ALASTAIR NEWTON: Looking for the right geopolitical risks

Watch all major flashpoints – North Korea, the Middle East, Washington, China – but question the common assumptions, geopolitical analyst Alastair Newton warns.

The former British diplomat says everyone’s core thesis is largely correct that global risk eventually collapses back on to one man – US president Donald Trump – but it’s the details that matter most.

“We need to start questioning some of the assumptions we’re making about the instruments on which we rely and the robustness of our regulatory regime.

“There will always be another financial crisis. I am not saying we are on the brink of GFC2 but there is a lot of risk out there and we shouldn’t allow the issues you’re focused on right now distract you from other issues that could be even more worrisome. Don’t allow the US tax bill to distract you from Mr Trump’s trade agenda. Don’t allow North Korea to distract you from Iran,” he says.

On the first issue, Mr Newton says the one-year-old US administration is attempting to pass major legislative advances, such as a tax upgrade, but will likely fail – at least this year.

“2017 hasn’t been too bad compared with what many people were saying in January. There’s no real reason to expect things to suddenly go pear-shaped before the end of the year – but they could,” he told the Insurance Council conference and NBR’s Sunday Business.

“When he’s under more pressure in the first quarter of next year, he’s going to be looking for things to do to distract from the bad things around him. That is not going to be good news. A few weeks ago he said we were living in the “calm before the storm” and no one quite knew what he meant.

“We may well be looking, in the first quarter of next year, at a rising storm.”

How 2018 is shaping up
A potential step – the go-to of many conspiracy theorists – may be to start a war to distract the US public from Mr Trump’s low approval ratings (although Mr Newton says 38% “is enough to get him re-elected in 2020, so we could be in for another seven years.”)

If the US president takes the war road, it doesn’t necessarily mean a shooting war. Indeed, a trade war is a “fat tail risk,” he says.

“Mr Trump recently asked North Korean leader Kim Jong Un to come to the negotiation table. But why would North Korea do that? When [Libyan president Muammar] Gaddafi and [Iraq president Saddam] Hussein gave up their weapons programmes, they ended up dead.

“And events happening today show the US can’t be trusted. Washington wants to tear up its nuclear deal with Iran, despite Iran being in compliance. So why would Mr Kim bother talking until he does have a credible nuclear deterrent? My answer is he almost certainly won’t.

“[The US] will continue on the current trajectory for the next 12-18 months until Mr Trump gets to a point where he has to live with a nuclear DPRK or opt for intervention. It probably will be the former. But I still put a 25% probability on Mr Trump ordering an attack,” he says.

Two kinds of war
As for the trade war potential, Mr Trump remains firmly set on rebalancing US trade with respect to its major trading partners, especially China.

An important weapon in Washington’s bureaucratic arsenal is found in section 301 of the 1974 US Trade Act. Under this authority, the US is preparing to conduct an investigation into China’s barriers to market entry for American companies and into claims they are asked to surrender intellectual property or risk being denied business licences in China.

“[US Trade Representative] Robert Lighthizer forced managed trade agreements with Japan in the 1980s in similar circumstances. But China is not going to roll over and accept managed trade agreements.

“In the event Mr Trump hits China with tariffs, probably in the first quarter of 2018, China will retaliate. It will take the US to the WTO to start with.”

And yet, Mr Newton says even here the US may have its bases covered as it is “deliberately undermining the WTO dispute settlement mechanism.”

“There are a total of seven judges on the appellate model, with two vacancies presently. The US is blocking those vacancies from being filled, and a third vacancy will appear at the end of this year. The minimum number of judges for the mechanism to function is four.

“Unless the US changes course, by September 2018 we will no longer have a WTO dispute settlement mechanism. That matters not just to New Zealand but to the world as a whole. The US is doing this deliberately because it doesn’t like having rulings against it,” he says.

China’s reactions?
If the US were to target China, Beijing wouldn’t ignore the slight, even if it is infringing on trade practices as the US alleges.

“China’s first target will be farm produce – pork, beef, chicken and soya beans. These are politically sensitive in the US and Mr Trump will hate that. So he’ll probably lash out at the issue of steel from China. And as soon as that happens, Europe will be affected and the conflict will escalate.

“A trade war is the most likely of the scenarios. Not a shooting war but a trade war.

China will remain an important economic partner for New Zealand in the Asia Pacific region, but “we are going to be living with an increasingly assertive, mercantile, dangerous and ambitious China,” he says.

“Domestically, there are a lot of economic stresses in China but it has probably the most competent leadership on the planet. The Politburo as a whole is packed full of skilled, experienced people who know how to run things.

“Despite his strong words at its recent 19th Party Congress, I think we can reasonably assume that left to his own devices [China president] Xi Jinping will concentrate on his ‘Davos agenda’ of soft power projection. China is doing very well out of this, why would it change?” Mr Newton says.

But if Mr Trump does decide to confront China on trade or over its land grabs in the South China Sea, “the velvet glove will come off and we’ll see the less appealing side of China’s international projections.”

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