Jacob Shapiro on the coming conflict between China and Japan, Persia rises, oil’s glass ceiling, shuffling deck chairs on Europe & NAFTA’s resilience

By Jacob L. Shapiro*

Almost a year ago to the day, we wrote an article titled "The Geopolitics of 2017 in Four Maps." 

The premise was simple: We picked out four of the best maps our graphic designers (TJ Lensing, Jay Dowd, and Mandy Walsh) had made in the past year. We selected the maps based not only on how awesome they were, but also on how closely they linked to our predictions for the year ahead. As it turned out, that article was one of our most popular in 2017.

We return this year with a similar concept in mind. Here is some of our best graphic design work from the past year, with an explanation of why each graphic is crucial for understanding the geopolitical forces to watch in the year ahead.

Map 1: The Coming Conflict Between China and Japan


Source: Geopolitical Futures  (Click to enlarge)

2017 was not kind to certain aspects of our East Asia forecast. (Here is our report card on last year's forecasts.) We expected the US to launch a pre-emptive strike against North Korea’s nuclear program. The strike never materialized, in large measure because of objections by South Korea, which is unwilling to sacrifice Seoul to keep the US out of range of Kim Jong Un’s missiles.

We don’t expect that to change in 2018. There will be no repeat of the Korean War. At most, the US will launch a limited tactical strike to slow North Korea’s progress toward a deliverable, long-range nuclear weapon. In other words, the world is going to get used to the idea of a nuclear North Korea. That takes the focus in the region away from the back-and-forth threats between Kim and US President Donald Trump and places it firmly on the Sino-Japanese relationship.

Theirs is a relationship that has remained steady for many decades, and with good reason. After all, China and Japan have many economic interests in common. But a nuclear North Korea changes the game. It would signal to Japan that a US security guarantee is perhaps not worth what it once was - and that means Japan will become more aggressive in pursuing its own interests. It would signal to China that the US is all bark and no bite, and that Trump is a paper tiger. 

In 2017, Xi Jinping became the newest dictator in China, and Shinzo Abe pulled off a stunning electoral comeback in Japan, cementing his mandate for years to come. They are two powerful leaders of two powerful countries with a history of mutual mistrust and a hunch that the US is too self-absorbed to throw its weight around in the region the way it used to. That means China and Japan will begin competing with each other directly - on the Korean Peninsula, in Southeast Asia, and as shown above, in areas that both claim for themselves.

Map 2: Persia Rises


Source: Geopolitical Futures (Click to enlarge)

The Middle East in 2017 was all about the war against the Islamic State. It created strange bedfellows. Russia coordinated its military activities with the United States. The cooperation between Turkey and Iran, historical rivals, was unprecedented. The Arab states put aside their differences and their disdain for the Bashar Assad regime and devoted their resources to the Islamic State’s defeat.

As it turned out, the war was successful. IS no longer holds meaningful territory in the Middle East - just a few isolated pockets in Syria and Iraq. The victor of this war was Iran, which is poised to be the most consequential actor in the region in 2018. As the map shows, Iran has at various times been powerful enough to dominate the Middle East. The Islamic State’s defeat is Iran’s best chance to realize its regional ambitions.

Everything is set up well for Iran. Its influence over its old nemesis Iraq has become quite strong. The preservation of the Assad regime means the preservation of one of Iran’s most powerful allies. The end of the war against IS means Hezbollah can retreat from the battlefield and get back to ruling Lebanon… and causing problems for Israel. And all of this means Iran’s dream of projecting power out to the Mediterranean is within its grasp.

We don’t expect Iran to complete its objectives. First of all, Iran’s geography makes power projection difficult, even with significant allies in the region. But second and more important, Turkey is stronger than Iran. However, Turkey is not yet ready to assert that strength. That means 2018 will belong to Iran. It must make its moves now if it is to press its advantage successfully. In the long term, a new Persian empire will fail to materialize. But in 2018, Iran’s pursuit of empire will define Middle Eastern affairs.

Chart 3: Oil’s Glass Ceiling


Source: Geopolitical Futures (Click to enlarge)

This chart shows the range of break-even oil prices for new wells in the US Lower 48, the Gulf of Mexico, and Canada. For many of these wells, the break-even point has dipped well below US$60 a barrel. And that means 2018 is going to be another year of oil prices that are too low to solve the fundamental problems of Iran, Saudi Arabia, and Russia in particular.

