Five Risks to Watch in 2019: Q2 Update

1. Yes, we have no certainty. I warned in a 2019 year-ahead look at risks that uncertainty would rule. Let me double down on that bet.

• Mueller Investigation: Recent weeks have included the indictment of Roger Stone, the conviction of Paul Manafort, and the jarring testimony of Michael Cohen. The overall stats of the investigation are mind-boggling: 199 criminal charges, 37 indictments or guilty pleas, and 5 prison sentences. House Democrats are conflicted about impeachment as they intensify their own series of investigations. Multiple additional criminal and civil actions are unfolding in courts from Washington to Manhattan. But this has yet to move markets or fundamentally alter the U.S. political landscape, and it remains pure speculation whether anything definitive hits before 2020.
• Federal Budget: The year started with the fiscal uncertainty of the longest U.S. government shutdown in history. The outlook for the FY2020 budget is even worse, with President Donald Trump’s emergency declaration to fund southern border security and ongoing maneuvering to reprogram already appropriated Pentagon dollars intensifying the battle across party lines.
• U.S.-China Trade: The U.S.-China non-deal on trade is caught between a largely uncompromising Chinese position and a shifting U.S. one. Beijing and Washington appear to have each changed their minds at least once on the importance of concluding an agreement and on the wisdom of getting Presidents Trump and Xi Jinping into the room without a final deal agreed. The worst possible outcome is a non-deal that markets do not sufficiently anticipate and price in, which could send both U.S. and Chinese stocks reeling (to date, U.S. markets have shrugged off the delays and overall course of negotiations).
• North Korea: The zero-outcome Hanoi summit has pushed Pyongyang back to its old tricks of provocation. While it likely redoubles global criminal activities from illegal fishing to bitcoin theft and ransomware to keep itself solvent, it’s also dusting off its rocket testing program . North Korea made clear at the summit that it is eager for sanctions relief, but it isn’t willing to give enough to get that. A worsening situation would be a real problem for South Korean President Moon Jae-in, who has tied himself to the process and is due for reelection next year with a faltering economy in tow.
• Brexit: Let’s call it Zombie Brexit, or maybe go with the slogan, “The sun never sets on Brexit.” Theresa May remains in her job, principally because no one else would dare take it. And while Britain is united in hating her proposals, no one else has a clue how to proceed. A highly frustrated Brussels will keep this albatross around its neck for the foreseeable future as it also deals with rising populism across the European Union and increasingly tense transatlantic ties (more on that below).
• Emerging markets: Recession has finally hit in Turkey, a market that had proven surprisingly resilient despite rising sovereign risks, debt, and inflation over the past several years. If Argentina was the first emerging market shoe to drop last year, Turkey might be another canary in the coal mine warning of tough times ahead.
• Energy markets : Oil markets could tighten dramatically in May as Iran sanctions waivers expire and U.S. secondary sanctions on Venezuela’s cratering oil sector tighten. The Saudis feel burned by the price outcome the last time the United States leaned on them to increase production ahead of Iran sanctions late last year, so don’t expect relief should the United States decide to tighten things up. More on the outlook from my CSIS Energy Program colleagues.

2. U.S. alliances are breaking . Allies increasingly doubt U.S. commitment today and in the future. Former U.S. Secretary of Defense Jim Mattis warned in his resignation letter to President Trump, “While the U.S. remains the indispensable nation in the free world, we cannot protect our interests or serve that role effectively without maintaining strong alliances and showing respect to those allies.”

Having served as a shock absorber for the first two years of the Trump administration, Secretary Mattis knew just how thin U.S. policy was wearing with U.S. allies. Since his departure, what was happening behind closed doors is out in the open.

In recent months, the Philippines demanded a U.S. affirmation of commitment to defend its territory in the South China Sea under the terms of the bilateral 1951 Mutual Defense Treaty (MDT). Setting a slippery-slope precedent, U.S. secretary of state Mike Pompeo recently publicly reaffirmed U.S. commitment, hoping to forestall a threatened review by some in the Philippines government of the MDT. Under the chaotic Duterte presidency, the Philippines is merely the most vocal of U.S. allies, but it’s hardly the only one in the Indo-Pacific asking these questions of U.S. resolve to honor mutual defense commitments—and wondering whether they want to get drawn into commitments of their own as tensions rise between the United States and China. As the United States walks away from multilateralism in the region in favor of a bilateral approach, concern is waxing, and willingness to cooperate is waning.

