In a month’s time, the UK will have a new prime minister. The campaign has been dominated by candidates’ views on how to deliver Britain’s withdrawal from the EU by October, alongside some discussion of domestic issues.

But relatively little has been said about international affairs, despite the fact that foreign policy questions are becoming a more partisan issue and Britain is facing crucial questions around Brexit and the wider international context. These will be waiting for whoever finds themselves in Number 10 on 22 July. 

1. How can Britain influence Europe from outside the EU?

Theresa May was fond of saying that Britain is leaving the EU but not leaving Europe. Britain cannot change its geography. It will continue to share many strategic and security interests with the rest of the continent, but it will be outside of Europe’s central political and economic project. A new PM will not only have to negotiate Britain’s new relationship with the EU, but also think about how to influence it as a third country.

An aspect of this will be finding a new way to work with the EU on foreign, security and defence policy that meets the need for autonomy on both sides. How deep this relationship is or how institutionalized it will be is yet to be negotiated and can be shaped by the next PM.

The UK needs to decide how ambitiously it wants to engage with the new defence agenda in the EU (particularly its industrial components), and how to balance these with key bilateral relationships like France and Germany. Amid uncertainty about American security guarantees and Russian aggression, the next PM must also consider what Britain’s security role in Europe should be and NATO’s place within that.

Beyond conventional foreign policy issues, Britain is also going to be heavily shaped and influenced by the rule-making power of the EU, and how the world’s largest market regulates itself, from energy to financial services, consumer products and the environment.

The UK will need a strategy to influence the EU from the outside – something Swiss, Norwegians and Americans will acknowledge is no easy feat. This could include significantly increasing its diplomatic footprint across Europe, working closely with the UK’s private and non-profit sectors, utilizing Britain’s technical expertise in areas like sanctions, and creating new ad hoc groupings to share perspectives and ideas, building on examples like the Northern Future Forum. 

2. Should Britain do business with President Trump?

President Trump represents a fundamental challenge to Britain: an American president whose belligerent unilateralism runs counter to many of Britain’s foreign policy objectives. His frequent and often shameless diplomatic faux pas – from proposing Nigel Farage be the British ambassador to his dog-whistle attacks on the mayor of London – are compounded by real differences of substance on issues like trade, climate change and nuclear non-proliferation.

A new prime minister must decide how to manage relations with the US administration, whether to challenge or condemn a US president when he acts against Britain’s interests, or use flattery or quieter diplomacy to seek to influence him. Theresa May’s strategy of staying politically close to the president and playing to his ego has yielded little in policy terms, though other world leaders have fared little better.

A new PM will face some uncomfortable choices. Will they continue to defend the Iran nuclear deal alongside European allies while the US continues to undermine it? Do they believe a trade deal with America is desirable or achievable with the current administration, and what are they willing to sacrifice to achieve it? Is the American security guarantee for Europe secure with Donald Trump as president? Judgements on these questions should inform Britain's wider strategy, and its objectives for a future relationship with the European Union.

3. Should Britain prioritize economics or security in its relations with China?

Britain faces its own version of the challenge that many countries face – how to balance the economic and investment benefits of a positive relationship with China with concerns about repressive domestic politics and a more assertive Chinese role regionally and globally. This tension has become more acute for two reasons.

First, the economic dislocation of leaving the EU may create a greater reliance on Chinese trade and investment. China is already a major investor in the UK. If Brexit proves to be disorderly, Britain’s need may be all the greater (though China faces economic headwinds as well). Some in Brussels even fear that the economic difficulties of Brexit may make the UK a soft touch for emerging powers from which it seeks inward investment and market access.

Second, the deterioration in US–China relations means the UK may come under increasing pressure from the United States to take a tough line with China. The controversy over Huawei’s role in delivering 5G networks may become a more regular feature of transatlantic debates, with Britain facing Chinese economic pressure on one side and a squeeze from America over security issues on the other, without the weight of the EU behind it.  

A new prime minister should consider whether the UK’s interests are served by a security role in east Asia, and whether it has the capability to play one.

The UK remains a party to the Five Power Defence Arrangements. The Royal Navy has conducted freedom of navigation exercises in the South China Sea, prompting a rebuke from Beijing. It has also taken steps to deepen security ties with Japan.