At the time of writing, oil prices have actually spiked to near US$70. There are a host of reasons for this: cold weather, political uncertainty, and an unexpectedly large decline in US crude stocks. The thing to keep in mind is that even with many OPEC nations respecting crude production cuts, supply will outweigh demand in 2018.

For Iran, that means less money to spend on its adventurism abroad. For Saudi Arabia, it means more political upheaval as the young, new crown prince attempts to do what no Saudi ruler before him has been able to do: make Saudi Arabia more than an artificial state held together by oil profits. For Russia, it means a choice between cutting social spending, cutting defense spending, or running its economy into the ground (none of which are particularly savory options from Moscow’s point of view).

Absent a major event that knocks out one of the main crude producers - and we don’t see such an event happening in 2018 - we expect oil prices to remain around the US$60 range, perhaps even slightly lower. We can’t predict the exact price, but we can predict continued problems for oil-dependent states as well as record-high levels of US production.

Map 4: Shuffling Deck Chairs on Europe


Source: Geopolitical Futures (Click to enlarge)

Perspective maps are my favorite kind of map that we make. Even the subtlest change in perspective can completely alter the way you view a situation. This map of Europe from the United Kingdom’s perspective is a case in point. It also happens to highlight some of the issues we expect to dominate European affairs in the year ahead.

The UK is going to leave the European Union in 2019. 2018 will feature a great deal of political melodrama as negotiations between the EU and UK occupy headlines. But the headlines will not capture the issues of real importance. What matters is not whether there will be a UK-EU trade deal. We expect there will be simply because the EU (i.e., Germany) trades a lot with the UK, and the UK in turn trades a lot with the EU. It is in neither side’s interests to fail to reach an agreement.

But the UK’s exit means London’s foreign policy toward Europe must now revert to a prior form. We’ve already seen the beginnings of this process with the recently signed Polish-UK defense treaty. What’s the goal for the UK? To ensure that no country on the European continent becomes strong enough to project power across the English Channel.

Another intriguing element of this map is that at its center are two countries whose relationship more than any other will define EU affairs in 2018: Poland and Germany. Poland is fed up with Germany’s disproportionate influence in the EU and is nervous about what losing the UK, a counterbalancing force to Germany within the bloc, will mean. The EU will be tested in several areas, and separatism won’t go away, but the Polish-German disagreement on the EU’s future will be the most important issue to watch.

Chart 5: NAFTA’s Resilience


Source: Geopolitical Futures (Click to enlarge)

NAFTA negotiations are heating up so much that even Canada is becoming a tough negotiator. Jokes aside, one of GPF’s major forecasts for 2018 is that NAFTA will remain in place, despite whatever threats are bandied about or whatever letters of intent Trump signs. This chart goes a long way toward explaining why.

The only way we know to analyze highly politicized debates like the one surrounding NAFTA is to tune out the rhetoric. Interests take precedence over words and politics. And the interests here - for all three countries - require that NAFTA stay in place. The chart shows very clearly why this is the case for Canada and Mexico - trade with the US is an overwhelmingly important part of their economies. 

But the chart doesn’t quite say everything about the US angle. US trade with NAFTA partners is large, but it doesn’t come close to US trade volumes with the rest of the world. We can’t forget, though, that the US is made up of 50 states, and two of the most influential of those states - California and Texas - are deeply invested in NAFTA’s continued existence. And California and Texas are by no means the only states whose economies rely on trade with NAFTA partners.

As with the Brexit-EU negotiations, expect a good deal of political soap opera performances around NAFTA, especially on the question of whether Trump will try to take the US out of the trade pact unilaterally (a step that is as likely to lead to years of domestic litigation as it is to an actual US exit). Expect also that at the end of the day, NAFTA will remain in place, no matter how badly the three sides insult each other.

These are some of GPF’s best maps and charts of 2017, and each sheds light on what will be the important stories in 2018. China and Japan will compete for power in Asia. Iran will try to reshape the Middle East to suit its interests. Oil prices will remain too low for Iran’s, Saudi Arabia’s, and Russia’s liking. Poland and Germany will square off over who gets to make the rules in Brussels, while the UK will go back to being an outsider, working to balance powers on the Continent. And NAFTA, for all the political drama to come, will remain in place. It should be an interesting year.


