at one fell swoop. But there has been no serious suggestion in Washington of raising tariffs on foreign autos. And both nationwide polling and congressional votes have made clear that there is no large-scale public pr political demand for keeping the industry alive through massive subsidy. If the crisis in the auto sector, where both unionized labor and management could easily point to foreign competition as a cause of its problems, is not enough to merit nuclear protectionism, what is?
Nothing, probably. The silver lining to the economic and financial crisis in the United States is that it has very little to do with globalization. To date, there has been virtually no scapegoating of foreigners. Instead, polling suggests that Americans view the recession as the price that must be paid for domestic greed and lousy oversight. Certainly, as Americans feel poorer, the risk of redistribution from the have-lots to the have-littles increases. But that's not a backlash against international economic interconnectedness, trade, or global supply chains.
Some risk of a global trade war will remain for as long as the recession continues. And we certainly see more tit-for-tat protectionism internationally (especially out of Beijing, where economic nationalism is on the rise) as an unintended consequence of U.S. policy. But absent a depression scenario, the near-term likelihood of an all-out trade war remains small.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.