02/02/2017 5:27 AM AEDT | Updated 20/01/2018 4:12 PM AEDT

2017: The Year of Living Dangerously

As the world attempts to come to terms with the first few weeks of the Trump Administration, it is clear that we are living in an increasingly uncertain world.

Global norms are being rapidly upended, and none of us can know with any great certainty what might replace them.

This sense of unease is borne out by more objective measures: the Global Uncertainty Index, which looks at the totality of political, economic, and environmental risks on the planet, has rated global uncertainty at its highest level in 16 years. It is this uncertainty that radically affects the behaviours of individuals and their consumption decisions; firms and their investment decisions; and nation-states in their policy decisions. 2017 looms indeed as a'year of living dangerously'.

I see these uncertainties reflected in 10 key policy challenges.

Challenge Number 1:The Future Policy Direction of the Trump Administration.

Few of us can answer the question of the Trump Administration's future policy direction with any level of definitive accuracy. But the early signs are beginning to become apparent. It is clear from President Trump's first weeks that he intends to follow through on the many of the core convictions he articulated both before and after the election campaign, however extreme some of them may seem. But at a broader level, it is important to keep the following points in mind.

• First, the best way to describe Mr. Trump is that he is primarily a nationalist. Simply using the term "populist" does not materially add to our understanding of the nature of this presidency. "Making America Great Again" is very much about a re-birth of American nationalism.

• Second, whatever the rest of us in the world may think or want, this will be overwhelmingly a domestic presidency. And within that, a domestic, economic presidency. This is likely to occupy more than three quarters of his time. It is the domain in which he is most comfortable. It is also the one most directly relevant to the remarkable political constituency he brought together to be elected president.

• Third, President Trump has a profoundly negative predisposition against China.

• Fourth, he has an entrenched predisposition to do whatever he can to normalize relations with Russia.

• Fifth, he is likely to be significantly protectionist when measured against ant any recent Presidential comparison. Here he will face significant opposition from a Republican congress. But very little opposition from the American people.

• Sixth, he has a deep view that America's central national security challenge is global Islamic terrorism.

• Finally, he is deeply skeptical about the compatibility of the global rules-based order with his deeply nationalist agenda.His excoriation of the UN, along with that of his congressional colleagues, is likely to be just one of many shots directed at the multilateral system in general in the future. His attitude to the WTO may well be the same. As for the UN framework Convention on Climate and Change and the future of the Paris Agreement, the prospects look limited, in which case global leadership will come from elsewhere, including subnational governments and corporations under pressure from their own shareholders and customers.

Challenge Number 2: Will U.S.-Russia Rapprochement Work?

Decision-makers in both in Moscow and Washington have some doubts. But the new President has made a simple conclusion that Russia does not represent a long-term threat to "making American great again," as the only uncontested superpower in the world. He has, however, made the conclusion that China does constitute such a threat.

The question is whether intelligence scandals in the United States involving Russia will cause the Trump administration to begin"correcting against" the now widely expected normalization process with Moscow. If "normalization" does proceed, we should look carefully at the nature of the deal which Mr. Trump has begun to outline in terms of sanctions removal on the one hand, in exchange for a new nuclear agreement with Russia on the other, in addition to what becomes possible in ending the war in Syria and dealing more effectively with global Islamist terrorism.

Challenge Number 3: The Future of the US-China Relationship

In the months since the Presidential election, President Trump has engaged in a brutal public exchange with China on five core issues - the One China policy, the South China Sea, North Korea, Chinese cyber-attacks, and China's "trade and currency manipulation" practices. These have not been confined, as in certain previous presidential elections, to the campaign itself. Despite early contact between the two sides, these issues have continued to escalate.

Although, how far Mr. Trump and his administration will push each of them remains to be seen.

The core problem is that if political thresholds are crossed on the One China Policy, as opposed to the other problematic areas of the relationship, we may find ourselves in deep water sooner than we think. The One China Policy is a matter of fundamental ideology and identity for the Chinese Communist Party. But President Trump seems to see the One China Policy as but one of a number of bargaining chips for use with the Chinese. I would not therefore rule out the possibility in the not-too-distant future of seeing US carrier deployments to the Taiwan Strait in response to China's deployment there in early January.

Keeping the principles of escalation dynamics in mind, I am also concerned about the ability of the diplomatic machinery between the two countries to manage such escalation. In the current climate, it is possible that overwhelming nationalist sentiment in both countries may overtake the rational processes of normal relationship management. More broadly, President Trump may well seek to build on growing, long-term anti-Chinese sentiment across all elements of American politics, society, and the economy, a sentiment lying well outside the foreign policy elites entrusted historically with the management of this relationship.

Challenge Number 4: The Future of the Strategic Triangle Between Washington, Moscow, and Beijing.

It is unique that a President-elect of the United States of America has been voted into office on the basis of normalizing relations with Russia, and identifying Russia as a long-term strategic partner. This turns on its head US presidential foreign and national security policy orthodoxies that have existed since 1945.

Equally, President Trump is proving to be unique in the case of China. For the first time since 1972, the cornerstone of US-China relations, the One China Policy, has been thrown up in the air as a negotiating tool, rather than as a given in the relationship. These two sets of policy departures, one on Russia, the other one on China, are of historical significance.

The open question for the year ahead is whether there will be concrete signs of this radical change in language leading to a radical "re-triangulation" of the strategic framework laid out in 1972, between Nixon and Mao - i.e. a US-China strategic accommodation against a common ideological, political and military foe, the then Soviet Union.

We should note that there have been a number of growing tensions in the China-Russia relationship, based on a Russian sense of strategic vulnerability in its far east, the continuation of "the great game" for strategic influence in Central Asia, as well as unfulfilled Russian expectations for greater Chinese financial support during the last three years of Western financial sanctions against Moscow.

