Jack Devine’s Summer 2018 Intelligence Report

TAG President Jack Devine’s Summer 2018 Intelligence Report includes his current assessment on the U.S. mid-term elections, North Korea, Iran, Mexico & NAFTA negotiations, and Europe.

Mid-term Elections
While President Trump continues to confound critics and allies alike with his seemingly spontaneous policy comments and initiatives, the trajectory of his Administration is becoming clearer and more deeply rooted at home and abroad.

On the home front over the next few months, the overwhelming amount of political and media attention will be devoted to the very important mid-term elections which will impact greatly on what the Trump Administration will be able to accomplish in the years ahead. Virtually all political behavior should be viewed through the optic of the mid-term. While history, this week’s mid-term primary turnout, polling data, and pundits would suggest that the Democrats will make gains in November, it is still too early to forecast whether the Democrats’ current political activism will be enough to give them control of the Senate and/or the House. The short-term impact of the Trump tax cut, the general health of the economy as well as potential progress on the North Korea problem, may mitigate Republican losses. However, there is no reason to expect a more collegial and productive environment on the Hill whatever the outcome.

North Korea
North Korea’s apparent interest in engaging in a dialogue with the Administration may bring at least a temporary freeze to its nuclear program. It is increasingly clear that Kim Jong-un is feeling serious economic pressures at home and has staked his domestic reputation on improvements that can only come from sanctions relief. This development has provided the first glimmer of hope that a deal may be possible. While Kim Jong-un may make concessions on the nuclear program, it is hard to imagine under what circumstances he would be willing to “denuclearize” his entire program as Trump insists. There is a long shot possibility that he might agree to park his nukes in China or Pakistan, something he might be able to sell at home and to the Chinese leadership. But, don’t bet on it.

With the appointments of Secretary of State Mike Pompeo and NSC Director John Bolton, both hardliners on North Korea, Kim should anticipate rigorous negotiations. This time around it will be very difficult for Kim to construct a formula for protracted negotiations. Trump’s recent willingness to walk away from the table will make this maneuver unproductive. From the outset there will be real concessions on the table from both sides, and it will be quickly apparent whether a breakthrough can be accomplished or whether a collapse is in the making. Success will require masterful brinksmanship on both sides.

Iran Nuclear Deal
After Trump’s withdrawal, the Iranian nuclear deal is on life support. What’s more, the European’s ability to keep the deal alive without major friction with the U.S. is remote at best. It is hard to write a credible scenario where this turns out well for the U.S. Even if somehow the Europeans magically hold it together, re-imposed sanctions by the U.S. will only hurt Iran around the edges. Moreover, we will be the odd man out with Russia and China gaining influence in Iran and the Europeans benefiting economically from our absence. Perhaps most damaging of all is that our action has put a deep strain on the Western alliance which both Russia and China are moving aggressively to exploit. This will have far-reaching deleterious implications for our national security interests.

Additionally, if the Europeans can’t hold the deal together without us or develop sanctions workarounds for Iran, all of which appears unlikely, then the economic benefits will cease to accrue to Iran, and we should anticipate Iran will become even more aggressive internationally and press ahead with developing a nuclear weapons program. Despite the hopes of the Trump Administration, the Israelis and Saudis, new sanctions on Iran will not be nearly enough to promote a regime change any time soon. Historically, Washington policymakers and the Intelligence Community have overestimated support for change in Iran and the willingness for dissidents to put their lives on the line to bring about that change. In this context, it is hard to fathom exactly how the U.S prevents or contains the Iranians without military force, something that would be extremely hard to sell to the American people in the wake of the wars in Iraq and Afghanistan.

Mexico & NAFTA Negotiations
Andrés Manuel López Obrador appears poised to be elected the next president of Mexico this July 1. A win for AMLO (as he is popularly called) would likely spook financial markets in the short term, resulting in a period of capital flight from Mexico, a cooling of foreign investment, and a slump in economic growth in Mexico, which has been averaging approximately 2.4% a year. If elected, we can expect AMLO to take a more interventionist role in the economy, which could mean the return of state-owned entities, government subsidies, and a roll back of market-friendly reforms, namely in the energy sector.

At the same time, AMLO has been a fierce critic of President Trump, and we can expect the US-Mexican relationship to get even worse. His leftist, Latin American brand of populism will no doubt clash with Trump’s, making issues related to immigration, border security, and trade all the more difficult.

Regarding NAFTA, Mexico has much more to lose than the United States or Canada if negotiations fail; after all, 80 percent of its exports go to the United States. But if AMLO is elected to stand up to Trump, he could be the one to pull out of a deal deemed locally as unfair to Mexico. With other free trade agreements in Latin America, Asia, and Europe, he could shift trade elsewhere. At this point, this is the less likely outcome, but still a possibility. With luck, the current negotiators will make progress on key sticking points, including rules of origin in the auto industry and the five-year sunset clause, and announce a preliminary deal before Mexico’s election.

Europe
National/populist parties continue to make gains across Europe, including most recently in Hungary, Slovenia and Italy, while French President Macron and German Chancellor Merkel struggle to hold the EU together. Nowhere does the struggle between progressive democracy and reactionary populism seem more acute than in Italy, a key state in centrist Europe. If there is a silver lining in the victory of the anti-establishment Five Star Movement and the far-right, anti-immigrant, League, it is that for the moment they appear to have pulled back from demands to abandon the Euro. Nevertheless, the political novice, Prime Minister Conte, reiterated the coalition’s hard line on immigration as well as a rejection of economic austerity and a call to lift EU sanctions on Russia. In Hungary, returning pro-Russian Prime Minister Viktor Orban has long protested Russian sanctions, yet thus far has toed the line in voting to uphold EU sanctions. Austria’s far-right Vice Chancellor also called for an end to Russia sanctions ahead of Putin’s recent state visit. However, Chancellor Kurz demurred, saying that progress on eastern Ukraine was needed first.

Meanwhile, Macron and Prime Minister Shinzo Abe were among the attendees at Putin’s annual St. Petersburg economic forum which had been sparsely attended by Western leaders since Crimea. Make no mistake, Putin is gaining friends in Western Europe. As a result of the U.S. steel and aluminum tariffs, along with the withdrawal from the Iran deal, the TPP, and the Paris Climate Accord, the Western alliance is strained to an unprecedented degree.

If you or your firm would like an individualized consultation or information, please contact Jack Devine at The Arkin Group.

Summer 2018 Intelligence Report