But the UK government has struggled to present a coherent position. Some cabinet ministers have sought to open doors to the Chinese market at the same time as others announced their intentions to send aircraft carriers to the Pacific. The next PM will need to find a balance between China and the US, or accept the consequences of more directly taking sides on disputes about trade, technology, and security.

4. How can the contradictions between UK foreign and domestic policy be reconciled?

One of the many problems with the vague and unhelpful slogan ‘Global Britain’ is how it jars with many aspects of domestic policy. This incoherence reduces Britain’s foreign policy credibility and effectiveness.

Britain has actively supported the UN-led Yemen peace process while continuing to support Saudi Arabia’s military campaign through arms sales. Britain wants to build a new ambitious independent trade policy while restricting the migration that is crucial for services trade. British foreign secretaries trumpet the UK’s soft power while the Home Office deports members of the Windrush generation, bungles EU citizenship applications and sets unreasonable burdens for many people seeking visas simply to visit the country.

Global universities are celebrated while international students had their post-study visas cut (a policy that sensibly is likely to be reversed). Britain advocates international tax compliance and transparency while not taking robust steps to regulate the tax haven role played by crown dependencies and overseas territories.

A new prime minister has the chance to get to grips with these inconsistencies and develop foreign and domestic policies which are more coherent and self-re-enforcing.

5. At what level should Britain’s international ambitions be funded?

Successive governments have celebrated the fact the UK is the only Western country to spend 2% of GDP on defence and 0.7% on development. However, this masks some real pressures in the system.

There are significant problems in the defence budget and a growing gap between commitments and committed funds. Meanwhile, the funding of Britain’s diplomacy has been cut by successive governments – Labour, Conservative and coalition – for much of the last 20 years. Numerous bodies have highlighted the problems facing the overstretched and underfunded Foreign Office. Where would defence and diplomacy sit in the new prime minister’s hierarchy of priorities?

The problem is not purely one of funding, but the gap between ambitions, rhetoric and resources. It is not sustainable for British ministers to trumpet Britain’s global ambitions while not properly funding the tools of its influence abroad.

It would be reasonable and understandable for a new prime minister to adjust that ambition and tone down the rhetoric, or alternatively to address resource pressures by investing in diplomacy and defence. But that choice should be informed by a sober reflection on Britain’s international position and interests as it leaves the EU. Brexit offers a chance to revisit assumptions that have guided British policy for a generation. A new prime minister should seize this opportunity.

A realistic vision for the future

All these issues will be more pronounced if the UK leaves the EU with no deal at the end of October. ‘No deal’ would be not simply an economic shock but a diplomatic rupture that will colour the UK’s capacity to negotiate a new relationship with the EU, which will be the first order of business after a ‘no deal’ exit. Trust will be in short supply.

Even if they don’t get to vote on the new prime minister, the public deserves serious answers to these and other questions from the men who want to lead the country. Not the platitudes of ‘Global Britain’ or a reflexive and unexamined British exceptionalism, but a serious, realistic assessment of how Britain will cope with the disruptions of leaving the EU and how it might thrive outside the regional bloc it has been a part of for more than 45 years.

This will be done through examining transatlantic approaches and responses to China through the lens for four key themes (digital technology; trade and investment; governance of global commons; and climate change and the environment) that have been identified as crucial to developing effective policy responses and fostering collaboration.

The project will strengthen national, regional and international responses to the risks and opportunities posed by China’s changing role within the global economy and international rules-based order.

Since the 2018 economic crisis, when the value of the lira plummeted and borrowing costs soared, Turkey’s economy has achieved a miraculous ‘V-shaped’ economic recovery from a recession lasting three quarters to a return back to quarterly growth above 1 per cent in the first three months of 2019.

But this quick turnaround has been built on vast amounts of cheap credit used to re-stimulate a consumption and construction boom. This so-called ‘triple C’ economy generated a rapid growth spurt akin to a modestly able professional sprinter injected with steroids.

This has made the currency vulnerable. The lira has steadily depreciated by 11 per cent against the US dollar since the beginning of 2019 and crossed the rate of 6 lira versus the US dollar on 7 February. And there are further warning signs on the horizon.

