Foggy outlook

How the twists and turns of the trade war are hurting growth

The IMF downgrades its forecasts for the global economy. Again

AFTER WELCOMING the St Louis Blues, a championship-winning ice-hockey team, to the White House on October 15th, President Donald Trump fondly recalled a recent triumph of his own: last week’s tentative trade deal with China. Simply put, America will impose no further punitive tariffs on Chinese imports if China promises to buy American farm goods worth billions of dollars.

How many billions? “It’s very big numbers,” Mr Trump emphasised. “I said, ‘Ask for 70.’…My people said, ‘All right, make it 20.’ I said, ‘No, make it 50.’”

Will this carefully calibrated amount ever materialise? China does not want to pay over the odds or deprive other, friendlier suppliers of its custom. It also wants America to go beyond promising no new tariffs and to start removing existing ones.

The deal may unravel before it is written down, let alone signed by the two countries’ leaders next month at the Asia-Pacific Economic Co-operation forum in Santiago.

That unpredictability is a problem. Not just higher tariffs but “prolonged trade-policy uncertainty” are damaging the world economy, said Gita Gopinath, the IMF’s chief economist, this week as the fund again cut its forecast for global growth. “Manufacturing firms have become more cautious about long-range spending and have held back on equipment and machinery purchases,” the fund notes.

The fog of trade war is depressing investment spending. And because machinery, equipment and other capital goods are often imported, weak investment spending is further hurting trade.

The IMF now expects the world economy to expand by just 3% this year, compared with 3.6% last year. That would be the slowest rate in the decade since the global financial crisis.

Both America and the euro zone are expected to grow more slowly this year than the fund had envisaged in July, before trade tensions escalated. India’s prospects have dimmed sharply: it is forecast to grow by 6.1% rather than the 7% expected only months ago. And in 2020 China is now projected to expand by less than 6% for the first time in 30 years.

The fund has, unsurprisingly, slashed its forecast for Hong Kong. The city is now expected to grow by only 0.3%, compared with the 2.7% foreseen in April, before its economic prospects vanished in a cloud of tear-gas. The unrest could also jeopardise the fragile trade truce between America and China.

On October 15th the House of Representatives passed a measure enjoining America to assess Hong Kong’s autonomy annually and sanction officials who violate it. China reacted angrily to what it describes as meddling in its affairs.

The IMF’s economists have valiantly tried to quantify the damage to the world economy from the trade war if Mr Trump’s putative deal falls apart. The direct impact is surprisingly modest. The tariffs already in place and in the pipeline could reduce America’s GDP by just over 0.2% next year, compared with a world in which the trade war had never started (see chart).

More harmful are indirect effects: weaker business confidence, productivity and risk-appetite on financial markets. These bring the damage to almost 0.6% of America’s GDP in 2020. The damage to China would be almost 2% of its GDP.

These are small percentages—but of vast economies. If the IMF is right, an unresolved trade war could cost America roughly $125bn of forgone output next year alone. The cost to China could exceed $300bn (at market exchange rates). Big numbers indeed.

The Middle East’s Dangerous New Hegemonic Confrontation

Although Yemen's Houthi rebels have claimed credit for the sophisticated nighttime strike on Saudi oil facilities last month, the attack was almost certainly launched by Iran. By giving Iran no other option but to demonstrate its military prowess, US President Donald Trump has exposed himself and his Saudi allies as paper tigers.

Joschka Fischer

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BERLIN – In the old Middle East, a single overarching conflict – between Israel and the Arab countries – had many fronts, and it was the West’s prerogative to protect the flow of oil to the global economy. In the new Middle East, the defining conflict is a broader struggle among multiple players seeking regional primacy.

This new struggle began when former US President Barack Obama initiated America’s broader withdrawal from the region, but it has intensified under Donald Trump. Obama, at least, had a political vision for the region. With the 2015 Iran nuclear deal having forestalled a nuclear-arms race, he hoped that an easing of sanctions and faster economic growth would permit Iran’s gradual reintegration into the international community over the following decade. Trump, by contrast, has no strategy, and wants to disguise America’s retreat from the region, currently demonstrated in Syria by the open betrayal of the Kurds, with militant rhetoric and massive arms exports to US partners and allies in the Gulf.

For its part, Saudi Arabia, the region’s wealthy, predominantly Sunni power (if one doesn’t count Turkey), has long harbored ambitions for regional hegemony – at least in the Persian Gulf and on the Arabian Peninsula – and views predominantly Shia Iran as its main rival. For the past few years, Iran and Saudi Arabia have been waging a disastrous proxy war in Yemen, resulting in a massive toll of civilian casualties and a humanitarian catastrophe.

