The number, significance, and pace of global developments in the last few months of 2019 has felt unprecedented. With major developments in the U.S.-China cold war, Hong Kong, Brexit, Syria, and impeachment in the United States, plus hotspots across Latin America and the Middle East, it looks like the world will continue to heat up in 2020.

Macro themes to watch

Cold War II: Navigating a superpower relationship going south while economic disengagement takes hold

A mini-deal between China and the United States that dials back or defers some tariffs could be struck in 2020, but a comprehensive agreement is out of the question. Rather, superpower politics are likely to confound the rich economic relationship in many ways, and the longer the animosity endures, the deeper it will be engrained.

In the United States, there is a bipartisan push to prevent U.S. pension funds from investing in Chinese equities, the Treasury Department is moving forward with new rules tightening national security restrictions on foreign investments, and the Commerce Department is working to specify which technologies will be subject to new export restrictions. After Commerce started curtailing business with Huawei earlier this year, Beijing announced in May that it would publish an “unreliable entities” list, which has not yet been released.

Then in August, President Trump also added Chinese exports of fentanyl to his rationale for new tariffs. In November, he signed legislation that could end Hong Kong’s special trade relationship with the United States and would mandate sanctions on Chinese officials should Beijing crack down on the demonstrations in Hong Kong. As the sanctions on Russia have shown, restrictions imposed by Congress are nearly impossible to lift.

President Xi Jinping has made it clear that he will not bow to U.S. pressure or its demands that China turn away from its growth and innovation strategies. Indeed, his political identity at home is predicated on the notion of China First.

For Trump, beating up on China makes for good political theater in an election year—he controls the agenda, which bolsters his America First credentials. The Democrats largely support a get tough strategy for China, but they have yet to land on a compelling alternative policy line. As events in 2019 illustrated, any announcement of a deal will create an opportunity for Democrats and China hawks on the right to pick the proposal apart and motivate Trump to backtrack.

While China’s leaders hope a new administration will be elected and moderate America’s stance, President Xi Jinping has made it clear that he will not bow to U.S. pressure or its demands that China turn away from its growth and innovation strategies. Indeed, his political identity at home is predicated on the notion of China First.

Inequality everywhere: Social protection, fairness, and accountability

Inequality, like climate change, is a word of the year in 2019. Inequality is being cited as a catalyst for a host of political risks in many countries—from populism in the UK and Italy to social unrest in Chile, France, Hong Kong, Lebanon, Iran, and Iraq—and will be front and center in the U.S. presidential election. Slow global growth in 2020 is likely to make the issue more visible everywhere.

The topic of inequality is very broad, but it can be broken down into issues such as income stagnation, job insecurity, and lack of opportunity. Slow growth and megatrends such as tech transformation and globalization of the labor force are creating an acute sense of vulnerability, particularly among the middle classes. Insecurity, in turn, drives anger, blame of others, and a feeling that the system is rigged.

During the 20th century, governments did a lot to provide basic social protections and promote economic security and fairness. But in the 21st century, social welfare efforts have not kept up with economic and technological change, and establishment elites have come under attack for being unresponsive and unaccountable on pocketbook issues ranging from job security and gig work to the cost of education, housing, gasoline, and transit.

If business leaders do not follow through on their initiatives to address inequality, cynicism about free markets, capitalism, and the system is likely to grow.

Political entrepreneurs on the right and the left have capitalized on social media, exploited anxieties, and bashed the system and the establishment. In the United States, younger cohorts are particularly interested in equity and inclusion, as demonstrated by the declining enthusiasm for capitalism, while older generations remain supportive of it (see chart, below).

fig 1.PNG

In 2020, business leaders will be expected to pay more attention to the equity agenda, and they can accomplish this with commitments to promote social protection, fairness, and accountability. Conversely, topics such as the gig economy, labor arbitrage, and disrupting markets will be viewed more skeptically. If business leaders do not follow through on their initiatives to address inequality, cynicism about free markets, capitalism, and the system is likely to grow.

World on fire: There will be intense pressure to take radical action on climate change in 2020

The world seems to be on fire—politically and in real life—from California to the Amazon, Siberia, and Australia. Some climate developments appear to be happening faster than scientific forecasts had predicted, other phenomena (such as fire frequency in California) have not been anticipated, and critical tipping points (such as triggering the desertification of Brazil) remain unknown.

In short, the human environment may not be as resilient as the predictions stated, and climate change is contributing to the narrative of a world in crisis and out of control. To this point, carbon emissions reached their highest level in 2019 despite pledges by countries and businesses to make significant cuts.

