Joe Biden’s Big Challenge — Geopolitics

Insights and Market Perspectives

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December 18, 2020

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THERE’S BEEN SO MUCH GOING ON — the pandemic, a disputed election, a sliding economy, racial tensions — that another crisis has been largely overlooked: the serious geopolitical challenges that Joe Biden will inherit.

AS WE DESCRIBE BELOW, rocky relations with several U.S. adversaries are likely to persist or intensify. A major impact will be on defense spending — which we thought might level off in the next few years. But that looks less likely as threats percolate from the Persian Gulf to the South China Sea.

Here’s a quick look at Biden’s geopolitical challenges:

Russia: The brazen hacking of U.S. companies and government agencies almost certainly was approved by the Kremlin. We highly recommend yesterday’s New York Times column by Thomas Bossert, the former Homeland Security director for Donald Trump. Bossert makes it clear that the U.S. has been massively hacked. This will be Biden’s first foreign policy crisis; he has vowed to impose “substantial costs on those responsible.”

China: U.S. relations with China are at rock-bottom, and it’s unlikely that a thaw
is imminent. Biden’s own Democrats are deeply suspicious of Beijing’s lack of
transparency on the virus, its treatment of dissidents, and its hacking of U.S. firms.
The tone from Washington may be less strident, but the China tariffs won’t be lifted
any time soon.

Iran: Countries in Western Europe will press Biden to talk with Iran, perhaps because there are trade deals to pursue. But the new president is likely to go slow; revisiting the Iranian nuclear deal doesn’t appear imminent as radicals in Tehran reject any rapprochement and continue to fund Hezbollah. The risk of an Iranian provocation looms large in the Persian Gulf and Israel still faces a threat from Iranian-backed terrorists.

North Korea: Unpredictable dictator Kim Jong-un is boasting that he has huge new
missiles, which he may test in 2021. In October Kim showed off his mammoth new intercontinental ballistic missiles, with a range that undoubtedly exceeds its Hwasong-15, which has a range of about 8,000 miles. Kim will make noise but substantive talks with the U.S. are unlikely any time soon.

BOTTOM LINE: Trump managed to keep the lid on. He flattered Putin, Kim and, initially, Xi Jinping — and Trump increased defense spending dramatically; it’s now around $750 billion. Biden will quickly patch up relations with Western Europe, Canada and much of the world, but relations with Russia, China, Iran and North Korea will stay rocky.

THIS COULD BECOME A MAJOR DISTRACTION for Biden, who could get boxed in on spending. He will be pressured by progressives to cut defense spending, but considering these global threats, Pentagon outlays are likely to rise in the next few years — an issue where the new president and Congressional Republicans will find agreement.
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STIMULUS DEAL STILL NOT DONE: As we feared yesterday, Congress can’t get its act together and quickly pass the pandemic stimulus bill. A short-term extension is likely, because without one the government could shut down at 12:01 tonight. The extension could last until Monday.

PART OF THE DELAY is simply the need to get everything in writing, but a Trump veto threat still looms on the defense spending bill. And the relief bill has snagged over efforts by GOP Senators to write into the law a ban on the Federal Reserve clawing back money that it had to return to Treasury, plus a ban on reinstating two Fed lending facilities that Treasury has shut down. This has enraged Democrats, who see this as an effort to hamstring Biden if more Fed lending is required.

A COMPROMISE ON THIS AND A HANDFUL OF OTHER ISSUES should get ironed out over the weekend, and by Monday there should be an agreement in principle. But it may take until Christmas Eve to get a final bill actually — finally — enacted.