But the situation changed last month, when a nighttime attack targeting the heart of the Saudi oil industry sent shockwaves through the global economy. Several drones managed to cross into Saudi airspace undetected, where they launched precise attacks on key oil installations. The Saudi air defenses – if there were any – seem to have been fast asleep, suggesting that the attackers had intimate knowledge of local conditions.

A midnight attack without warning raises obvious questions. Who did it, and how did they pull it off? The Iran-backed Houthi rebels in Yemen claimed responsibility, but they are in no position to carry out such an attack. Given the technology used and the logistics involved, the only plausible suspect is Iran, despite the Iranian government’s vehement denials. And in terms of motive and interest, it is clear that Iran has profited the most from the strike.

Saudi Arabia, after all, has been humiliated in the eyes of the world and exposed as a loud-mouthed paper tiger. In addition to the undeniable failure of Saudi counterintelligence to detect or avert the attack is the equally obvious fact that Saudi Arabia will lose the war in Yemen sooner or later. At that point, its hegemonic aspirations will become an even greater source of derision.

And so, in the final analysis, responsibility for the attack on Saudi Arabia almost certainly lies with Qassem Suleimani, the general who commands the Islamic Revolutionary Guard Corps’ foreign operations unit. With this attack, Iran has proven itself to be a major regional power with impressive technical and logistical capabilities that cannot be easily thwarted. That could fundamentally change the strategic calculus in the region. All the oil monarchies on the Arabian side of the Persian Gulf are doubtless already reassessing their foreign-policy outlook, interests, and loyalties.

Iran has also left Trump looking weak. Following his refusal to respond militarily to an attack on a cherished regional ally, Trump fired his national security adviser, John Bolton, an archenemy of the Iranian regime. No one should shed any tears for Bolton. But nor can one rule out the possibility that his ouster has invited this attack.

Trump’s foreign-policy dilettantism – his use of militant bombast to mask his lack of plausible options and strategy– seems to have played a crucial role in bringing about the current situation. His decision to abandon the Iran nuclear deal with no thought for what would come afterward has proven to be the height of folly and will be very dangerous.

But there is one other dynamic to consider. Following the G7 summit in Biarritz, France, in late August, there was talk of a possible meeting between Trump and Iranian President Hassan Rouhani. The attack on Saudi oil facilities came just weeks later, shortly before both leaders were in New York City for the United Nations General Assembly, where they could have met. The question, then, is whether the attack was an outgrowth of a broader internal power struggle between Iranian radicals and moderates.

Whatever the case may be, with Saudi Arabia’s position already eroding, the region’s two real remaining military powers are Israel and Iran. Already, the two countries appear to be moving toward a dangerous confrontation. Israel is deeply worried about Iran’s apparent capacity to launch precise long-distance attacks with drones or ballistic/cruise missiles. And if that were not already a significant threat to Israel’s national security, Iran could try to supply Hezbollah or its other regional proxies with similar capabilities.

Were Israel to be attacked with the same precision and sophistication as the strike on Saudi Arabia, the Middle East would be plunged into war on a scale beyond anything it has experienced so far. Sadly (but happily for Russian President Vladimir Putin), that is the reality of a world in which the US has abandoned any pretense of global leadership.

Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO's intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960s and 1970s, and played a key role in founding Germany's Green Party, which he led for almost two decades.

The Role of the Caucasus in Russia’s Middle East Strategy

Moscow is trying to play all sides.

By Ekaterina Zolotova

Amid mounting tensions in the Persian Gulf and the Turkish incursion in northern Syria, Russian President Vladimir Putin is trying his best not to burn any bridges in the Middle East.

Last week, Putin visited Saudi Arabia and the United Arab Emirates, and this week, he will meet with Turkish President Recep Tayyip Erdogan in Sochi.

So far, the Kremlin has managed to maintain good relations with all parties involved in the turmoil, but in order to continue to do so, it will need to enlist the help of some of Putin’s closest allies in the North Caucasus.

A Precarious Position

 Needless to say, this puts Russia in a precarious position. It’s trying to play all sides, claiming to be partners with multiple countries that have conflicting interests.

Russia’s own interests in the Middle East are many, but chief among them is to maintain stability in the region, in large part so that the volatility doesn’t spread to Central Asia and the Caucasus – a critical area of concern for Russian security.