In Europe, NATO allies are reeling from the way U.S. withdrawal from Syria was announced. By all reports, the decision was made on the fly by President Trump following a late December phone call with Turkish President Recep Tayyip Erdogan, during which President Trump said about Syria, “[I]t’s all yours. We are done.” Since that time, others in the administration—and particularly the Pentagon—have walked the president back to a 1,000-strong enduring U.S. force presence in Syria. But Europeans remain furious over the lack of consultation, which the president repeated regarding U.S. enduring troop presence in Afghanistan, where NATO allies have spent blood and treasure over the past 18 years.

No surprise then that not a single NATO ally committed forces several weeks ago when the United States pivoted back to U.S. allies to request troop commitments for Syria, even going so far as to impose a deadline on demand. That resounding silence is the first total brushoff from NATO allies in recent memory. Even at the height of the furor over the Iraq War under the George W. Bush administration, there was commitment of forces from NATO allies. Europeans are similarly breaking ranks on U.S. calls to keep Chinese companies out of 5G networks, and they’re broadly going their own way on China policy due to lack of U.S. consultation on trade talks among other issues.

Tensions between the United States and its allies could become much, much worse in coming months if the Trump administration moves forward with the president’s reported focus on a “cost plus 50” arrangement to U.S. bases abroad. Allies also remain concerned about the next lurch in U.S. trade policy, including possible auto tariffs.

And the problem is unlikely to go away under a new administration. There is a growing sense among U.S. allies that U.S. retrenchment and unilateralism under the Trump administration may not be outliers in U.S. policy but a trendline they must account for in future planning. Many in Europe still have a bitter taste from the lead-up to the 2003 Iraq War, and deep disappointment in U.S. response to the Syrian Civil War and resulting refugee crisis. Frontrunning 2020 Democratic candidates have been notably quiet on the importance of alliances as well. And public views of the United States from allies certainly make it politically convenient for leaders to step back from working closely with the United States, including a recent Pew Research poll that finds U.S. favorability ratings at historic lows, and another Gallup poll in which China now eclipses the United States in global approval and Russia equals it.

3. Pressure to fragment global supply chains is intensifying. Growing regulation and scrutiny by the U.S. government of technology trade with China has rightly raised for businesses the question of whether they should restructure global supply chains to bifurcate U.S.-bound and U.S.-sourced inputs and products from China-bound and China-sourced inputs and products. This challenge is also being felt in the digital domain as China builds out its own global approach to digital products and services under its Digital Silk Road initiative, an offshoot of the $1 trillion Belt and Road Initiative. U.S. digital services companies have for years been forced to navigate China’s censorship and data localization requirements; now Chinese information and communication technology (ICT) and digital companies are falling under U.S. national security scrutiny, with the United States taking a strong stance with its allies not to integrate Chinese commercial technology into their next generation 5G telecommunications networks or face potential reductions in U.S. intelligence cooperation.

Congress is closely watching ongoing trade talks to decide whether it needs to step in to address the structural issues threatening U.S. future prosperity and security. Last year, Congress passed the Foreign Investment Risk Review Modernization Act and Export Control and Reform Act. Chinese companies have broadly accepted a presumption of denial in a range of potential U.S. investments and acquisitions, and U.S. companies in turn are losing appetite for new investments into China with so many uncertainties about the future contours of the relationship.

Another wildcard is Europe’s parallel movement on scrutiny of Chinese tech transfer, alongside its increasingly protectionist posture toward its own technology base. As mentioned under the last risk item, Europe and the United States are pursuing these similar ends quite independently. And when taking into account the additional layer of data privacy standards, where Europe has been particularly aggressive in protecting its citizens at the expense of U.S. high tech companies, it’s not difficult to envision a trifurcated world. Related, Japan is in talks with the European Union about creating a shared data governance standard it hopes to involve the United States and others to set norms in sharp contrast with the direction China is taking the internet.

The hook is this: we’re talking about completely unraveling the global economy. It’s wishful thinking that the United States and China can file for a neat divorce. Supply chains are deeply intertangled. There’s a reason Tim Cook has spent so much time at the White House, and that Xi Jinping has met more with U.S. business leaders than U.S. officials over the past two years. A move from market to state-directed supply chain planning and operations would likely place a significant drag across a range of sectors and industries reflected in immediate economic slowdown and consumer price increases beyond tariffs to date.

