Economics

US-Mexico crisis on the horizon, Trouble For The EU And More

We recently caught up with Peter Zeihan, author of The Accidental Superpower, to ask his thoughts on the top geopolitical shifts to watch in 2018. He shared his predictions on everything from anti-trust concerns for Silicon Valley and the dire consequences for the United States if we exit NAFTA to why he expects North Korea to back down this year. In the following Q&A, we share a recap of that conversation. Peter kicked off the outlook 2018 discussion with his top three major predictions with extra-regional consequences.

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We recently caught up with Peter Zeihan, author of The Accidental Superpower, to ask his thoughts on the top geopolitical shifts to watch in 2018. He shared his predictions on everything from anti-trust concerns for Silicon Valley and the dire consequences for the United States if we exit NAFTA to why he expects North Korea to back down this year. In the following Q&A, we share a recap of that conversation. Peter kicked off the outlook 2018 discussion with his top three major predictions with extra-regional consequences.

KLC: What’s your #1 big prediction for 2018?

PZ: There is a US-Mexico crisis on the horizon that has the potential to send both countries into deep recession, and it will probably manifest fully by this summer. Canada is trying to get Mexico to join in pushing a delay of NAFTA negotiations until after the mid-term elections in the United States (November 2018). Now if this is the position presented to Trump, I predict he’ll shut down NAFTA negotiations entirely.

All of this is going to come together this year as the violence on the border and social instability in Mexico (from the drug war) blows up. There are also economic issues. When Mexico liberalized pricing, one of the first markets they opened was gasoline distribution. Gasoline in Mexico City is almost $5 a gallon now, so the average Mexican is already furious at the government, and the Mexican presidential election is next summer. Politically, Mexico can’t agree to anything that is Trump’s idea right now --it would be toxic. That's the beginning, because if the Mexican political system evolves the way it looks like it might, and if we get a president Obrador, we get somebody with a view of foreigners like Trump, with a blind ideology like Ted Cruz, with the shrillness of Elizabeth Warren, with the corruption of Hillary Clinton, and the pathological unwillingness to do math of Bernie Sanders --all in one person. If that becomes Trump's partner on the other side of the border, you can imagine how horrible relations are going to get. Then everything that is already tenuous in American-Mexican relations just goes straight downhill whether it's water rights, cooperation on the drug war or immigration. I would also expect the peso to crash.

If we walk away from NAFTA, we are at a minimum going to have a recession in the United States. There will be a depression in Mexico, and a very deep, very painful adjustment in Texas. Mexico is our largest trading partner, and the interconnectedness of the supply chain across the borders is very deep.

Ironically, the places where it's deepest are Trump states, so that'll be an interesting political conversation to have. California, the Pacific Northwest, New York and New England will be affected the least, and Texas, the Great Plains, and the Mid-South will be affected the most.

KLC: What’s big prediction #2?

PZ: Trouble for the European Union. It will be obvious midway through 2018 that there's not going to be a Brexit deal between the UK and the EU. That means hard Brexit, leaving the EU without a deal in place. In my opinion that is unavoidable. To have a meaningful deal on Brexit, and to have a meaningful deal on anything that involves the Eurozone, you have to have a German chancellor that can make deals. Which is a problem right now. Angela Merkel has already come out and said that Germany will be taking no position on anything related to Europe at all. If you want to have a deal on Brexit, that’s a bad thing. If you're cheering for the end of the Eurozone, it's great. But I don't think the Germans want to end the Eurozone. This has been the longest period of peace and prosperity in their history. They would really rather not go back to the old European competition that involves bullets. They're good at it but they're not good enough. If you look at all the problems the EU has dealt with since 2006, they've all been solved by German political leadership and German money -- whether it's the next Greece renegotiation, an Italian banking crisis or Brexit. And there's another swell of migrants about to come through this winter from Libya. The Russians and Syrians are on the march in Syria, and that could generate another half million refugees. The Greek situation is now such that food shortages are the norm. It's not Venezuela-style, but its close.

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Article by Knowledge Leaders Capital