The North Caucasus is one of the most unstable regions in Russia. It has a diverse, multiethnic population and is highly dependent on financial support from Moscow. Without that support, the Kremlin would have a much harder time controlling this part of the country. The relative proximity of the Caucasus to the Middle East increases the risk that violent extremism will spread to Russian territory. Many of the Islamic State’s foreign fighters originate from the North Caucasus and Central Asian countries, which share a border with Russia.

With the Islamic State effectively defeated, some of these foreign fighters have already returned home. The recent Turkish airstrikes have also allowed several hundred IS supporters to escape from Kurdish-guarded camps in northern Syria, creating the risk that some could find their way into the Caucasus. Russia sees this as a serious national security threat. Speaking at the Commonwealth of Independent States summit in Ashgabat on Oct. 11, Putin said he had doubts about the Turkish military’s ability to control prisons housing IS militants.

Russia, therefore, wants to have a say in how the situation in northern Syria and the Persian Gulf unfolds. It doesn’t want to be dragged into another military conflict, which would be expensive and unpopular and could jeopardize its relations with some of its partners in the region. Instead, it prefers to play the role of mediator – which requires a careful balancing act. In the Persian Gulf, Russia has cultivated ties with both Saudi Arabia and Iran, though the two countries are longstanding enemies and the Saudis have blamed the Iranians for last month’s attacks on Saudi oil facilities.

In the Syrian war, Russian support for Bashar Assad and Assad-backed forces has pitted it against Turkey, which has supported the government opposition. Though Russia and Turkey are historical rivals, Moscow doesn’t want to antagonize Ankara, and both have worked together to find a resolution to the conflict in Syria. Moscow therefore has to be careful not to rock the boat with either Damascus or Ankara. The Syrian Kurds have also asked Russia for help; Russian troops are currently patrolling parts of northern Syria to prevent clashes between the Turkish army and Kurdish forces.

Room to Maneuver

The Kremlin has successfully managed relations with all these parties by using leaders from the North Caucasus, including most notably Chechen chief Ramzan Kadyrov, to build ties throughout the Middle East. Kadyrov, who accompanied Putin to Saudi Arabia and the UAE last week, is an important ally for the Russian president. He has maintained control of Chechnya and ensured that the republic remains stable. In exchange, Kadyrov has secured substantial subsidies for Chechnya from the Kremlin. (Chechnya is among the top five most subsidized Russian regions.)

In recent years, Chechnya has also attracted investment from Arab donors. The UAE has invested $350 million there, funds that have supported projects like a five-star hotel in Grozny called The Local, a large shopping center, and the Akhmat Tower high-rise complex. Saudi Arabia has also invested in projects, including a sheep breeding program in the Chechen mountains. In fact, Chechnya is the only region in the North Caucasus that has been successful in attracting foreign investment, mostly because of Kadyrov’s links to Middle Eastern investors.

He has visited the UAE, Saudi Arabia and Bahrain many times over the course of his leadership and even met with Saudi Crown Prince Mohammed bin Salman during Putin’s visit last week. These personal ties are part of the Kremlin’s strategy to win over allies in the Middle East. So while Moscow continues to support Iran publicly, Kadyrov has worked to smooth things over with the Saudis – giving the Kremlin more room to maneuver throughout the region.

Russia could also lean on Chechen leaders to help maintain relations with opposing sides in the Syrian war. According to unconfirmed reports, Syrian Kurdish leaders have reached out to the Kremlin, asking Russia for help in their fight against Turkish forces in northern Syria. Moscow has reportedly agreed to transfer some special forces – more precisely, from the Chechen special forces – to the northeast.

Though unconfirmed, this scenario would make sense considering that the Chechens have historical grievances against Turkey. In the past, Kadyrov has accused Turkey of financing terrorists and luring tens of thousands of Chechens to Turkey during the Second Chechen War (about 70,000 Chechens live in Turkey today).

Russia has managed to involve itself in various conflicts in the region without jeopardizing its relations with key partners. It has done so by relying on the cooperation of its republics in the North Caucasus. It has positioned itself as a mediator in the Syrian war and the Persian Gulf crisis and will continue to maneuver as much as possible between opposing sides in these conflicts 

A Question of Timing

by Jeff Thomas

France, 1788. Russia, 1916. Germany, 1937.

These dates have something in common.

In France in 1788, political conditions had been getting questionable, but there was no apparent need to panic.

That came the following year, with the sudden outbreak of the French Revolution.

From that point on, it was dangerous even to go out in the streets of Paris.

So many people had become enraged, that even if you were not a member of the aristocracy, you could easily become collateral damage.

And so, it would have been wise if, in 1788, you had decided to pack your bags and remove yourself from the epicentre of what was developing.

