Geopolitics of a pandemic

The Covid-19 crisis has accentuated all the geopolitical fault lines of the past decade.

The geopolitical world has become decidedly dangerous over the past decade, and the pandemic has advanced a coming reckoning with those dangers. There are three primary stories to understand, all of which predate the Covid-19 crisis but will be shaped in outcome by its fallout. The first concerns China’s integration into the world economy and its geopolitical ascendancy in east Asia. The second is the decline of American power and ascendancy of Russian power in the Middle East, and the third the return of the United States as an energy power. These stories overlap, especially around energy. Together, they have left Europe as a continent and the EU exposed to a succession of external and internal shocks.

China’s deep integration into the world economy through export-led growth supported by WTO membership, western investment in China, and complex manufacturing supply chains was supposed to make the world more secure. Viewed optimistically in the 1990s, it allowed China to become much more prosperous without becoming more geopolitically powerful. A China tied to western export markets, capital, and technological knowledge and lacking the naval power to challenge the United States’ ability to maintain open seas for trade, according to this logic, should have been militarily weak and had no interest in trade or technological warfare. In this peaceful inter-dependency, Hong Kong served as a portal. It integrated Communist-party run China into the capital side of the American-led world economy whilst providing a safeguard that allowed China to maintain financial restrictions and western investors to put their trust in common law. When China also began in the early 2000s to act as a creditor to the United States, a mutual US-China dependency indeed appeared to materialise, even if it was, as Lawrence Summers – Bill Clinton’s former Treasury secretary – characterised it, perhaps best described as ‘a balance of financial terror’.

But there were always reasons to be rather more pessimistic about how far this international economic environment could ever have served as a source of geopolitical stability. From China’s point of view, export-led growth required an active exchange rate policy, large-scale dollar reserves, and local-currency losses. In the United States, allowing more Chinese imports and offshoring production sacrificed many manufacturing jobs whilst hugely benefitting corporate executives. Although it was politically easier for the corporations to lobby to defend the China policy than it was for workers to attack it, this political imbalance suite could only be sustained for so long. Indeed, China’s exchange rate policy soon created a direct target for the discontent. As early as 2005, China was forced to show just enough flexibility over the yuan to keep the protectionist pressures in the US Congress at bay, even as it could not act to change the trade outcomes without inviting an internal crisis.

The 2008 crash transformed the US-China economic relationship in ways that have been geopolitically disruptive ever since. China’s Pacific-oriented growth model proved too vulnerable for comfort in Beijing. The Chinese leadership turned towards Eurasia for investment and opportunities and then in the Belt and Road Initiative committed to creating a transport infrastructure to support them. This move created the conditions for a sharp divergence between American and European interests around China. Yet China’s response to 2008 also deepened its American dependency on the financial side. Corporate China’s sizeable dollar borrowing left China acutely susceptible to the Federal Reserve’s monetary tightening when it began in 2014. China’s efforts to make the yuan an international currency to achieve more monetary and financial autonomy have largely failed, and China has more reason to fear externally-driven financial instability than it did a decade ago.

Beyond the political conflicts trade and financial flows generated, China’s economic rise always had to become its own source of severe geopolitical tension. Once China could spend more freely on a navy, it would have taken a serious act of self-restraint for China’s leaders to accept American dominance in the eastern Pacific as a permanent reality. Indeed, the fact that enough of the American corporate and political class were tied together, through lobbying and campaign donations, in reaping benefit from the American end of the China relationship constituted a reason why China could take geopolitical risks in pursuing regional hegemony.

An economically-rising China also had to throw the international energy order into disarray. Chinese oil demand greatly contributed to the surge in oil prices between 2003 and mid-2008, and this oil price shock, allied to the growing importance of natural gas, created the external conditions in which Putin could restore Russian power.

By 2016 there was little room left for illusion in Washington about peaceful interdependence. Either the United States had to accommodate a regionally more assertive China for the sake of China’s services to world economic growth – which after 2008 were substantial – or it had to begin to decouple economically, in the reasonable hope that in the short term anyway China as the state with the trade surplus and the foreign-currency dependency had the more to lose. Trump’s pursuit of the second option was made easier by the American military establishment’s growing awareness of the security stakes inherent to technological competition. Long before the Covid-19 crisis hit, there was a broad domestic political consensus behind Trump on this issue. With it, the old story that international political stability requires only aggregated economic well-being across borders shattered.

