2022 Year Ahead: United States

Globally, 2021 was dominated by the post-pandemic fallout, including supply chain snarls, widening fiscal deficits, rising inflation, and in some cases, accelerated economic growth. We anticipate most of these economic trends to continue in 2022, except the rapid economic expansion, which in many cases may slow down sharply. Plus, the pandemic exacerbated wealth inequality and dissatisfaction with leaders – two elements which will shade the elections occurring across the world in 2022.

 

In our “Year Ahead” series, we’ll outline our outlook for major economies around the world, including key risk events that should be monitored. We’ll avoid making election predictions, but instead focus on risk factors and implications of electoral trends.

 

First, we’ll start off with the United States. While the U.S. itself will hold midterm elections in 2022, the dominating theme we foresee in the U.S. will be foreign policy challenges, namely those connected with Russia and China.

 

Domestic politics in the U.S. are worthy of their own analysis. But we’ll focus our outlook on:

 

We see the 2021 U.S. pullout from Afghanistan as a pivotal moment in foreign policy that will continue to influence events in 2022. Many countries see/saw the move as an indication of the U.S. reducing its footprint in the region, which in turn will affect their own behavior. At a minimum, geopolitics in Asia and South Asia will become more complicated, while countries like Russia and China will seek to leverage the situation be trying to expand their own influence. Moscow will likely continue to raise the specter of war with Ukraine to suit its needs, while China will slowly increase pressure on Taiwan, all while continuing to keep border tensions with India simmering as a barometer for the world (and US) reaction to its behavior. What happens in Russia could directly influence Beijing’s behavior in 2022 as well.

 

The U.S. kicked off 2021 by becoming the first country to declare that China is committing crimes against humanity and genocide against the Uyghurs, a Muslim ethnic group from China’s Xinjiang region. Yet, following President Joe Biden’s inauguration, U.S.-China relations cooled slightly (for the better), outside of the tense rhetoric exchanged at the Alaska meeting in March. That said, U.S. action in other regions of the world aggravated tensions, which will shape how the two nations interact over the next year.

 

In September, the U.S., the U.K., and Australia announced a trilateral partnership (AUKUS) to share nuclear submarine propulsion technology, which was seen as direct acknowledgement of the threat China poses in the Indo-Pacific region. Specifically, China views Taiwan as a renegade province with unification being a key objective of President Xi Jinping. The frequency and volume of Chinese military flyovers increased in 2021, serving as a warning to the U.S. and Taiwan as to not cross Chinese red lines.

 

Outside of curbing Chinese influence, Taiwan has strategic importance to the U.S. and the broader global economy as a leading supplier of semiconductors, which will be essential to the global transition to green technology. But the security challenges posed by China are not just about Taiwan as Beijing is making territorial claims over parts of India, the South China Sea, and expanding its sphere of influence into the Middle East, Africa and LATAM through investments. Accordingly, AUKUS upped the ante between China and the West given the alliance’s emphasis on military cooperation.

 

The announcement of AUKUS was followed by the first in-person Quad meeting, which included the leaders of the U.S., India, Japan and Australia, who converged in Washington, D.C. The Quad is less vocal about being anti-China, or a military alliance, but its evident that the body is designed to mitigate China’s expansion, at least within Asia.

 

The Quad was then followed by both Biden and Prime Minister Scott Morrison of Australia saying, for the first time, that their respective countries would defend Taiwan if it were invaded. Till then, no country has made such a declaration as the U.S. followed a policy of “strategic ambiguity,” which meant signaling that the U.S. would defend Taiwan, without actually saying it, to preserve optionality.

 

The Middle East emerged as a proxy battleground between the U.S. and China in 2021 reminiscent of the Cold War (a theme we have touched upon in the past). Chiefly, the U.S. withdrawal from Afghanistan renewed the debate over the level of U.S. engagement around the world moving forward. A U.S. exit was welcomed by China and Russia, however both have not rushed in to fill the power void, as many initially expected. But both countries are trying to ramp up arms sales to the region, while increasing their diplomatic outreach, and in the case of China, extending financing.