*Jacob Shapiro is director of analysis at Geopolitical Futures. This article was first published by Mauldin Economics, and is used with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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47 Comments

Splendid piece. Plenty to think about. Any predictions for the Poland/Germany EU-post Brexit situation might play out?

Canada isn’t negotiating & neither has the US yet
It’s all been posturing with US making 5 silly demands & Canada demanding progressive policies be included
in a revised NAFTA
The US has preferred right to Canada energy oil & gas which would expire if they ditch NAFTA a very unwise
event for both countries.
The interconnections of the big 3 countries will see a revised NAFTA regardless of any cancellation by the moron president

Hey - how did you get that word passed censorship?

Moron, moron, moron - testing - one - two - three ..

2017 was not kind to certain aspects of our East Asia forecast. (Here is our report card on last year's forecasts.) We expected the US to launch a pre-emptive strike against North Korea’s nuclear program. The strike never materialized, in large measure because of objections by South Korea, which is unwilling to sacrifice Seoul to keep the US out of range of Kim Jong Un’s missiles.

One cannot diminish Putin's previous assertion that there will never be a conventional war on or near Russian Federation territory again.

Hence US frustration:

US Secretary of State Rex Tillerson accused Russia of using nuclear weapons to establish a new post-Soviet global balance of power and revive the Cold War threat. Read more

Predictions have a dismal track record however that's how these guys make a living I guess.

This map of Israel shows a tiny sliver of real estate surrounded by huge countries who have a mission statement to drive it into the sea. Yet it remains a major stumbling block for the world. The USA being largely the only major supporter left (NZ shamefully has turned against Israel in line with UN viewpoint).
https://www.science.co.il/Arab-Israeli-conflict/
.
Trump announcing that the US Embassy would be moved to Israel’s capital ( in line with previous Presidents) also has implications for 2018.
Yes, the cooperation between the USA and Russia in Syria is unusual - given that historically Russia has always backed the Arab states against the existence of Israel.
The Chinese area - with North Korea as a kind of unstable proxy for China, along with the Iran nuclear armament connected with NK runs through to the Middle East - Russia waiting in the wings.
Maybe the geopolitical events will be more influential to Economics this year than the failed policies of QE and ZIRP etc.

NZ shamefully has turned against Israel in line with UN viewpoint).

Are you claiming your allegiance lies not with New Zealand's declared political landscape, but elsewhere and yet you remain domiciled here?

What kind of question is that?

Who wants to know?

Know what ?
Of course NZ joins with the UN it’s a progressive country like the UN
Why would it side with Israel a country that invented the Soda stream that fails to meet expectations!

SH is denying his historic cultural heritage I think - the one that has provided a framework for his own personal freedom, human rights, the enjoyment of living in a democracy & the ability to make money without too much corruption!
Note that Israel is the only democracy in the Middle East. NZ is also a democracy.
NZ also supported the Balfour Declaration in 1917.
NZ also fully supported the creation of the modern State of Israel in 1949.

SH is denying his historic cultural heritage I think - the one that has provided a framework for his own personal freedom, human rights, the enjoyment of living in a democracy & the ability to make money without too much corruption!

A heritage long consigned to the dustbin of history.

All of the important activities in this land have been converted into odious rackets, by which I mean nakedly dishonest money-grubbing scams, especially the two sectors that used to be characterized by first, doing no harm (medicine), and seeking the truth (education). But everything else we do is infected by engineered falsehood and mendacity, including the news media, the law, banking, government, retail commerce, you name it. We’re living in a culture of pervasive control fraud, in which authorities set up looting and asset-stripping operations without any restraint. Read more

History is only a dustbin to those unwilling to learn.

A second thought:

Only the man who studies where the arrow came from can tell you the direction it is traveling in.

Perhaps the ‘odious rackets’ and the downward spiral of the USA (& by implication Western democracies) you quote from Kunstler, is still constrained partially at least by the heritage that you so quickly assign to the dustbin.

