Fracture risk: Navigating domestic and global fragmentation

At a recent well-attended Monday Club event in New York with panelists Tara Hariharan, Managing Director and Head of Global Macro Research at NWI Management LP, Tinatin Japaridze, Director of Geopolitics at Anadyr Horizon, and Matt Aks, Senior Strategist at Evercore ISI, there were a few interesting takeaways.

In the current geopolitical situation with increased global fragmentation and newly formed trade deals and alliances, fracture risk can be described as sudden disruption, and hard to recover from. It can happen in forms of conflicts, sudden moves, dislocation of correlations, institutional breakdowns to mention a few. Fracture risk is something that we could not have anticipated before.

There has also been a recent loss of ability to marshal global collective action, to solve global problems. In the final years of the Obama administration, there were the Iran nuclear deal, with Russia and China at the table. We have the Paris agreement on climate change. Really, the whole world, around the table, and we have the transpacific partnership, not necessarily global, but aspirational. In recent years, much as a result of Trump’s policies, there is a loss of global multilateralism and multilateral coordination.

The entire world is very transactional now, and it’s all about making a quick transaction. It does not have to be clean. It just has to be successful, and they it’s all about maximizing gains for either or both of the sides. And the end results, the ripple effects, the spillovers, everything else becomes irrelevant or secondary. As a result, many countries now see the U.S. as an increasingly unreliable partner, as the focus is on transactions instead of sustainable relations, making it hard to depend on the U.S. for many global actors and countries.

In terms of geopolitical changes and trends, the panelists mention the notion of variable geometry. This is the concept that you can keep, but also change alliances, resembling a form of non-alignment, but depending on the subject, you can find the right forms of alliances, and new formations. In this scenario, there is an increased importance of the Middle Powers, some call them the Global South. In this environment where the rules are constantly shifting, the variable geometry is also constantly shifting.

The U.S. has also sought to reduce dependences in particular in the energy area and it is paying off. So now again, ironically, with Iran, we are in that situation where the U.S. is the best house on a bad block. The Hormuz situation, for instance, has taught us that, again, because U.S. has been solidly on the path towards energy independence, they don’t import all oil, but the U.S. is much more resilient on the energy side than before.

A really important piece with this whole discussion about fracture risk, and that is the increasing U.S. use of financial sanctions as a way of enforcing its foreign policy priorities. And, what has really shifted in recent years is the move from what so called primary sanctions, where we would say, the U.S. will block foreigners, block you from doing business with a U.S. person to so called secondary sanctions, where if you are in Europe, or anywhere else in the world do business with a sanctioned person in Iran, you and Europe can now be sanctioned too and cut off from the U.S. and global financial system. This increased usage of secondary sanctions started about ten years ago and have increased in implementation. Over the long term, there is going to be a bit of a backlash where people say, we do not necessarily want to be completely exposed to the U.S. sanctions regime via the U.S. financial system and they diversify instead.  

Is there a chance that the rest of the world is moving on without the U.S.? There are certainly trade deals being concluded that are bilateral between countries that continue to want to welcome trade, and the U.S. isn’t part of those. If the U.S. is left behind in a sort of trade globalization international institutions perspective, will they also be left out of formulating the new rules and will miss out on investments and trades. These arrangements are often ruled by some kind of governance structure, so either you are in or out. The U.S. government has taken a step away from many global cooperations and partnerships. Trump seems to have a transactional approach to the world, but he constantly runs into reality such as rare earth minerals and other dependencies. He might have been underestimating guardrails that exist in the international system based on commonly agreed rules. The fact that Trump has used transactions is making other people and countries use transactions too.

The global formations and ways of business and interactions are rapidly changing with new alliances, new technology and new challenges. Fracture risk and fragmentation will continue to be part of the transformation and based on the Monday Club panel discussion; the U.S. should be more careful with its allies and try to welcome more international cooperation. You can never have too many friends and the U.S. will need them in the soon to be here post-Trump era.