 

Examples include the ongoing Belt and Road Initiative, China and Iran’s newly inked 25-year strategic agreement, which will provide China with cheap Iranian oil while allowing Iran to circumvent U.S. sanctions, Russia, establishing a military base in Syria providing Moscow with strategic access to the Mediterranean, and enhanced cooperation between Russia, China and Iran, and Russia’s increased outreach to Pakistan.

 

The last example is particularly complex because Russia and India were virtual allies during the Cold War, while U.S. and Pakistan were formal allies in the 1980s, and then again in the 2000s. In fact, Pakistan helped kick Russia out of Afghanistan in the 1980s, making the two technical enemies. But new geopolitical, and economic realities, have aligned the U.S. and India more closely, while Pakistan has shifted into China’s sphere of influence. The U.S. withdrawal from Afghanistan all but cemented Pakistan’s drift toward China. And Russia is moving to leverage this development by forging ties with its past nemesis Pakistan, even though it knows this will come at the expense of its ties with India. But it’s a calculated bet given, again, closer ties between the U.S. and India.

 

Another example of the increasingly complex geopolitics includes the United Arab Emirates (U.A.E.). The U.A.E. is a key U.S. ally in the Middle East, which closed a Chinese facility following allegations by U.S. intelligence that the site was being used as a military base. Yet, days later, the U.A.E. suspended its multi-billion-dollar contract for U.S. F-35 aircraft after the U.S. asked the U.A.E. to eliminate Huawei from its telecommunications network. Really, the U.A.E. was acting in its own best interest, assessing that the cost of losing Huawei exceeded the value of the U.S. aircraft. Plus, the U.A.E. may be playing hardball trying to obtain better concessions from the F-35 deal. But the events demonstrated that the U.S. does not exercise as much sway as initially assumed in the region. Not every nation buys into the notion that trade deals with China are disguised as covert military activities. More so given that many countries in the region are trying to evolve their economies and move away from oil-export dependence.

 

Moving into 2022, additional fallout from the U.S. extricating itself from the region, the evolution of geopolitics in Asia and the direct impact on Russia’s calculation with respect to Ukraine, as well as China’s actions against Taiwan will be the key foreign policy risk events to observe. Russia, at the moment, appears to be the largest risk factor.

 

Vladimir Putin is focused on ensuring that NATO does not work with Ukraine to, at a minimum, maintain a buffer state. It would allow Putin to effectively set red-lines in the security map of Europe and prevent NATO’s expansion. It could even erode the strength of NATO if:

 

Furthermore, a military invasion plays to Russia’s national pride harkening back to the time of the power of the Soviet Union, which provides him with a political boost. Under Putin, Russia has already expanded its sphere of influence and deepened ties with traditional adversaries, like Pakistan. On the economic front, Russia has deftly managed its fiscal balances in recent years ensuring that it has limited deficits and debt (under 20% debt to GDO). Until now, U.S. sanctions targeted Russian debt markets and the ability to trade Russian bonds. Those sanctions could be expanded, but they may have limited impact given that Russia is not really reliant on external financing.

 

More importantly though, Russian action in Ukraine and the U.S. response will be closely watched by China and Iran. China was poking and prodding India all throughout 2019 and 2020 through border incursions to likely:

 

However, Russia-Ukraine will signal to Beijing how the world, especially the U.S., may actually respond to a Taiwan invasion. Furthermore, if the U.S. gets distracted in Eastern Europe, Washington, D.C. may be less focused on its China containment strategies, which would benefit Beijing. In addition, Iran will watch to see how much leeway it has in furthering its influence via proxy groups in Yemen, Syria and Lebanon, which in turn would threaten Israel.

 

 

The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal or medical advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations contained herein are as of April 2022.