Who constrains unelected RBNZ officials from enacting failed ideological policy actions which repeatedly transfer wealth from the many to the diminishing, but elite few, over protracted periods?

Well, who voted in the 1980s Labour Govt which enabled the poor to rich transfers, and dismantled the public good structures?

I confess. It was me.

Lol. Were you tricked? Or did you feel sorry for all those merchant bankers harvesting our public assets?

To call NZ Rail at the time "a public asset" would stretch the meaning of the word "Asset" so thin as to see through it.

At the time it was gigantic financial hole in which we poured endless money and hid unemployment.

I think you’ll find a couple of well known NZ merchant bankers made a fortune out of NZ Rail ultimately at the NZ people’s expense.
The Lange ~ Douglas govt were a joke
Douglas too free market and Lange too weak
The Merchant bankers had a field day

None of which changes the fact that - it was gigantic financial hole in which we poured endless money and hid unemployment.

As an asset it was loss making - so the tax payers were going to keep pouring it down the toilet if they didn't sell it. There is no benefit to "the people" in making them pay never ending losses.

I might also add that it is not a surprise to me that, when it comes to commerce, a merchant banker makes a politician look like a *moron* - testing - one - two - three ..

Not me - I chose to live elsewhere during that period.

Although, in my defence:

1. Like so many NZ elections, we weren't voting "in" anything. We were voting "out" Muldoon, his fixed exchange rates and price controls etc.

2. They also made us nuclear free.

3. The economic reforms of that time propelled NZ into a GDP per capita growth increase to everyone's benefit.
http://www.treasury.govt.nz/publications/research-policy/tp/economicgrow...

Stephen may I suggest therapy

NZ also used to "support" and have cultural ties with apartheid South Africa.

This false analogy breaks down when the facts show that Arabs living within Israel enjoy better freedoms and higher incomes than those in any of the Arab states.

Don't believe it, sorry. Arab Israelis look like second class citizens to me. And Africans even moreso, being deported after whatever purpose is over.

The walls Israel has made are ghettos for themselves and others.

Maybe I've been watching too much Al Jazeera? (10 years). I've seen what I have seen. The illegal settlements contravene their own laws. They fail in terms of the Geneva Convention. UN resolution as to 1967 boarders. If they would get on with expelling all Palestinians into Jordan it might be more honest.

.

But not for all, including refugees?

Israeli officials have unlawfully coerced about 7,000 Eritrean and Sudanese refugees into returning to their African homelands, where they face abuse, Gerry Simpson from the pressure group Human Rights Watch told RIA Novosti on Tuesday. Read more

"But not for all, including refugees?"

Would that not be true for ALL nations who harbour refugees?

I have Arab friends who live as immigrants in Sydney doing very well - much better than their family members in the old country. But that doesn't mean there weren't Arab's having a terrible time in the camp on Christmas Island.

South Africa is simply thriving today
Crime is up & equality is seen as every business must have at least 1 black director even if they’re paid to do absolutely nothing
Apartheid replaced with new apartheid
Then there’s the tribalism with elites pillaging while the lower classes get beans muchlike NZs $25Billion Maori trusts which primarily benefit elite Maori
Oops I’ll be censored

A very good question

China and Japan will likely feature at some point. Although I am not sure it will be this year.

My basis is not so much due to North Korea, but rather the Spratley dispute. US clearly don't have the influence in the area that they would have us believe. They put up almost zero opposition to the military conversion. So China now has the south covered.

You can only assume they will look East next.

I suspect the US will back Poland militarily as Poland is the gateway on the European plain between Germany & Russia. Japan will most likely rebuild its blue water Navy which was a formidable force in WW2 and cooperate with the US in maintaining open seaways being the key to international trade and force China to devote more resources to building a Navy or accept the status quo. China may build many warships albeit it will take decades to achieve the numerical number of the US and much longer to gain the necessary human resource with experience to be a major force whilst Japan has the experience and with US help will probably outstrip China's efforts in quantity and quality. The US possibly has another agenda to maintain its position as the most powerful military & economic power .

Japan is the country to watch according to George Freidman. My guess is if North Korea is allowed to keep nuclear weapons the Japanese will get the ok from the US to do likewise. I think a previous Japanese prime minister said something to the effect that they could have them "in about ten minutes". Presumably it is why they have nuclear power plants, to provide the feedstock.

