Daily Comment (April 27, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s a busy Friday.  Here is what we are watching:

Korean leaders meet: In a historic event, the leaders of North and South Korea met and Kim Jong-un became the first DPRK leader to visit the South since the war.  The two leaders vowed to work on denuclearization (with a strong dose of strategic ambiguity) and promised to actually draft a peace accord, which would officially end the Korean conflict.  Currently, the armistice that ended the war is in place but a formal peace has never been negotiated.  The symbolic importance of this meeting should not be underestimated.  It is an important development; not too long ago we were preparing for war.

However, what it means in the end remains in doubt.  One issue to remember is that Koreans, in general, would prefer to reduce outside influence.  The peninsula is valuable land; throughout history, China and Japan have controlled the area to project power.  The U.S. also has an interest.  A potential outcome is one that enhances the independence of both Koreas at the expense of China, Japan and the U.S.  The next big event is the U.S./North Korea summit.

The other big meeting: Overshadowed, but in many ways just as important, is the meeting today between Chairman Xi and PM Modi in Wuhan, in the Hubei province of China.  Relations between the two countries have been tense recently.  There was a flare-up on the northern border several months ago over disputed boundary areas.  India is concerned about rising Chinese investment in its arch-rival Pakistan and is also worried about the one belt, one road (OBR) project that seems to be engulfing the region.  India is facing a difficult path.  If it joins the OBR, it will receive welcome investment and likely gain access to China’s growing consumer market but it will also become a Chinese satellite.  Unfortunately, India does not have a strong enough military or economy to hold out against being surrounded by Chinese allies (purchased with investment from OBR).

Under normal circumstances, India would ally with the U.S.  Geopolitically, this would be a win/win for both nations.  India’s position in the region would be a potential barrier to the OBR and would allow the U.S. to threaten Chinese expansion.  But, the U.S. is in withdrawal mode and Washington may not be reliable.  India’s historical default position is non-alignment.  It was one of the founders of the Non-Aligned Movement and thus would prefer to not team up with either China or the U.S.  Unfortunately, for Modi, remaining non-aligned is probably not an option.  Even if India resists China’s “charms,” it will face a growing threat from Pakistan which will be fueled by Chinese investment.  And, India’s neighbors are increasingly acquiescing to Chinese OBR pressure.  We doubt a resolution will come from this meeting today but the pressure on India is rising.

And yet another meeting: President Trump and Chancellor Merkel meet today in Washington.  Unlike Macron, Merkel does not have a warm personal relationship with President Trump so we would expect a businesslike meeting.  Criticism of Germany’s trade surplus is likely.

A portrait of discontent: A recent Pew poll[1] shows that the political divide is hardening.  Democrats have traditionally preferred officials who compromise.  We believe that’s because Democrats generally see government as a force for good and thus want to see government work, which entails compromise.  The majority of Republicans oppose compromise.  However, this recent polling suggests the majority of Democrats now oppose compromise, a significant hardening of position that will make it very difficult to govern under conditions of gridlock.  But, the most significant finding was that two-thirds of Americans believe their side “loses” more than it “wins” in politics.  Some of this is probably due to a hardening of partisanship; getting partial wins when you think you should get everything you want seems like a “loss.”  But, the most likely reason for this finding is that Americans seem to believe the entire system doesn’t work for them and thus whomever is in office won’t lead to a “win.”  This would explain the attraction of rogue candidates like Obama and Trump.  Our contention is that the voters in 2008 who favored Obama thought they were getting Sanders.  The disappointment was palpable and if the GOP had not run the poster child of the establishment in 2012 then Obama would have been a one-term president.  We would not be at all surprised to see the Democrats repeat the “Romney error” in 2020.

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[1] http://www.pewresearch.org/fact-tank/2018/04/26/key-findings-on-americans-views-of-the-u-s-political-system-and-democracy/?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top-stories