The global economy continues on its long, painful rehabilitation from the Covid-19 pandemic. While the worst is clearly over, economic data in recent days shows that the current recovery is fragile. The continuing outbreaks of infections do not help either, as they make consumers and businesses nervous about spending again. In this context, the last thing the world needs is another shock of some kind.
Unfortunately, political risks are growing in many areas, increasing the chances that something untoward could erupt, hurting confidence or creating so much uncertainty that the global recovery could lose momentum. What are these risks and how can they unfold?
Two big risks in the US elections
There are two concerns about the presidential election on Nov 3, which is less than nine weeks away. First, whether the bitterly fought election prompts President Donald Trump to engineer some kind of crisis in order to improve his electoral chances. Second, whether the results could be challenged by a losing candidate, precipitating a constitutional crisis.
On the first issue, our view is that Joe Biden is likely to maintain his current lead and keep Trump on the defensive. This is not to discount the polls showing that Biden’s lead is narrowing, especially in the swing states, which will decide the election. Nor is it wise to underestimate how effective Trump’s strategy — of casting the violent protests against racism as a law-and-order issue that puts his Democrat opponent on the back foot — might be. But, even with these factors helping Trump, the fundamentals are against him. Key voting segments are turning against him. Older white voters, who were an important part of his electoral base, are put off by his management of the pandemic. Independent voters are leaning towards Biden and so are suburban women. His lead over Biden in terms of who can best deliver the economic goods has evaporated due to the recession. Add in the fact that the Democrats will mount a massive campaign to mobilise a high voter turnout and you have the odds being stacked against Trump.
In short, we could have a situation where the sitting president may seek to do something drastic to improve his electoral chances. The risks of an “October shock” are high. More on this risk below when we discuss China.
On the second issue, there is a huge controversy over postal votes. Typically, more Democrats post their votes to the election authorities than Republicans. Trump has been decrying the use of postal votes and has persuaded his supporters to believe that such votes open the way to fraud by his opponents. There are growing fears that if it is postal votes that help Biden win a narrow majority, Trump’s supporters will cry foul and refuse to recognise the results. In the 2000 presidential election, a dispute between Al Gore and George Bush over who won was eventually settled by a court decision to halt the recount of votes in the key state of Florida. Gore graciously accepted the verdict even though a recount would probably have shown him winning. In today’s hyper-partisan environment, and given Trump’s incendiary rhetoric against postal voting, such graciousness is unlikely and a full-blown constitutional crisis is possible, one that leaves the world’s largest economy in a leadership limbo with a high chance of protests and violence. That would certainly derail the American economy.
US-China relations may not be as big a risk as some fear
There are good reasons to worry about where the most important bilateral relationship in the world today, that between the US and China, is heading. With trust between the two countries broken and each side hitting back at the other, frictions are escalating. The US has unleashed a flurry of trade, technological and other measures against China, while the latter has retaliated with its own counter-measures. American voters’ attitudes towards China have become progressively more hostile.
With this background, some observers fear that Trump could pick a fight with China over some issue in the weeks leading up to the election. An external crisis with an unpopular China, it is argued, could help voters rally around their president. However, we doubt this. Deliberately creating a clash with a nuclear-armed power is risky business. China is no pushover and any incident would probably occur close enough to its territory as to give China an advantage. A clash with China may also cause financial markets to plunge, hurting Americans as well. The economy would take a big hit from the likely fall in business and consumer confidence.
Thus, it is not impossible that a desperate Trump might take such a big risk but it does not seem very likely. In fact, if anything, Trump has been careful to avoid a clash over trade — probably because he knows that a worsening of the trade war would hurt confidence and trigger a major stock market correction, all of which would hurt his electoral chances. So, while relations between the two big powers are likely to be troubled, an outright clash is quite unlikely.
Brace for a messy Brexit
Britain is currently negotiating the terms of a new relationship with the European Union following its withdrawal from the union at the end of January. The grace period under which economic relations continue as before ends on Dec 31; without a new agreement on economic exchanges, there could be major dislocations to both Britain and the EU. Since the two together account for more than a fifth of global economic activity, the consequences for the world economy could be quite painful.