4. Alternatives to capitalism are trending. In case you hadn’t noticed, socialism is no longer a cringeworthy word—and it’s not just the Bernie 2020 campaign and the arrival of Congresswoman Alexandria Ocasio-Cortez driving this change. To an increasing number of Americans who never lived through the Cold War, socialism doesn’t invoke life behind the Iron Curtain, but rather an idyllic life of center-left Nordic governments with zero student loan debt, generous parental leave, and free health care.

The progressive arm of the Democratic Party, which took off after the 2016 election and claimed serious ground in the 2018 midterms, is happy to look beyond free-market capitalism for cures to perceived social ills. Its ideas have already taken the party by storm. A two-pronged litmus test has emerged for all 2020 Democratic hopefuls: endorsement of single-payer healthcare and the New Green Deal.

This hasn’t gone unnoticed by Republicans, including President Trump’s rejoinder in his State of the Union address, “Tonight, we renew our resolve that America will never be a socialist country.” But polling data suggests that Republicans are likely on the losing end of a trendline dating back at least to 2010. Their own experience with the failed repeal of the Affordable Care Act and the continued state expansion of Medicaid should be instructive in reading the mood of the country when it comes to interest in government playing a substantially different role in the broader U.S. economy.

Gallup polling from last year revealed that 47 percent of Democrats have a positive view of capitalism compared with 57 percent that holds a positive view of socialism. The trend also holds for all voters ages 18-29, with only 45 percent with a positive view of capitalism and 51 percent with a positive view of socialism.

President Trump redirected U.S. concerns about fairness in wealth inequality and perceived global winners and losers on the issue of trade in the last election. This election, we can expect Democrats to push the idea that it’s far less about trade and more about the underlying “winner-take-all” approach to the free market. Senator Elizabeth Warren’s campaign promises to put the focus back on U.S. corporations, and in particular large tech companies. She doesn’t accuse them of outsourcing jobs, but of rigging the overall system so that it isn’t competitive or fair for new entrants or workers. There is similar furor with drug companies and health costs—something the Trump administration has only dabbled in, leaving it vulnerable to Democratic attacks in the lead-up to 2020. There’s also a growing interest among Democrats across all wings of the party in the idea of massive government stimulus: a return to a mixed economy and limited industrial policy focused on growing a new American middle class. Signature initiatives under discussion include infrastructure investment, a rapid move from hydrocarbons to renewable energy (“green collar jobs”), and broad job retraining and upskilling to get ahead of an anticipated automation onslaught.

5. Designer babies are here. It is no exaggeration to say that humans now hold the potential to control their own evolution. CRISPR—an acronym for “clustered regularly interspaced short palindromic repeats”—is essentially a cut-and-paste function for DNA editing in organisms from the most basic bacteria to humans. While the technology has been in use for only five years, it has already transformed biosciences, with remarkable possibilities and frightening potentials.

In November 2018, MIT Technology Review broke headline news: “EXCLUSIVE: Chinese scientists are creating CRISPR babies.” He Jiankui and his team at the Southern University of Science and Technology in Shenzhen announced that, contrary to an agreed-upon worldwide ban on the practice by the scientific community, he and his research team had genetically altered a viable human embryo resulting in the live birth of twins: Lulu and Nana. His research purpose, he assured the world, was noble: create a human resistant to HIV, smallpox, and cholera.

A global furor followed the announcement. Shockingly, the changes made to the DNA of the babies were germline edited, meaning heritable to any children the twins may have in the future. The Chinese government reacted to the furor by denying involvement in the undertaking, placing He under apparent house arrest, blaming him alone for the event, and even threatening the death penalty. Further investigation suggests that elements of the Chinese government might have been behind the research, raising questions about what else might be ongoing in China and elsewhere.

In recent days, leading global scientific researchers have called for a global moratorium on human testing of genome editing until an agreed international framework can be put into place. But even the co-discoverers of the technology are split, with some arguing that such restriction would fail to constrain the worst practices while denying the benefits of the technology. Existing regulations are nation-by-nation and fuzzy in what they permit. They can be very difficult to enforce considering the ease and availability of CRISPR technology. CRISPR is so easy to use that there is even an online enthusiast community of “do-it-yourself” biohackers who have edited their own DNA, inspiring the U.S. Food and Drug Administration to issue a warning about the safety of such activities. More alarming yet: biosecurity researchers have also flagged the dual-use potential for the technology to increase new classes of bioweapons.

Sam Brannen leads the Risk and Foresight Group and is a senior fellow in the International Security Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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