A 1989 moment plus other good news

Thoughts on the economic consequences of the fall of Assad, the truth about Chinese exports, Ursula von der Leyen's impressive leadership, and the Brexit reset backlash begins

In this newsletter:

• The fall of Assad: a 1989 moment for the Middle East?

• Chinese Trade: Let’s get the facts straight

• EU-Mercusor: Some European leadership at last

• Brexit Reset Latest: The People versus the Pols

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1. The Middle East’s 1989 Moment?

The implosion of the Assad regime is one of the most joyous events in recent times, all the more so for being so unexpected and coming at the end of a year in which the flow of geopolitical news has been anything but joyous. But while Syrians celebrate the overthrow of a dictatorship the depth of whose barbarism we are only beginning to fully appreciate and start to plot their own future, what might be the wider economic ramifications of events in Syria?

The short answer, of course, is that much depends on what happens within Syria. Can HTS, which led the revolution and is currently designated a terrorist group by many countries, succeed in providing stable and inclusive government, as it says it wants? Or will it try to impose an Islamist regime, increasing the likelihood of another civil war? Can Turkey, which supported Hayat Tahrir al-Sham (HTS), and Israel, which has seized Syrian territory and bombed its military capacity, play a constructive role or overplay their hands?

Clearly the first round economic effects of events in Syria will be minimal. The country’s biggest export has been the drug Catagon whose manufacturing facilities has already been all but destroyed. While there may be investment opportunities if and when sanctions are lifted, these are some way off. Nonetheless, it is worth noting just what an outsize impact events in Syria have had on the global economic landscape over the last decade. Kim Ghattas put it well in the Financial Times when she wrote that “Syria broke the world”:

In August 2013, then US president Barack Obama failed to enforce his own red line over Assad’s use of chemical weapons. Syrians felt abandoned to their fate. There was a spike in foreign fighters travelling to Syria to help the rebels. Soon, Isis was taking over territory from Iraq to Syria. By 2014, millions of Syrians were fleeing the country, including to Europe, where the refugee crisis roiled the politics, leading to the rise of populism, the far right and set the stage for Brexit. The flexible red line was also read as weakness by Russia which intervened to save Assad, increasing its military footprint and testing its war arsenal, including by bombing hospitals.

Could events in Syrian today create the conditions to remake the world? Much may depend on whether Assad’s fall is the Middle East’s 1989, as Lina Khatib, an associate fellow at Chatham House, put in an essay for Foreign Policy. She argues that the collapse of the Assad regime will set off a domino effect that will inevitably spell the end of the Iran-dominated regional order, replacing it with a regional order dominated by Israel and its partners.

Standing alone without Syria and Russia in the face of a still-strong Western-backed bloc, the regime in Tehran will be revealed to its people as having imposed a futile sacrifice that not even its nuclear program can redeem. This poses a serious risk to the survival of the Islamic Republic—potentially the biggest fallout of last week’s events.

The repercussions of Assad’s collapse will also ripple across Lebanon, Iraq, and Yemen as Iran’s proxies find themselves without an important lifeline. In Lebanon, in particular, the political dynamics set off by Israel’s decimation of Hezbollah are likely to accelerate with the loss of the all-important land bridge for weapons supplies from Iran. The sudden vulnerability of an already weakened Iran also means that Tehran’s remaining proxies may doubt the reliability of their patron.

Then there is the equally tantalising prospect of what Assad’s demise may imply for Russia and the outcome of the Russia-Ukraine war. Putin’s response to defeat in Syria may be to become even more determined to achieve victory in Ukraine. But just as America’s botched Afghan withdrawal has been blamed for emboldening the West’s adversaries, the damage to Russia’s prestige could have consequences both inside and outside the country. With the Russian economy in serious trouble, the speed of the Assad regime’s collapse should be the signal to the West to redouble its support for Ukraine, not try to force it to surrender.

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2. Chinese Trade

While events in Syria may not yet have intruded into the wider economic debate, the single biggest point of discussion in the markets remains what Donald Trump is planning in terms of tariffs, particularly on China. The fact that Trump has broken with precedent by inviting Xi Jinping to attend his inauguration, might be an indicator that he is looking for a deal, not a trade war. After all, the Chinese president could hardly be expected to come amid all Trum'p’s threats if there was nothing on the table or he would look as if he had come to bend the knee.