Similarly, in 1916, Russia was at war with the Germans, and the populace was becoming increasingly vocal about the state of the economy.

Yet, even the czar believed that the people simply had to accept the situation and muddle through.

A year later, soldiers were deserting, a host of political wannabes were vying for power and anyone who simply wanted to be left alone to run his own life was now afraid to go out on the streets.

And of course, in Germany, prior to Kristallnacht in November of 1938, all the warnings were there that the country was beginning to unravel, but virtually everyone assumed that, somehow, things would be all right.

A year later, Germany was at war with five nations and had invaded three others.

People were being rounded up, imprisoned and/or shot.

Those who sought to get out of Germany found that they were no longer allowed to do so.

And history is full of similar cases.

In hindsight, the warning signs have always been there: an increasingly autocratic government, increasingly volatile and irrational political struggles, mounting debt, increased taxation, a declining economy and the removal of basic freedoms "for the greater good."

In 1929, if you lived in the US, you might have just paid $2,735 for a new Packard Custom 8 Roadster – a means of showing off your recent gains in the stock market.

A year later, you might well have offered it for sale for only $100, as, for all your previous price offers, there were no takers.

And you, like they, had been wiped out in the crash, and $100 meant the difference between eating and not eating.

In 1958, you might have been enjoying a daiquiri at El Floridita in Havana and joking to friends about ‘las barbudas’ – the tiny rebel force hiding in the Sierra Madre.

A year later, the joking had ended and private businesses like El Floridita had been nationalized by the new government.

For millennia, the playbook has been the same. Countries that had been wonderful to live in, began to deteriorate from within, and the great majority of residents had failed to read the tea leaves – the warning signs that, in the future, conditions were not going to get better; they were going to get worse.

But why should this be so?

Well, in 1787, in the midst of the Scottish Enlightenment that gave rise to Adam Smith, economist and historian Alexander Tytler is credited as having said:

A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.

A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury.

From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

He further noted that the latter stages of any such decline are marked, first, by complacency, then by apathy.

The final stage is invariably one of bondage.

In some cases of collapse, the country is taken over by an outside force, but invariably, as stated above, the rot always starts from within. It’s simply human nature for the majority of any population, when passing through challenging times, to fall prey to promises that, somehow, a change in the form of government can and will result in the elimination of problematic conditions.

But how do those who make such claims sell their ideas?

Do they suggest that everyone should work harder and practice a greater level of abnegation?

Well, no.

Although such people may exist and may even become outspoken, they are, historically, never the individuals whom the majority of the population follow. Invariably, the majority (having become complacent and pathetic), choose those who promise to take from one group and share the spoils amongst those who are less productive.

As illogical as this promise is, most people, even if they doubt the reality of the claim, tend to think, "Well, it couldn’t be any worse. I might get something, so let’s give it a try."

A very simple case in point is the Bahamas election of 1967, in which Bahamians elected their first ‘man of the people’ as their premier.

Under his rhetoric of ‘Bahamas for Bahamians,’ he promised the large underclass of Bahamians that he would take the top jobs away from the British bankers and other business leaders and that the spoils would go to the average Bahamian.

Of particular interest were the luxury vehicles driven by successful businessmen.

Bahamians in their thousands imagined that the senior staff in banks would be fired, that they themselves would be given the jobs… and the fancy Jaguar Saloons.

And that did happen to some extent. Those who were loyal to Prime Minister Lynden Pindling did move up to management positions overnight – positions for which they were not qualified.

Not surprisingly, they were unable to learn decades of knowledge overnight. They subsequently either lost their new jobs, or the banks lost business on a massive scale.

And the Jaguars?

Well, it turned out that there were thousands of Bahamians for every Jaguar that existed, and for 99.9%, there would be no previously imagined spoils.

Instead, their lives soon headed south in the coming months and years, as wealth flowed away from the Bahamas, most of it never to return.

In other countries the details have often been quite a bit more complex, but the scenario and the outcome have been the same.

Once the warning signs begin to appear, it’s important to remember that, historically, the process never reverses itself.

An apathetic population is not one that will suddenly decide to roll up its sleeves and get the country, once again, on a productive footing.

Invariably, the population jumps on the toboggan of empty promises and rides it downhill until it reaches the economic bottom.

And so, circumventing such a situation becomes a question of timing.

When it becomes clear that the telltale signs are reappearing once again, those who are wise will acknowledge that the sands are running out and it’s time to move on.

The signs tend to be the same in any locale, in any era.

They’re quite easy to see. The difficult part is choosing to make an exit whilst it’s still easy to do so.