Climate concern pervades global popular culture. It was the dominant issue in many elections across Europe in 2019, and the new leadership of the European Commission and the European Central Bank have pledged to put climate action at the top of the European agenda. At a November U.S. Federal Reserve conference devoted to climate change, the president of the San Francisco bank, Mary Daly, said, “Early research suggests that increased warming has already started to reduce average output growth in the United States."

Seventy countries have indicated they will develop more vigorous climate plans in 2020, while the U.S. government has moved in the opposite direction—which complicates the business community’s response.

Seventy countries have indicated they will develop more vigorous climate plans in 2020, while the U.S. government has moved in the opposite direction—which complicates the business community’s response.

Visible through the smoke is the fact that younger folks are very angry about the state of the planet and are demanding more radical environmental action from the companies that they work for and buy from. One manifestation of this is flight shaming—peer pressure to reduce air travel. If the idea of flight diets takes off, business leaders will have to rethink how they function in the borderless world while promoting organizational cohesion and client-centric service.

Key developments to watch

Bipolar nation: After a pitched election battle, America will remain divided

Many facts and models are being cited to predict the outcome of the U.S. election, but political rules of thumb these days are constantly being broken. Evolving issues to watch include media spending, social media dynamics (including foreign and domestic fakery), and voter mobilization.

Against this backdrop, there are several key signposts:

• Impeachment. Barring a blockbuster development, the trial underway in Washington is almost certainly going to result in acquittal by the Senate. Given the predetermined outcome, the drama probably will not change voter sentiment but will animate it.
• The Democrats. The field is large, the policies being proposed are wide-ranging, the personalities are varied, and the issues that mobilize the electorate next fall are still far from settled. A lot will change in the first sprint of the February primaries, and then on Super Tuesday a few weeks later when California, Texas, and 14 other jurisdictions vote.
• Black swans. The world is unsettled, and a distracted and thinly staffed White House makes the management of geopolitical risks less certain. The news cycle is rolling at a furious pace, and a lot will happen that makes the Ukraine affair—like the Mueller investigation—a faint blip as the election approaches.
• November 4, 2020. The day after the election, one side is going to feel deeply aggrieved. Whoever is president in 2021 will probably also have to contend with a divided and polarized Congress. The country could be more fractious and paralyzed than before.

Is the UK OK? No-deal Brexit risk recedes but long-term uncertainty remains

Despite headlines about elections and Brexit uncertainty, Prime Minister Boris Johnson will close a deal by January 2020 that allows the UK and the EU to avoid a disorderly Brexit and improves both sides’ near-term business outlook. The deal will also take a risk to global growth off the table.

Johnson’s deal sets out a much harder Brexit than the one former Prime Minister Theresa May proposed. For example, there will be no customs union with the EU (except in Northern Ireland), which will add complexity and cost to trade with Great Britain over the longer term. Financial and similar services based in London will need to be moved into the EU if they have not been already, whereas professional services were never part of the common market so impacts on them will be minimal. And the rights of the 3 million EU citizens in the UK will be protected.

The UK will need to renegotiate its economic relationships with the rest of the world. Expect Brexit to be a 10-year process that begins once a deal is closed.

While Johnson’s deal increases near-term clarity, his desire to free the UK of EU rules will complicate and draw out negotiations on the new relationship. It could take years to agree on everything from data and privacy to pharma, fishing, food, and security. Then the UK will need to renegotiate its economic relationships with the rest of the world. Expect Brexit to be a 10-year process that begins once a deal is closed.

Not special: Hong Kong loses its status as an attractive and safe place to do business

The explosion of civil unrest in Hong Kong Special Administrative Region was a big surprise of 2019, and it epitomizes the combustible mix of economic inequality, frustrations with a political establishment, and the power of communications technologies and social media.

It is difficult to predict what will happen in 2020, as the protestors’ grievances and confrontational tactics have quickly escalated. In the near term, the Hong Kong government is trying to wait out the protests while ramping up the police presence and arrests.

Hong Kong’s administration has sought to address one set of protestor grievances—high living costs and limited economic opportunity—by announcing new benefits, but Chief Executive Carrie Lam has handled the situation poorly. (In November, Lam declared on TV that protesters were “enemies of the people”—a Leninist term.) As a result, the municipal administration has lost credibility, and whoever Beijing sends in to remedy the situation will not be welcomed.

Beijing has asserted for years that it is the sovereign authority of Hong Kong. Hong Kong’s Legislative Council elections, slated for September 2020, will be a key inflection point to watch.

