Life is going to get harder before it gets easier.
In the last week, US presidential aspirants Donald Trump and Ron de Santis both suggested that they would halt or cut support for Ukraine in what they describe as a Slavic border dispute. The International Criminal Court in the Hague (that’s in the Netherlands, not Holland, for Seinfeld fans) said that it had issued a warrant for President Putin’s arrest. President Putin, to show how little he cares for the ICC, visited occupied Mariupol.
Putin then received President Xi of China to discuss trade talks and the ‘crisis’ as Putin puts it in Ukraine. In a post-summit press briefing, Xi said there will be increased focus on trade in energy, raw materials and electronics (chips for missiles?). Chinese data show that in the first two months of 2023, Russia has overtaken Saudi Arabia as China's main oil supplier. The increase in trade in energy and raw materials means Russia is drawn more tightly into China’s embrace in the long-term, so even if the war in Ukraine ends tomorrow, Russia won’t be supplying as much energy and raw materials to its former western customers in the future.
Xi presented a 12 point peace plan for the war in Ukraine. This is no more than a re-hash of China’s February position statement which is open to multiple interpretations. The first point calls for respect for the sovereignty of all nations but does not condemn Russia for its invasion. It appears to call for an immediate ceasefire but crucially not for the withdrawal of Russian troops from any occupied areas of Ukraine. If this doesn’t change, the plan will not be acceptable to Ukraine or to its western supporters. Xi is expected to call President Zelensky of Ukraine to talk about what Ukraine will have to give up to get peace (the Donbas and probably more).
Uncertainty and obfuscation are exactly the strategy at the moment, the best hand that Russia and China have to play. Both Xi and Putin now know that they only have to hold out until the US presidential election in 2024 and they will have won this round of the Great Power game, assuming the Republican candidate wins.
President Xi will prefer to deal with a transactional, isolationist US president than one who espouses liberal interventionist policies supporting Ukraine and Taiwan. If Putin wins by getting away with annexing a fifth of Ukrainian territory, Xi wins because the precedent that both Trump and DeSantis offer to set in Ukraine can be applied to Taiwan. Xi will be emboldened to think that he can fulfil his destiny by reuniting China with its errant island province without going to war with the US in the process. Any price Xi has to pay in reduced trade with the collective west can be offset by the gains he makes in Eurasia, having neatly pocketed both Putin and Zelensky to add to his Middle East collection of energy-exporting theocratic potentates. Xi’s 12 point plan decries ‘unilateral sanctions’ so he hopes to maintain trade links even as he competes strategically with the US and its allies.
One scenario for the near future is a MAGA Republican president doing a deal over Zelensky’s head to cede territory to Moscow in return for peace, having secured Europe’s dependence on US energy exports to substitute for lost Russian oil and gas. The MAGA President then does a deal over the next President of Taiwan’s head (presidential elections there are scheduled for January 2024) to assure China that the US will not fight to support democracy on Taiwan. In exchange, the US gets more favourable trade terms with China such as a restructuring of the RMB:USD trading band or higher tariffs on Chinese exports to the US.
Meanwhile, as liberal interventionism loses ground both in the liberal democracies and in the authoritarian nations, the financial underpinnings of fiat-currency western capitalism begin to look shakier than at any time since 2008. None of Silicon Valley Bank, Signature or First Republic are globally significant, but the timing of the intervention to support either the banks or their depositors is politically bad. In the US, the Fed may tighten money supply further even as the Treasury prints money to bail out banks, leading to further tightening, a greater risk of recession and the inevitable calls for cuts to government spending that will ensue. Credit Suisse has been a known problem for years and its acquisition by UBS does not by itself portend a systemic breakdown. However the coincidence of bank failures does point to a need for renewed regulatory rigour. In true comedic style then, the UK Chancellor, against the Bank of England’s advice, announced he wants to relax the regulations on banks imposed after the GFC.
Alongside the banking problems, recessionary fears are now stalking stock markets. Technical analysts are poring over yield curves, new home starts, non-farm payroll data and Purchasing Managers’ Indices to try to time the next economic contraction. A US recession between now and November 2024 would not help Democratic chances at that election. Most banking analysts and stock markets do not predict a recession this year, or at least only a reduced chance of one, which is a marked improvement on predictions from Q4 last year. Still, there are fragile elements to the global economy including low probability events such as a resurgent or new pandemic, climate change and weather events, inflation and central bank responses to it, and geopolitics.
What would world trade and global shipping look like with a MAGA US President? Would the EU distance itself from a less interventionist US and take a more defensive stance against both Russia and China? Europe might decide that in foreign policy it was time to stand on its own and learn not to rely on the US. That would affect trade and economic policy too, perhaps leading to more defence spending and further reshoring of technology manufacturing from China, as well as the further exclusion of Chinese companies and investors from EU technical businesses including those involved in the energy transition.
The concept of the Indo-Pacific might crumble, leaving India to balance its positive relationship with Russia and its negative relationship with China, and perhaps driving Japan and South Korea into closer military alliance with each other and the AUKUS.
The so-called Global South of non-aligned nations, perhaps led by India as the world’s most populous nation, would play the liberal democracies off against the autocracies to their own best advantage. Politics would become increasingly transactional and bilateral. International bodies would continue to lose relevance, capability and function. The chances are that globalisation will continue to reverse, that free trade will lose out to bilateral and club deals, nativism and climate-related food nationalism. Shipping will have to contend with a changing geopolitical context and more regional regulation such as the EU’s ETS, at the same time as it has to contend with lower long-term demand growth in the next 20 years compared to the previous 20 years. The times, they are a-changin' and not for the better.