As you point out the Japanese navy has a storied history, going back to destroying two Imperial Russian fleets in 1905, an astonishing achievement.
https://en.wikipedia.org/wiki/Battle_of_Tsushima
In London in 1906, Sir George Sydenham Clarke wrote, "The battle of Tsu-shima is by far the greatest and the most important naval event since Trafalgar";[5] decades later, historian Edmund Morris agreed with this judgment.[6] The destruction of the Russian navy caused a bitter reaction from the Russian public, which induced a peace treaty in September 1905 without any further battles.

Interestingly this defeat is said to have been a significant cause of the unrest in Russia which led to the 1917 revolution as it suggested the Tsar was incompetent. It also alerted Lenin to the possibilities of exploiting a spontaneous uprising for his own ends, partly in order to get his own personal revenge for the execution of his elder brother which the Tsar had personally approved. You couldn't make this stuff up if you tried.

Fun charts and pictures, thanks.

"What is particularly notable about this dismal result is that it is not in the least upsetting to the Russians. This is because most of the newly discovered oil and gas is in Russia. Over the course of last year, Russia was able to grow its oil reserves by a billion tonnes, 350 million of which can be produced without investing in new technology. In comparison, last year Russia produced 560 million tonnes. Thus, depending on its level of technology investment, Russia has either broken even or gotten ahead in terms of its ability to maintain and increase its oil production. A similar situation obtains with regard to natural gas: over last year, Russia was able to grow its reserves by 1.5 trillion cubic meters. This positive trend is likely to continue, because when it comes to exploring its vast reserves in the rapidly warming Arctic, Russia is just getting started."

Orlov

And I suspect they will not worry about burning it. Russia and Canada etc. may benefit from a level of climate change.

Summary of this article: ultimately it all boils down to Real Estate.

Every nation has its obsession.

When I was very young, early twenties, I was doing business in Taiwan when it was still a police state. Army guys with sub machine guns walking around the airport kind if thing. I had not traveled much and was having my share of cultural shock. One the stark things that stuck out like dogs junk was their TV. In NZ when they want an opinion on something we generally cut to a sports hero or movie/TV personality. But they were cutting to business people. It was truly weird.

It would be like us running nightly documentaries on the life of Sam Morgan and asking him which shoes he likes best just because he started TradeMe.

I think Trumps comments regarding Haiti and Elsalvador could easily be applied to the Middle East.

The UN aims to make every country a melting pot and dismantle what successful sovereign countries have built

Built ? Massive world debt

And war.

Which as we all know. Is good for absolutely nothing. Good god y'all.

Iran predictions need to take account of two aspects addressed in this Asia Times piece:

  1. Awful demographics. A dearth of births, a plethora of oldies, a few decades of stagnation under the theocracy, heightened expectations.
  2. A population which, if not totally disgruntled, ain't well gruntled either. Iran has a rich recent history of fomenting terrorism in other countries via proxy: Houthi in Yemen (just across a main shipping thoroughfare from half the world's oil); Hizbollah in Syria and Lebanon; de facto if not de jure control of Iraq; attacks in South America; nuclear buddies with the A Q Khan mix of Pakistan and North Korea and (former) Libya. Mais naturellement, munny spent ginning up wars across the border is not being spent at home. This tends to leave the locals unimpressed.

Iran's best bet is to go with China's OBOR, and just knuckle under to the inevitable quid pro quo's that accompany that. Tales of a 'Persian Empire' are simply wishful thinking. Pepe Escobar's take on OBOR/BRI/TLA's galore is here.

A Kurdish State, now, that's another matter, given that Saladin was a Kurd, and Kurds are distributed across Turkey, Syria, Iran and Iraq. George Friedman (Flashpoints) notes that they are vulnerable, especially to the Turkey/Russian axis, and Erdogan has moved against them in recent days.

But a good litmus test of a group is 'how do they treat their women?'. Well, the Kurds give 'em AK's and RPG's and they fight alongside the men. That's good enough for me....

I always thought the Kurds were a nomadic tribe from Nth Iraq, nth Iran and Turkey maybe parts of Syria. Iran has a birthrate of .8 per woman, a country that few years ago had child soldiers clearing mine fields, how things change