COVERAGE AREA and macrothesis

In our view, three trends define prevailing global fragmentation. First, Western efforts to promote democracy and to link it to market capitalism appear to be faltering. Key contributors to this dynamic include weakening Western institutions and China’s resilience relative to OECD economies during the Great Recession. Second, authoritarian leaders – or leaders with authoritarian tendencies – continue to win over electorates in market-capitalist democracies. This, too, may emanate from the Great Recession, when the frothy tide of debt that had buoyed global expansion receded to reveal craggy inequalities within and across nations. Third, leaders of democratic, market-capitalist economies seem to be warming to command-based allocation and regulatory practices. In this case, years of huge fiscal stimulus may have spawned economic revanchism: elected leaders who spent tomorrow’s money on yesterday’s factories appear to be to protecting their investments.

Trade war continues to pose downside risk to energy demand. Despite several modest indicia of Chinese goodwill, we think it may be premature to call the end to Sino-American commercial conflict. Officials in President Donald Trump’s Administration have articulated two distinct and non-trivial goals: the disaggregation of global value chains and re-shoring of productive capacity currently supplied by Chinese workers and factories; and/or substantial reforms of Chinese intellectual property practices and market access. Neither looks to be an easy lift, especially before the end of 1Q2019. Could economic weakness provoke the White House to take a weak deal? Maybe not: market perturbations have yet to materially alter President Trump’s trade war trajectory. Indeed, we think the White House might double down, rather than back down, in a down market.

Sanctions risks with potential to impair energy supply also seem unlikely to abate. New U.S. measures could impact the Russian energy sector during the 116th Congress, especially as we expect the Administration’s Russia policy to become a focal point of House Democrats’ oversight. And, if Special Counsel Robert Mueller releases a report that criticizes President Trump’s Russia ties, on-cycle Senate Republicans could join Democrats to pass legislation. Congressional sanctions against Saudi Arabia for the killing of dissident Jamal Khashoggi also remain viable, in our view. Not only do Democratic Party leaders tend to be more skeptical of the U.S.-Saudi relationship, but Khashoggi’s role as a Washington Post contributor portends ongoing entreaties for Congressional intervention by lawmakers’ local newspaper of record.

On the climate front, we believe green-leaning countries are likely to focus increasingly on securing pledges for greater ambition to address climate change from all nations in the run up to the U.N. Framework Convention on Climate Change meeting in late 2020. In the interim, we expect several separate sectoral agreements to advance, including pacts governing marine and aviation transportation emissions. That said, should international cooperation falter, we think higher-ambition countries could internationalize their prices on carbon in the long term by levying border adjustments against imports from lower-ambition trade partners.

Our targeted geopolitical coverage examines the decision sets and decision criteria of global leaders positioned to materially alter supply/demand fundamentals. In addition, our soon-to-be-released, new quarterly product, Themes, Trends and Discontinuities, will contextualize recent developments and outline our forward-looking projections of relevant economic and geopolitical outcomes.

Updated: December 24, 2018.