Of course, one never knows with Trump. But it is still important that whatever America does decide to do on tariffs is based on facts, rather than emotion. And it does appear that one of the most powerful narratives in developed countries concerning Chinese trade is simply not supported by the data. China has not been flooding the world with cheap manufactured goods in an effort to export its way out of its economic difficulties, according to Simon Evenett, professor of geopolitics and strategy at IMD business school and a leading trade expert.

First, Evenett shows that while Chinese exports as a share of manufacturing revenues increased slightly in the first 10 months of 2024 to 21.3 percent from 20.6 percent in the same period in 2023, the US share over the same period was 23.2 percent. Yet as Evenett says:

No one ever accuses the United States of pursuing an exported growth strategy or of excessive manufacturing export dependence. This part of the China delegitimisation narrative should be dropped.

Secondly, Evenett looks at Chinese export volumes, which it turns out are highly correlated with East Asian export volumes. That suggests there is nothing exceptional about Chiana’s export performance, which if anything should be seen as part of a wider regional phenomenon.

If Chinese exports are currently flooding world markets, then why haven’t observers levelled the same criticism at other emerging markets in East Asia?

Third, Evenett looks at export prices. This is a contentious issue given that one of the charges levelled at China is that it is dumping cheap goods on world markets. Yet here again, the picture that emerges from the data is rather different. It is true that during 2024, Chinese firms slashed their export prices. But this followed five years following the pandemic when they raised prices to the point that they were on average 15 percent above East Asian rivals. Now they are slightly below.

Yet as previously noted, these price cuts do not seem to have led to an increase in market share at the expense of East Asian rivals. As Evenett says, “falling export prices and stagnant export volumes are not a great recipe for export-led growth. Nonetheless, one consequence of lower Chinese export price was lower import prices in the rest of the world, notes Evenett.

Worldwide, a 1% cut in Chinese export prices is associated with roughly a 1.1% fall in import prices. In short, this means the sharp falls in Chinese export prices this year would have placed considerable downward pressure on import prices and, in turn, this would have contributed to reducing unpopular high rates of price inflation.

There may be, and indeed are, valid reasons for restricting some trade with China on national security grounds. But it is vital that at a time of so rising geopolitical tensions that the debate over China’s manufacturing exports is conducted on the basis of evidence rather than anecdote and emotion. And as Evenett says:

In a year when many governments faced electorates angry about price inflation, an unsaid “thank you” may be a more appropriate response than jumping on the bandwagon to delegitimise the Chinese development model.

Indeed, as almost every reputable economist in the world has warned, Trump’s tariff plans is likely to hurt America as much as China, given Beijing’s ability to retaliate by restricting exports of resources such as critical minerals that America needs, or by allowing its currency to devalue. Nor is there any evidence that US export restrictions are slowing Chinese advances in key technologies such as AI, while they are accelerating Chinese investment in semiconductors to the point where its technology is catching up with America.

Then there is what Stephen Roach, the former boss of Morgan Stanley in Asia, calls in a piece in the Financial Times “the ultimate financial weapon” — Greater China’s $1 trillion in direct holdings of US Treasury securities:

Cavalier Americans typically dismiss this possibility, claiming China wouldn’t dare flirt with this nuclear option because it would hurt them more than us. Oh really? There are a couple of “bad dream” options to consider: China could go on a buyer’s strike during upcoming Treasury auctions, or, even more extreme, it could start to unload its outsize position as America’s second-largest foreign creditor. Either option would be devastating for America’s deficit-prone economy and would unleash havoc in the US bond market, with wrenching collateral damage in world financial markets.

Perhaps it is no surprise that Trump wants a meeting with Xi on his first day.

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3. EU-Mercosur

One person who is not taking the threat of Trump’s trade wars and America First foreign policy lying down is Ursula von der Leyen. The European Commission president showed an impressive political resolve and admirable strategic intent by making her first foreign trip in the very first week of her second term to Brazil to sign the EU-Mercusor trade agreement.

This controversial deal, which has been 19 years in the negotiating, is as significant for its geopolitical symbolism as its economic content. It will sweep away tariffs on around 90 per cent of goods between Europe and members of the South American trade bloc, which have a combined population of 275 million people and GDP of close to $3 trillion, though mostly over a period of up to 12 years. But more importantly, the deal strengthens ties between two regions that are most exposed to Trump’s threat to the global rules-based trading system and should allow Europe more secure access to critical materials.

