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In June, we first wrote about Geopolitics in a post-pandemic
world - Scenarios for 2025. In that piece, we looked at two
possible scenarios of how the world might look in 2025 as a result
of changes brought about or accelerated by the COVID-19 pandemic.
The first was a rebalanced global order with renewed commitment to
multilateralism, while the second was a fragmented world where the
three key players in our scenarios - the US, China and European
Union (EU) - turn inwards to focus on domestic challenges amid a
worldwide retreat from globalization.
Although scenarios can never forecast the future perfectly, at
present, the 'fragmented world' scenario seems more likely, with
multiple implications for regulation, supply chains, security and
other factors. Here we take a look at how we have moved along this
scenario pathway, and indicators to watch in relation to our three
key players: the US, China and EU.
Regardless of the US election outcome, US disengagement
is likely to persist
Current context: The trend of US disengagement
from international affairs is not new to the Trump presidency; it
has been evident since at least 2008 when then-President Obama
sought to scale down US military commitments overseas, particularly
in the Middle East. While a Biden presidency would likely see a
return to some Obama-style initiatives, such as engagement with
Iran, the Power Africa initiative and the Paris Climate Agreement,
in this scenario we would not envision that the overall trend of US
disengagement would reverse significantly, especially given the
array of internal issues facing whoever wins the presidential
election in November 2020. COVID-19 has revealed deep fractures
between state and federal governments over how to manage the
pandemic, while ongoing protests over racial inequality look set to
keep the US preoccupied with domestic issues for the time
being.
Fragmented world scenario: In this scenario,
the US public increasingly questions the efficacy and integrity of
established institutions, as politicians seek to divert blame
towards China and multilateral bodies. The US moves towards
isolationism, both within the administration and in Congress, who
begin passing "buy first" legislation and subsidies for domestic
reshoring. The administration expands restrictions on foreign
investment in key sectors of the US economy, such as medicine, rare
earths, and technology. US withdrawal from the World Trade
Organisation (WTO) or disregard of its rules prohibiting
discriminatory tariffs on grounds of goods' national origin, is a
high likelihood in this scenario.
A critical indicator to watch: The US withdraws
funding from the World Bank or other regional development banks to
force other countries to choose between the US and China when it
comes to foreign aid and development loans, as well as high-tech
investment.
China is coming under increasing domestic and external
pressure
Current context: China's relationship with the
US is worsening at an accelerating pace. The US has introduced new
sanctions on Chinese companies and officials over Xinjiang and Hong
Kong (SAR) and is considering removing trade privileges from Hong
Kong. It has also blocked Huawei's 5G ambitions, and recently
applied sanctions on major Chinese state-owned enterprises
operating in the South China Sea. Reflecting this change in
bilateral ties, in late July, US Secretary of State Pompeo relayed
that the US's official attitude to China had changed from
"pro-engagement" to "distrust and verify" (recalling former
president Ronald Reagan's attitude to the Soviet Union). The
Chinese government is likely to be alarmed by the number of
countries - India, Australia, Japan, many in ASEAN and the EU -
that have rallied to renew opposition to Chinese presence in their
economies, critical infrastructure, and claimed territory.
Compounding all this is the simultaneous collapse in global demand
caused by COVID-19, and its enormous impact on China's export
economy. Already, there has been a noticeable rise in the
willingness of the Chinese public to question the direction the
country is taking.
Fragmented world scenario: The above indicators
point towards our 'fragmented world' scenario where the Communist
Party of China (CPC) comes under internal pressure for modest
reforms to the existing system, forcing a turn inwards to
concentrate on maintaining domestic control. In this scenario,
without reduced export revenues, the Chinese state's falling fiscal
resources must be concentrated on domestic security, and Belt and
Road Initiative (BRI) investment - already suppressed - is further
scaled back around the world. China instead focuses its resources
on the relationships that are already established and are most
strategic - for instance Pakistan, with its energy corridor to the
Gulf.
A critical indicator to watch: The plenum
meeting of the CPC in October is almost certain to discuss major
themes of the government's 14th Five Year Plan (2021-2025). Among
these is expected to be the idea of 'dual circulation', an economic
strategy that, while still loosely defined, would emphasise the
idea of self-reliance. Adoption of this strategy by the world's
second largest economy would significantly affect global trade and
investment patterns and the geopolitical considerations with which
they are intertwined.
Slow EU decision-making is a risk factor for European
fragmentation
Current context: The key risk for Europe is the
fragmentation of the EU, which in our 'fragmented world' scenario
sees either de facto or de jure withdrawal of more member states
over the next five years and the emergence of smaller regional
blocs. The EU in July 2020 completed a relatively successful
negotiation over its financial rescue package. Yet longer term
there are deep fault lines around shared responsibilities, while
the EU is divided over relations with China and remains far from a
common position on migration and refugees.
Fragmented world scenario: In the 'fragmented
world' scenario, there are delays in resolving these issues.
External economic factors drive migration from Africa and the
Middle East, exacerbated by Turkey fulfilling its threat to reopen
its borders to migrants and refugees seeking to access the EU, in
the context of its dispute with the EU over hydrocarbons access in
the Eastern Mediterranean. This creates opportunities for populist
parties to come to the fore, pushing for strong local content rules
and restrictions on foreign investment and immigration. In this
scenario, terrorism remains a significant risk from far right and
Islamist militants.
A critical indicator to watch: The EU is due to
agree its multiannual financial framework by end 2020, including
decisions over aid disbursement to member states. The speed at
which this happens will set the tone for the next five years. If
talks drag on into 2021, anti-EU sentiment among both the public
and European political parties is likely to gain momentum, while
governments will remain reluctant to spend on major infrastructure
works that could improve employment levels and re-engage citizens
with the European project.
Helping clients get ahead of the future
Our 'Rebalanced global order' and 'Fragmented world' scenarios
and their potential impacts are fleshed out in detail in our '
Geopolitics in a post-pandemic world - Scenarios for
2025' report. While the report only focuses on these two
scenario possibilities, the full scenario catalogue contains many
more scenarios of varying probability and impact.
There are many ways of selecting and developing scenarios to
help think through and inform planning for an uncertain future. If
you have a scenario challenge, we would be excited to discuss it
with you and develop an approach that provides you with the most
practically useful outcome.
Contact us to learn more or request the full report.
Posted 15 September 2020 by Anna Boyd, Associate Director, Economics & Country Risk, IHS Markit and
Laurence Allan, Ph.D., Director and Head of Desk for Country Risk Europe and CIS, IHS Markit and
John Raines, Ph.D., Principal Global Risks Adviser and Head of North America, Economics & Country Risk, IHS Markit and
Keerti Rajan, Research and Analysis Director, Economics & Country Risk, IHS Markit