Credit bonanza

Statistics reveal that Turkish domestic credit grew by around 13 per cent on average throughout 2019.  The credit bonanza is still ongoing. Mortgage-backed home sales jumped by a record high of 600 per cent last December alone and the 2019 budget deficit catapulted by 70 per cent due to higher government spending.

Turkey’s central bank fuelled this credit expansion by cutting interest rates aggressively to below inflation and, since the start of this year, purchasing lira-denominated bonds equivalent to around one-third of total acquisitions last year to push yields lower.

Equally, it has linked bank lending to reserve requirements – the money that banks have to keep at the central bank – to boost borrowings via state and private banks. Banks with a ‘real’ loan growth (including inflation) of between 5 and 15 per cent enjoy a 2 per cent reserve ratio on most lira deposits, which authorities adjusted from an earlier band of 10-20 per cent that did not consider double-digit inflation.

Cumulatively, bond purchases (effectively quantitative easing) and reserve management policies have also contributed to eased credit conditions.

Commercial banks have also reduced deposit rates on lira accounts to less than inflation to encourage consumption over saving. Together with low lending rates, the boost to the economy has flowed via mortgages, credit card loans, vehicle leasing transactions and general business borrowings.

Accordingly, stimulus is at the forefront of the government’s economic approach, as it was in 2017 and 2018. It does not seem to be implementing structural change to re-orient growth away from consumption towards productivity. 

In addition, governance is, again, a central issue. President Recep Tayyip Erdogan’s near total monopolization of policymaking means he guides all domestic and external policies. He forced out the previous central bank governor, Murat Cetinkaya, in July 2019 because he did not share the president’s desire for an accelerated pace of interest rate reductions.

New challenges

Despite the similarities, the expected future financial turbulence will be materially different from its 2018 predecessor in four crucial respects. 

Firstly, foreign investors will only be marginally involved. Turkey has shut out foreign investors since 2018 from lira-denominated assets by restricting lira swap arrangements. Unsurprisingly, the non-resident holdings of lira bonds has plummeted from 20 per cent in 2018 to less than 10 per cent today.

Secondly, the Turkish government has recently introduced indirect domestic capital controls by constraining most commercial transactions to the lira rather than to the US dollar or euro to reduce foreign currency demand in light of short-term external debt obligations of $191 billion.

Thirdly, the Turkish state banks are intervening quite regularly to soften Lira volatility, thereby transitioning from a ‘free float’ to a ‘managed float’. So far, they have spent over $37 billion over the last two years in a futile effort to buttress the lira. This level of involvement in currency markets cannot be maintained.

Fourthly, the Turkish state is being far more interventionist in the Turkish stock exchange and bond markets to keep asset prices elevated. Government-controlled local funds have participated in the Borsa Istanbul and state banks in sovereign debt to sustain rallies or reverse a bear market.  

All these measures have one running idea: exclude foreign investors and no crisis will recur. Yet, when the credit boom heads to a downturn sooner or later, Turks will probably escalate lira conversions to US dollars; 51 per cent of all Turkish bank deposits are already dollar-denominated and the figure is still rising.

If Turkey’s limited foreign reserves cannot satisfy the domestic dollar demand, the government may have to impose comprehensive capital controls and allow for a double digit depreciation in the value of the lira to from its current level, with significant repercussions on Turkey’s political stability and economic climate.

To avoid this scenario, it needs to restore fiscal and monetary prudence, deal the with the foreign debt overhang in the private sector and focus on productivity-improving economic and institutional reforms to gain the confidence of global financial markets and Turks alike.