Nonetheless, von der Leyen has taken a political risk in pushing ahead with this deal, given the significant opposition in parts of the European Union. In France, no fewer than 622 parliamentarians signed a letter objecting to a deal. That raises the possibility that the deal won’t be ratified, which would damage the EU’s credibility as a trade partner. According to The Economist:

To ease ratification in Europe, the trade part has been duplicated in a separate agreement that requires assent only by the European Council and the European Parliament for it to take effect. The full treaty must be approved by national parliaments. The council is likely to discuss the deal in the summer.

It is torn between its protectionist instincts and geopolitical calculation. France opposes the trade agreement but may not be able to get the necessary blocking minority of at least four countries totalling 35% of the eu’s population. With Germany, Spain and Sweden strongly in favour, the outcome may depend on Poland and Italy.

Meanwhile an op-ed in Le Monde, highlights just the absurdity of this political opposition within France. Much of the anger is focused on the supposed threat to French farming from imports of Argentine and Brazilian beef. Never mind that agriculture accounts for just three percent of French GDP and that the other 97 percent of the economy that is engaged in industry and services stands to gain from increased access to Latin American markets, say Etienne Vauchez and Alain Bentejac of La Fabrique de l'Exportation, an international trade think-tank:

In reality, there are three sensitive sectors: livestock, cereal and sugar. The agreement specifically provides for tariff quotas on each of these three sectors. Their importance is put forward as a deal-breaker, in particular the oft-quoted 99,000 tons of beef. But while these volumes may seem enormous, they represent around 1% of the European market (1.4% for poultry; 1.1% for sugar). You can't destabilize a market with 1% of additional imports.

No one here is trying to deny the crisis facing French agriculture: low profitability, hyper-regulation, lack of a clear strategy, etc. But this situation is not due to competition from outside the EU, since France's foreign agricultural trade is constantly in surplus with countries outside the European Union. It's not even due to the Common Agricultural Policy (CAP), since German agriculture has prospered over the last 20 years. The difficulties facing French agriculture are first and foremost to be found in France, and in any case have nothing to do with Mercosur.

Not for the first time, the interests of Europe run up against France’s inability to reform itself - a situation unlikely to be eased by the appointment last week of Francois Bayrou as the country’s fourth prime minister this year. Indeed, it was striking that just hours after his appointment, Moody’s chose to downgrade French debt citing political fragmentation. Meanwhile, the wider risk is that the deal will only fuel support for Marine Le Pen at a time when two thirds of citizens in a recent poll say they no longer have confidence in the EU.

But French politics should not be an excuse for blocking a deal that is overwhelmingly in the EU’s interests. Europe is crying out for decisive leadership. All credit to von der Leyen for providing some.

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4. Brexit Reset Latest

In my long read on Brexit reset last week (How (Not) to Reset Brexit), I asked why Sir Keir Starmer was risking so much political pain for so little gain and whether he was at risk of falling into all six negotiating traps that had destabilised so many of his predecessors over the last 70 years. A taste of what he is going to be up against as he goes about his reset comes via the Mail on Sunday:

Keir Starmer's 'surrender squad' to undo Brexit: PM accused of betraying historic 2016 vote to leave EU as 100-strong Whitehall unit is launched to tie Britain back to Brussels, was the headline on one news story.

Meanwhile an editorial in the same paper went on to warn:

We are once again in danger of being a rule-taker but not a rule-maker, and of throwing away all our recently gained freedoms and opportunities – and in return for what?

All we can expect from such a deal is a future chained to a wheezing political and economic invalid.

The good news for Labour is that the government does at least have a clear majority of the public on its side to seek closer relations with the EU, a desire that is shared across Europe, according to this research by the European Council for Foreign Relations:

In Britain, a solid majority of 55 per cent agree with this, compared with only 10 per cent who would refer a more distant relationship. And the feeling is mutual. Across the EU, pluralities concur in every country polled. Our data also tell us why voters want more cooperation. Around half of Brits believe that this would help the UK to manage migration, strengthen its security, boost its economy, stand up to the US and China, tackle climate change, and allow Ukraine to stand up to Russia.

Nonetheless, public opinion can be fickle and history suggests that EU-UK negotiations are rarely smooth or even harmonious. As I wrote last week, what is currently missing from the reset is a clear narrative:

As so often with Starmer, the broader, unanswered question is to what end? What is his vision for UK-EU relations on a 10-15 year view that makes this investment of time and political capital worthwhile? Does he really believe that Britain’s destiny is to remain a long-term rule-taker, a status it comprehensively rejected during the Brexit negotiations? Why does he think that a long, protracted, piecemeal sector by sector alignment with EU rules that does little to boost growth is preferable to simply rejoining the EU?

Will we get answers? I’m not so sure.