Even if these demonstrations subside, others will re-erupt at some point because many of the protestors, especially the younger college-educated professionals, see this situation as an existential struggle to preserve civil liberties and freedom from Beijing’s interference. The landslide victory by pro-democracy candidates in the neighborhood council elections on November 24 legitimized popular frustrations and disproved arguments made in the mainland media that a silent majority opposed the uprising.

That said, Beijing has asserted for years that it is the sovereign authority of Hong Kong, and in November, the Central Committee of the Communist Party of China signaled that it will escalate its efforts to smother the territory legally, politically, and culturally. Hong Kong’s Legislative Council elections, slated for September 2020, will be a key inflection point to watch.

Brussels strikes back: The new EU leadership sets a “Europe First” agenda

European Commission President Ursula von der Leyen has said she wants her administration to be “geopolitical” and indicated that she and her cabinet will seek a more muscular international stance. These ambitions will require multinationals to pay attention to a Europe First agenda in 2020.

Greater oversight and regulation will be a key trend. One critical issue is Europe’s move to enhance its ability to compete with the United States and China (making Europe “fit for the digital age”) by focusing on issues such as digital tax, antitrust measures, data aggregation, the digital transformation of businesses and industry, and greater regulation of AI and social media (e.g. around hate speech and violence).

Although euroskepticism has been on the rise, threats to the EU and “old Europe” are overstated. Europeans overwhelmingly support the European project.

By extension, the big U.S. tech companies appear to be especially at risk of being targeted. Another priority is accelerating the transition away from fossil fuels (a “European Green Deal”)—an agenda that has been seconded by European Central Bank President Christine Lagarde.

Although euroskepticism has been on the rise, threats to the EU and “old Europe” are overstated for a few reasons. First, Brexit will become less of a rollercoaster ride for Brussels in 2020. Second, Brussels will no longer have to deal with strident objections from London on issues such as taxation. Finally, Europeans overwhelmingly support the European project (see chart), which helps offset concerns about a distant and unresponsive government in Brussels and pressing challenges such as migration and refugees.

fig 2.PNG

Other trends and issues we are watching:

• Technoskepticism takes hold. The politicization of technology was a top trend in 2019. This risk will intensify in 2020 on a host of fronts, including antitrust, tax, privacy, cybersecurity, national security, data localization, electioneering, worker rights, and diversity and inclusion measures, and, ultimately, the ability to trust. These challenges aren’t limited to Big Tech, as most large firms are transforming into tech-centric enterprises as well.
• Will emerging markets emerge? Although emerging markets are commonly viewed as growth markets, their growth rates, in real purchasing power parity terms, have lagged advanced economies’ growth, and their equity returns have lagged the performance of U.S. equities. In terms of GDP growth, Latin America, the Middle East, India, and Africa are all underperforming their recent past, while Eastern Europe and Southeast Asia are doing well.
• Regional free trade continues to expand. Despite headlines about rising tariffs and the demise of the World Trade Organization, regional and bilateral deals continue to be sealed. Notable agreements include the African Continental Free Trade Area, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Regional Comprehensive Economic Partnership, and the EU-Vietnam and EU-Japan agreements. The United States-Mexico-Canada Agreement will expand regional trade as well.
• The benefits of plastics get reassessed. Rapidly growing evidence of how microplastic pollution is choking the planet is starting to catalyze a rethink of plastics in the consumer economy that will go far beyond the elimination of plastic bags and drinking straws.
• “Social unions” are mobilizing. Workers are organizing and more forcefully pushing social and political agendas from inside the companies they work for. Some issues that workers are likely to mobilize on in 2020 include climate, diversity and inclusion, human rights in Hong Kong and China, surveillance, and corporate support to politicians and parties.
• Have we reached Peak Xi? China’s president has centralized power and promoted his image as a sage global leader. Now, his personal brand isn’t faring so well: China’s role as an engine of emerging market growth has stalled, Xi faces stiff political resistance in Hong Kong and Taiwan and increasing wariness across Asia, and his human rights record and climate, technology, and infrastructure programs are attracting sharp criticism.
• Who will rule Russia? In 2024, Vladimir Putin will reach the two-term constitutional limit on his current presidency, and political players are jockeying for position. In the meantime, Putin will work hard to show that he remains in control.

Read the full report here.

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DJ Peterson is a member of the Pacific Council and the president of Longview Global Advisors.

This article was originally published by Longview Global Advisors.

The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of the Pacific Council.