Japan's primary objective of the ‘free and open Indo-Pacific’ (FOIP) strategy is to shape and consolidate regional order in the Indo-Pacific region based on the existing rules-based international order. The concept initially aimed to achieve two different objectives—shaping a regional order in the Indo-Pacific and ensuring the defence of Japan; however, Japan has gradually shifted its strategic focus onto the former, separating national defence from the FOIP concept, which reflects a change in the degree of its commitment to the two objectives. On the one hand, as its overall security strategy, Japan has determined to steadily enhance its national defence by increasing its own defence capabilities and strengthening the US–Japan alliance, while transforming its partnerships with like-minded states, such as Australia and India, into a diplomatic, and potentially military, alignment. This has been brought about by shifts in the regional balance of power, particularly the rise of China and the relative decline of the United States. On the other hand, as part of its FOIP strategy, Japan's attempts to build a new regional order in the Indo-Pacific region aim to defend the existing rules-based order established by the United States from challengers, particularly China. Yet, given the strategic uncertainty over Japan's international coalition-building efforts to create a new regional order, Japan has made its approach flexible; Tokyo is using its ambiguous FOIP concept to gauge other states' responses, understand their perspectives, and change its strategic emphases accordingly—so-called ‘tactical hedging’. Japan has pursued similar means to achieve the two key objectives. Nevertheless, the country's core interest, the defence of Japan, is more imperative than building a regional order in the Indo-Pacific region, and Japan faces different types of challenges in the future.

The landlocked southern African nation of Lesotho faces a number of domestic challenges in 2014. Reducing reliance on the agricultural sector, containing the prevalence of HIV and improving service delivery are all important issues that must be addressed to ensure sustainable growth. However, social achievements including literacy rates and levels of gender parity among the highest in Africa, the country’s potential for electricity exports, and the booming relationship between its textile industry and the United States, could mean Lesotho is well-placed for future growth and development. 

HE Prime Minister Tom Thabane will discuss how his government seeks to address the Lesotho’s domestic issues and how the country seeks to exert its influence in the regional Southern African Development Community.

Video: Marianne Schneider-Petsinger and Dr Yu Jie discuss key themes from the research paper

Summary

• The underlying driver of the ongoing US–China trade war is a race for global technological dominance. President Trump has raised a number of issues regarding trade with China – including the US’s trade deficit with China and the naming of China as a currency manipulator. But at the heart of the ongoing tariff escalation are China’s policies and practices regarding forced technology transfer, intellectual property theft and non-market distortions.
• As China’s international influence has expanded it has always been unlikely that Beijing would continue to accept existing global standards and institutions established and widely practised by developed countries based on ‘the Washington Consensus’.
• China’s desire to be an alternative champion of technology standard-setting remains unfulfilled. Its ample innovation talent is a solid foundation in its quest for global technology supremacy but tightening controls over personal freedoms could undermine it and deter potential global partners.
• It is unclear if Chinese government interventions will achieve the technological self-sufficiency Beijing has long desired. China’s approach to macroeconomic management diverges significantly from that of the US and other real market economies, particularly in its policy towards nurturing innovation.
• Chinese actors are engaged in the globalization of technological innovation through exports and imports of high-tech goods and services; cross-border investments in technology companies and research and development (R&D) activities; cross-border R&D collaboration; and international techno-scientific research collaboration.
• While the Chinese state pushes domestic companies and research institutes to engage in the globalization of technological innovation, its interventions in the high-tech sector have caused uneasiness in the West.
• The current US response to its competition with China for technological supremacy, which leans towards decoupling, is unlikely to prove successful. The US has better chances of success if it focuses on America’s own competitiveness, works on common approaches to technology policy with like-minded partners around the globe and strengthens the international trading system.
• A technically sound screening mechanism of foreign investment can prevent normal cross-border collaboration in technological innovation from being misused by geopolitical rival superpowers.

The US 2020 election season enters a potentially decisive next phase with the Super Tuesday primaries on 3 March. With these fifteen, simultaneously-held state elections, the Democrats hope to have greater clarity about their party’s likely nominee for the general race against President Donald Trump in November. Concerns around intraparty divisions in the Democratic party between progressives (represented by Senators Elizabeth Warren and Bernie Sanders) and moderates (represented by former Vice President Joe Biden and former mayor Pete Buttigieg) have surrounded the primary races so far, and are unlikely to dissipate even if one candidate emerges from the field on 3 March.

Against this backdrop, Chatham House brings together a panel of experts to discuss the state of the Democratic primary race, implications for the general election, and the Trump campaign’s priorities ahead of its re-election bid. Will the Democratic party resolve its divisions and unite behind a progressive or moderate in light of the Super Tuesday election results? How is Trump positioned to fair against the Democratic candidates left in the race? Did Former Mayor of New York Michael Bloomberg’s primary gamble to focus on Super Tuesday pay off? And what policy priorities are likely to be pursued under either a Trump 2.0 or a Democratic administration?

