An increasingly united axis of authoritarian countries presents a dire threat to the world economy and geopolitical stability. Political analysts say the international financial community must ask whether the correct parallel is the 1970s Cold War — or 1938.
US defence secretary Lloyd Austin confirmed on Wednesday that North Korea had sent troops to help Russia in its war against Ukraine.
“We should be very concerned about this,” Bruce Bennett, professor of policy analysis at the Pardee Rand Graduate School, told GlobalMarkets. The addition of North Korean special forces could well help Russia make a “major battlefield breakthrough” in Ukraine, he said.
Nato secretary general Mark Rutte said on Monday the move would “mark a significant escalation”. He warned last week that Iran, North Korea and China were all fuelling Russia’s war machine.
The Centre for a New American Security (CNAS) thinktank has termed this hostile coalition the ‘Axis of Upheaval’. Its threat is an increasing source of alarm for global investors.
At the annual Institute for International Finance conference in Washington this week, Clay Lowery, IIF executive vice-president, said the key concerns the IIF hears from member firms were “geopolitical risks, geopolitical risks, geopolitical risks”.
Speaking at the same panel discussion on US security concerns, Evan Medeiros, a professor of Asian studies at Georgetown University, said the world had entered a “very fragile moment in international politics”.
The thought experiment for international bankers, said Medeiros, was whether they were in a situation akin to the late 1930s or the 1970s. “The reason I raise that [question] is because the US-China relationship sits in this context of a changing global order that might result in a major international destruction,” Medeiros said. “I don’t think we fully appreciate that.”
Christian Kopf, chief investment officer of fixed income and FX at Union Investment Privatfonds, agreed that geopolitical risk was not properly priced in. “We’re moving from global integration to great power confrontation,” he said. “We’re moving from hyper-globalisation to a situation where trade as a share of GDP will no longer rise — it may even decline.”
Tit-for-tat sanctions
Economic policy increasingly reflects this tension. In August, China added antimony — a strategic mineral used in batteries and solar panels — to a growing list of export restrictions on critical minerals where it dominates global supply.
In September, China sanctioned two US firms for selling arms to Taiwan. Last week, the US imposed its first sanctions on Chinese firms for supplying Russia with weapons for its war in Ukraine. The US Treasury Department said two Chinese companies had worked with Russian partners to produce the Garpiya series of long range attack drones.
China, Russia, Iran and North Korea are all working hard to dilute the West’s ability to impose meaningful sanctions, CNAS’s chief executive Richard Fontaine told GlobalMarkets. “They want an alternative to Swift [the international interbank payment system] and they want to have an alternative payments mechanism,” he said. “They’re increasingly denominating purchases in their own currencies, the yuan and the rouble rather than the dollar. Those are all economic effects [of the geopolitical tension].”
The prospect of increasingly acrimonious trade relationships is high ahead of the US election. Republican candidate Donald Trump has vowed to slap tariffs of 60% on Chinese imports. He has also promised tariffs of 10%-20% on most other imports — including those of allies. This fractious economic policymaking is anathema to current US officials who are desperate to convince allies to take the political threat of Russia and China seriously.
At a recent CNAS event, Democratic US Congressman Adam Smith, the ranking member of the House Armed Services Committee, urged collaboration to fight what he termed “CRINGE” — China, Russia, Iran, North Korea and extremist groups. The US was “on the right side” of the conflict, he said, but in convincing the rest of the world that this was a fight that mattered, it had done a “truly terrible job”.