The most recent round of talks ended with little agreement. The two remain divided over fundamental issues such as how far Britain has to accept EU standards and regulations in order to export goods tariff-free to the large EU market, or for its financial hub to continue serving the EU. But time is running out. A new relationship has to be ready in time for the EU summit meeting’s approval in the middle of October. Only then can the legal drafting and translating into the 23 different languages of the EU be done in time for the European parliament to pass the legislation before the grace period ends. But talks are only resuming this week and it does not look like an agreement can be hammered out in time.
A “hard Brexit” where Britain leaves the EU without a proper agreement is thus possible. That would be damaging to the European and British economies directly, with negative spillovers to the world economy and Asia. However, both sides realise this and will work hard to avoid it. A more likely scenario is one where both sides finally agree to a deal at the last minute. But because it is likely to be a vague agreement that was rushed through to meet the deadline, it will probably leave many questions unanswered and thus cause a headache to businesses in both the EU and Britain. Without clarity on trade and other cross-border issues, businesses would be uncertain on how to operate, causing a significant hit to confidence and spending.
Should we worry about China and India?
Two months after the first deadly encounter in decades between the two Asian giants left 20 Indian soldiers dead, the two appear to have clashed again last week. There are unconfirmed reports of at least one fatality on the Indian side. India claims that the incident erupted after Chinese forces attempted to occupy an area along their undefined border, which India claims as its territory. Both sides have hurled accusations against the other over the latest confrontation and talks between military officers at the border have failed to resolve the situation. Both countries are reported to be sending additional troops and fighter jets to the border where the clashes took place. But India is also fortifying the eastern border in the area it calls Arunachal Pradesh and which China calls southern Tibet.
Neither China nor India see any benefit from a wider military conflict. China has to deal with a hostile America, a disgruntled Hong Kong and a fragile economy right now: it really does not need a clash with India to add to this list. Neither does China want to push India into an alliance with the US. On its part, India knows that it is in no position to withstand a full military onslaught by China and so needs to avoid provoking the Middle Kingdom.
But that does not mean that further clashes will not happen. Much as each side prefers to avoid a clash, neither can each be seen to be conceding territory to the other. Years of road building have allowed Chinese forces to move closer to forward positions near Indian military deployments. In return, India has now started similar road building, which has allowed its soldiers to access areas India believes it owns but which China wants to occupy. This is why Chinese and Indian troops are now clashing more often.
In short, there is little chance of a full-blown war between the two countries. But there is a high likelihood of continued clashes from time to time. In that scenario, two implications follow. One is that India could find itself with little choice but to enter into a closer military and security relationship with the US, which would certainly anger China. Another consequence would be further measures by India to limit its trade and investment relationship with China.
North Korea is simmering away
Two developments in North Korea have raised concerns. The first is worries over the health of North Korean leader Kim Jong-un, who has been frequently absent from public view this year, setting off rumours of his ill health. These worries were amplified when it was recently reported that he had handed some powers to his younger sister. The second is that the country’s economy seems to be in free fall. Not only has the country been ravaged by some of the worst flooding in recent memory but its trade with China, its key trading partner, is said to have plummeted by two-thirds in the first half of the year after North Korea abruptly shut its border with China, when the Covid-19 pandemic erupted. Prices of important goods have also soared as a result.
It is hard to get a good read on what is going on in North Korea but Kim himself has made the rare concession that the country is facing multiple crises. Kim could well be tempted to launch a provocation against South Korea in order to distract his people from his regime’s mismanagement of the economy.
Political risks need to be monitored closely. While tempers will continue to flare between the US and China, a full-blown clash is unlikely. However, other political shocks might still erupt. The November elections in the US could produce trouble and Brexit is likely to be messy. China and India are not likely to resolve their border differences, so continued clashes cannot be ruled out. North Korea will continue to be a potential wild card.
Manu Bhaskaran is CEO of Centennial Asia Advisors