For decades, Venezuela has struggled to appropriately maintain production, redistribute profits and sustain investment in its nationalized oil industry to support its sagging economy. 

Compounded by recent political instability, corruption, US sanctions and the increased flow of human capital out of the country, Venezuela’s energy sector continues to spiral downward. But to what extent can Venezuela’s energy crisis be attributed to domestic politics, national mismanagement and a lack of investment and infrastructure? And how can the international community support the renewal of energy production in Venezuela especially with an eye toward lowering the country’s carbon footprint?
 
This webinar explores the challenges Venezuela currently faces in rebuilding its energy sector. Why did the Venezuelan oil industry collapse and how can it be recovered? How are trends in the Latin American energy sector, from the emergence of new players to the rise of renewables, impacting Venezuela’s oil industry? 

And with global crude prices in fluctuation due partly to the COVID-19 outbreak, how will Venezuela’s oil industry fare against global trends?

 

Video: Marianne Schneider-Petsinger and Dr Yu Jie discuss key themes from the research paper

Summary

• The underlying driver of the ongoing US–China trade war is a race for global technological dominance. President Trump has raised a number of issues regarding trade with China – including the US’s trade deficit with China and the naming of China as a currency manipulator. But at the heart of the ongoing tariff escalation are China’s policies and practices regarding forced technology transfer, intellectual property theft and non-market distortions.
• As China’s international influence has expanded it has always been unlikely that Beijing would continue to accept existing global standards and institutions established and widely practised by developed countries based on ‘the Washington Consensus’.
• China’s desire to be an alternative champion of technology standard-setting remains unfulfilled. Its ample innovation talent is a solid foundation in its quest for global technology supremacy but tightening controls over personal freedoms could undermine it and deter potential global partners.
• It is unclear if Chinese government interventions will achieve the technological self-sufficiency Beijing has long desired. China’s approach to macroeconomic management diverges significantly from that of the US and other real market economies, particularly in its policy towards nurturing innovation.
• Chinese actors are engaged in the globalization of technological innovation through exports and imports of high-tech goods and services; cross-border investments in technology companies and research and development (R&D) activities; cross-border R&D collaboration; and international techno-scientific research collaboration.
• While the Chinese state pushes domestic companies and research institutes to engage in the globalization of technological innovation, its interventions in the high-tech sector have caused uneasiness in the West.
• The current US response to its competition with China for technological supremacy, which leans towards decoupling, is unlikely to prove successful. The US has better chances of success if it focuses on America’s own competitiveness, works on common approaches to technology policy with like-minded partners around the globe and strengthens the international trading system.
• A technically sound screening mechanism of foreign investment can prevent normal cross-border collaboration in technological innovation from being misused by geopolitical rival superpowers.

Japan's primary objective of the ‘free and open Indo-Pacific’ (FOIP) strategy is to shape and consolidate regional order in the Indo-Pacific region based on the existing rules-based international order. The concept initially aimed to achieve two different objectives—shaping a regional order in the Indo-Pacific and ensuring the defence of Japan; however, Japan has gradually shifted its strategic focus onto the former, separating national defence from the FOIP concept, which reflects a change in the degree of its commitment to the two objectives. On the one hand, as its overall security strategy, Japan has determined to steadily enhance its national defence by increasing its own defence capabilities and strengthening the US–Japan alliance, while transforming its partnerships with like-minded states, such as Australia and India, into a diplomatic, and potentially military, alignment. This has been brought about by shifts in the regional balance of power, particularly the rise of China and the relative decline of the United States. On the other hand, as part of its FOIP strategy, Japan's attempts to build a new regional order in the Indo-Pacific region aim to defend the existing rules-based order established by the United States from challengers, particularly China. Yet, given the strategic uncertainty over Japan's international coalition-building efforts to create a new regional order, Japan has made its approach flexible; Tokyo is using its ambiguous FOIP concept to gauge other states' responses, understand their perspectives, and change its strategic emphases accordingly—so-called ‘tactical hedging’. Japan has pursued similar means to achieve the two key objectives. Nevertheless, the country's core interest, the defence of Japan, is more imperative than building a regional order in the Indo-Pacific region, and Japan faces different types of challenges in the future.