As geopolitics reasserted itself, Hong Kong also became increasingly politically unstable in ways that made it a less sustainable conduit. From 2014, the Umbrella Movement showed how many younger Hong Kong citizens are unwilling either to sacrifice Hong Kong’s governance to the one-country, two-systems principle, or accept the material inequalities generated by a large and highly-internationalised financial sector. By the beginning of this year, six months of often violent protests had pushed the Hong Kong economy into recession and the credit rating agencies had downgraded Hong Kong’s debt. Through last year Trump and European leaders, aware of the commercial stakes, were pretty cautious in responding to the new rebellion. But without some measure of constitutional stability in Hong Kong, there can be no means of separating out Hong Kong’s economic and geopolitical positions and China cannot remain financially connected to the West.

In the Middle East, there is little left of American military power beyond the Persian Gulf, and Russia has become the pivotal power in most of the region’s conflicts. Coming on top of the Iraq debacle, the American-British-French intervention in Libya destabilised the north-African country, and American policy in Syria collapsed into incoherence. American impotence in the face of ISIS’ carve up of Syria and Iraq then allowed the Russian military into the Middle East. This ensured Bashar al-Assad’s survival, and strengthened Iran and Hezbollah. As American power dissipated, the US’s simultaneous military dependence on Turkey and the Kurdish People’s Protection Units was cruelly exposed last year for the untenable position it always was.

Meanwhile, Obama’s attempts to deal with the Iran nuclear question independently of the broader regional conflicts was condemned to failure once Russia acted to guarantee Iran and Hezbollah’s military presence in Syria. In terminating the Iran nuclear deal, Trump again divided NATO over the Middle East. The dollar’s banking pre-eminence ensures that the European companies have largely complied with the return to sanctions. Yet there are too many European commercial and energy interests tied to Iran for the major European governments easily to give up on the idea of rapprochement with Iran.

Under Trump, the US has effectively retreated to the western side of the Persian Gulf. This takes American policy back to what it was prior to the first Iraq war when it relied on deterrence and the threat of retaliation to police the region rather than regime change or policing no-fly zones. As Trump demonstrated over General Soleimani’s assassination, the US can use its aerial power to hurt Iran. But the absence of ground troops elsewhere leaves considerable opportunities for Russia and Turkey. Russia has no interest in challenging American naval power in the Gulf. Nonetheless, as an energy power, it divides the US from its European allies over what happens in the Strait of Hormuz by offering Germany, in particular, an alternative oil supply than one that must come through those waters.

The United States’ return as an energy power is the past decade’s third defining geopolitical feature. A world in which there are three large energy producers – the US, Saudi Arabia, and Russia – would necessarily be different than one in which there was two. But the US’ newfound productive capacity in oil and gas has been more disruptive than simply establishing an additional producer rivalry.

Prior to the shale revolution, the American reliance on Saudi Arabia, both for supply and to help keep the Strait of Hormuz open, became from the 1970s Washington’s most important bilateral relationship. This dependency, and the Saudi willingness to funnel serious money into the US, ensured that Saudi interests were well protected in Washington. Now Saudi Arabia has been cast adrift from that Atlantic-anchor. The lure of American energy independence encouraged Obama towards a more confrontational approach with Riyadh. With China now the world’s premier market for oil exporters, Saudi Arabia had to compete with Russia for pre-eminence eastwards. American shale output, meanwhile, risked an oil glut that would drive prices a long way down. In late November 2014, the Saudis began a price war for market share. But, when they discovered they could bankrupt neither American shale producers nor the Russian government, they had to upend OPEC to accommodate an alliance with Russia to push prices back up to tolerable levels. Moreover, they had to do so after the Russians had already militarily moved into Syria, ensuring more distrust in Washington.

The ensuing internal tumult in Saudi Arabia produced Mohammed Bin Salman’s (MBS) callow leadership, a purge of the Saudi royal family, and Saudi military intervention in Yemen. MBS has made Saudi Arabia a chaotic power, exemplified by the Saudi government forcing Lebanon’s prime minister, Saad Hariri, to resign whilst on a visit in the Saudi capital in late 2017 but then being unable to stop President Macron intervening to restore Hariri to the premiership. Since then Lebanon’s politics has descended deeper into crisis with large-scale protests forcing Hariri to resign again last autumn, this time for good.

Nonetheless, there are clear limits to renewed American energy power. American energy independence is unachievable when shale oil and conventional crude oil are not substitutable for refining purposes, prices in good part depend on the security of overall supply, and shale output will fall off from the end of the decade. Saudi Arabia still sits on the world’s largest easily available oil reserves and can quickly adjust its production. Consequently, as the Saudis thrash around for a strategic way out of their difficulties, their capacity for disruption has in reality been amplified not diminished.