Would normalization and accommodation with the Trump Administration afford President Putin a new political and strategic freedom of manoeuvre in his dealings with Beijing - bearing in mind that many Russians have come to see the China-Russia relationship as a relationship of unequals? Second, if President Putin's Russia did seek to move in the direction of greater strategic distancing from Beijing, what counter measures will the Chinese seek to adopt to arrest any such strategic realignment between Moscow and Washington? Or, third, is it more likely that President Putin, known for his agile diplomacy, will seek to locate Russia in a strategic "swing position," equidistant from both Beijing and Washington?

These constitute, as former Defense Secretary Rumsfeld might have said, a number of"known unknowns" in the future construction of the triangular relationship between Washington, Beijing, and Moscow.

But the simple conclusion to be drawn so far is that this most fundamental part of the post 1972 strategic order is no longer fixed, but fluid.

Challenge Number 5: The DPRK and its Nuclear Ambitions

North Korea's military development presents the most immediate security challenge facing Asia this year. This is because of a simple fact: the North has reached a troubling level of technical sophistication in the development of its missile and nuclear technologies. Its stated aim, of course, is to develop the capability to hit United States territory with a nuclear-tipped missile, and parts of the U.S. military are already operating on the assumption that it possesses this capability and intent.

It is clear that the current policy of increased sanctions and diplomatic isolation has not been sufficient. A different approach is now required, which must start with President Trump reaching a strategic agreement with President Xi on how to arrest and stop the DPRK's nuclear ambitions.

This will need to be followed in time by the reopening of dialogue with the North, not least because this will be a Chinese requirement if they are going to apply fresh leverage. This should be tried even if the first step falls short of formal negotiations. Hardliners in the Trump Administration and in North Korea may balk at this view. But we need to consider more direct forms of engagement if we are to begin making any real progress in addressing this significant threat to Asian regional security and global security more broadly.

Challenge Number 6: The Future of the Global Trade and Economic Order

President Trump's explicit protectionism represents a historic departure from the policies of successive U.S. administrations since the conclusion of the GATT in 1944. If we accept the logic that post-war global trade has been a major contributor to increased global economic growth, poverty reduction, and radically improved individual living standards, the return of protectionism must command the attention of all of us in the international community. President Trump's threats of a trade and currency war with China, if executed, would have profound economic consequences for the global economy.

It would result in lost growth and lower trade and investment flows between the largest and second largest economies in the world, and between them and the rest of the world. We are also familiar with President Trump's position on both the TPP and NAFTA. What will follow after the TPP, and will RCEP have real prospects of being successfully being negotiated, and will its level of ambition remain low?

The core challenge is that given President Trump's predilection for nationalism, protectionism, and what I would call a "new bilateralism," based on the "Art of the Deal," the future of the post-war trading order, currently anchored in the WTO, could well be thrown in the air.

Put bluntly, if unilateral action is taken by the United States against a state party of the WTO, and the WTO's dispute resolution mechanisms are ignored by an incoming U.S. Administration, then it would not take long for the entire global trading system to unravel.

Similarly, on the possibility of currency wars, we must be conscious of the fragile consensus that underpins the International Monetary Fund on currency stability, and the financial regulatory reform agenda currently entrusted to the Financial Stability Board under the G20.

In summary, we need to be mindful of what would happen with the rapid unraveling of long established institutional arrangements currently underpinning international trade, investment, capital flows, and currency management.

In my own darkest moments, I am concerned about the reemergence of a Smoot-Hawley Tariff by stealth, or in slow motion, and by different means over the years ahead. For those of us with a mind for economic history, Smoot Hawley did not end entirely well, either for the United States or the rest of the world, in the dark decade of the 1930's.

Challenge Number 7: The Future of the EU and NATO

What will be the future of the European Union and NATO given the current dynamics with Brexit, upcoming elections in France and Germany, and a geopolitical realignment between Washington and Moscow? It would be foolish to reach faddish conclusions that the EU is now in irreversible decline. If Fillon and Merkel win next year, Germany and France may have enough critical mass between them to defend, advance, and reinvent the European project.

Challenge Number 8: Reaction from the rest of Asia

What will the Trump administration mean for the rest of Asia, particularly, Japan, Indonesia, and India, including the future trajectory of the India-Pakistan relationship? Japan has lost political face over the American rescinding of the TPP after so much political capital was expended by PM Abe to get it through the Diet. How will Indonesia, the largest Muslim country in the world, react to the Trump administration's overall posture on Islam? But will India see real prospects for deepening its strategic and economic relationship with the US, given Trump's dim view of China, and likely view of Pakistan.

Challenge Number 9: A Third Intifada in Israel over Jerusalem?

What is the possibility of a third intifada within Israel, accompanied by the collapse of the Palestinian authority, in the aftermath of any decision by the Trump Administration to formally move the capital of Israel to Jerusalem, as well as formal dissolution of the Two State Solution?

Challenge Number 10: The Future of the Western Democratic Project

Finally, there are the intensifying challenges to the now centuries-long Western democratic project the collapse of the political center, the rapid rise of the far left and the far right in response to the pressures of globalization; and whether this in turn leads to a more comprehensive repudiation of globalization per se, or will we instead see readjustment of the globalization project to place human dignity and social stability at the center.

Each of the challenges that I have listed naturally gives rise to the question: what then should be done? There is nothing inevitable about these challenges. This is a question for all countries great and small.

But given this year of living dangerously, 2017, where so many mega-challenges of great and complex dimensions are unfolding simultaneously, the demand of international political and policy leadership is now greater than any time since the end of the Cold War.


This is an edited version of a speech delivered to the Raisina Dialogue, convened by the Indian Ministry of External Affairs on 17 January 2017