The Covid-19 crisis has accentuated all the geopolitical fault lines exposed over the past decade. The US-China economic decoupling will accelerate. All US-China trade and supply chains will be judged a potential security risk, not just those that involve high-tech manufacturing. Indeed, the whole de facto geopolitical infrastructure that made the West’s economic relationship with China functional is now collapsing. Hong Kong has already become a zero-sum political game. On 22 May, the Chinese government decided to impose national security legislation on Hong Kong after protestors returned to the street. In bypassing the Hong Kong legislature, it effectively terminated the governance arrangements for Hong Kong agreed in the 1984 Joint Declaration. Whilst the Trump administration had previously largely left Hong Kong out of its otherwise more confrontational approach towards China, it now threatens to revoke Hong Kong’s trading status. Only China’s substantial dollar debt, and its need to maintain the indirect credit line the Federal Reserve has effectively provided over recent months, may now act as a constraint on both an economic cold war and a likely disastrous endgame in Hong Kong and possibly Taiwan too.

The instability in the Middle East and the turbulence caused by the US’ energy resurgence have proven just as susceptible to Covid-19 havoc. Once the potential size of the economic shock materialised, the Saudi-Russian oil axis fell apart. MBS dramatically increased Saudi production and let oil prices crash, effectively declaring a second war for market share against both the US and Russia. The Trump administration forced him to back down, apparently by threatening to withdraw military support from the kingdom. But the US’ ability sustainably to discipline Saudi Arabia is at the mercy of Iran’s behaviour.

Here, the oil crash has intensified the crisis in the Persian Gulf. For Iran, a further plunge in oil revenues when its economy was already hurting under renewed American sanctions is a disaster. Rather than letting up on his ‘maximum pressure’ policy towards Iran to allow Iran to deal with the humanitarian emergency, Trump has doubled down on it over the past few months, tightening sanctions and initiating a shoot and destroy policy on any Iranian vessels that harass American ships in the Gulf. But he is still unable to persuade the European governments to back such a confrontational policy and presumptive Democratic nominee Joe Biden is singing from a different hymn sheet.

Elsewhere in the Middle East, Covid-19 has again exacerbated existing perils. In Lebanon, the government defaulted on its debt in March, causing the Lebanese currency to slide into freefall. The central bank’s decrees make it near impossible for anyone to access dollars in an economy that is dependent on the American currency. Ignoring the lockdown, the protests have resumed, as what was already an economic crisis becomes, when so many people are struggling to buy food, a catastrophe.

For Europe, the deteriorating geopolitical environment over the past decade proved disruptive, divisive, and very difficult for either the EU or individual European states to influence. Now the Covid-19 emergency is amplifying the hazards. As the US and China accelerate their decoupling, the EU and Britain are too weak to walk in the medium term a path independently of that chosen in Washington, even whilst the German desire to resist dismantling manufacturing supply chains is already evident. For the EU, how to manage this separation will quickly run into the divisions that have prevented any coherent China policy emerging from the point after the 2008 crash when Chinese investment in EU states began to swell. The fate of Italy – as the largest EU member state to have joined the Belt and Road Initiative, as well as the Eurozone state most at risk of losing access to international capital markets to finance the now necessary substantial increase in borrowing – is pivotal. In proposing new fiscal transfers to Italy, albeit time-limited and outside any new fiscal institutions for the Eurozone, the German government is clearly aware of the high risks attached to letting Italy flounder under this new economic crisis. But this is unlikely to extend to allowing Italy to pursue an independent policy on Chinese investment inside the EU or port infrastructure, when Berlin will need some political space where it can be seen as getting tougher with China to try to protect German companies that manufacture in, and export to, China.

For the EU a qualitatively different China strategy ultimately requires a different Russia strategy. At a grand realpolitik level Emmanuel Macron was correct when, on these grounds, he pressed for a European reset with Moscow last autumn. But Merkel was also right in chastising the French President for his geopolitical freelancing, since his version of this reset appears indifferent to how this can be accomplished with meaningful guarantees for the security of eastern European states and without a change of attitude in Moscow. In wrestling with this problem, Germany too is stuck. German governments cannot lecture France that it must accept the centrality of the German-Polish relationship to the post-Cold War EU, and still treat German energy dependency on Russia as a purely commercial relationship without geopolitical repercussions.

The dangers coming from the Middle East will also now grow. European states must expect renewed migration problems as the crisis in Lebanon deepens, and the Syrian government retakes Idlib. Geography means Europe receives the human fallout of what happens in the Middle East. But the EU has no more capacity to exercise serious geopolitical influence in the region than it did when the Arab Spring began back in 2011, a problem compounded by Brexit and the rupture with Washington over Iran. The question for the EU is whether it can acquire the necessary internal political capacity and realism to make serious geopolitical choices in a world ever more fraught with danger where it has become so vulnerable to external shock.


Helen Thompson