PHP Global Risk Analysis Project, PHP Research Institute

PHP Global Risk Analysis

2019(Summary)© 2019 PHP Institute, Inc. All rights reserved.
Neither this summary nor excerpts thereof may be reprinted, copied, or retranslated without
the express permission of the PHP Institute, Inc. Citations must specify the summary as asource.
The views expressed herein are those of the project as a group and do not necessarily
represent the views of any organization which project members are affiliated.

PHP Global Risk Analysis Project, PHP Research Institute

PHP Institute, Inc.
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E-mail: think2@php.co.jp

English Summary of the “2019 PHP Global Risk Analysis” Report
Introduction

This is an English-language summary of the “2019 PHP Global Risk Analysis” report,
published in Japanese at the end of 2018 by PHP Sōken (PHP Research Institute), thepolicy think tank of the PHP Institute.
Seven years ago, the PHP Research Institute launched its Global Risk
Analysis Project. Since then, this annual report—the 2019 edition being the eighth inthe series—has won a broad readership in Japan’s business, governmental, andmedia spheres. This year’s full report, published in Japanese, may be downloaded
from the following URL: https://thinktank.php.co.jp/policy/5281/.
Beginning with the “2012 PHP Global Risk Analysis” report, the first in thisseries, these publications have consistently called attention to interactions between
the political and economic realms, stressing the need to adopt perspectives and craft
strategies that address them both in an integrated manner. Today the fusion ofpolitics and economics is more visible than ever. As the line between them isincreasingly blurred, business leaders and economic policymakers alike makepolitical and security factors an essential part of their considerations, while those
involved in the security policy side are ever more involved in the economic sphere.
In the “2019 PHP Global Risk Analysis” report, the PHP Research Institutehas once again sought to create a resource that experts in fields from international
politics and regional studies to global finance, international economics, and cybersecurity can draw on for their focused considerations of the world today. The
thorough integration of politics and economics has made this an age when risk
factors from both of these sides interact in complex ways, and it is certain to continue
to become more important that specialists with a full range of backgrounds cometogether to carry out their analyses.
The Japanese-language report consists of a “Global Overview” presenting
the context for the various risks confronting us, followed by the main body of the text,
an analysis of 10 global risks that will be of particular concern to Japan in 2019, theirlikely impact on the country, and their implications for Japanese policy choices in theyear to come. This English-language summary includes a complete translation of the“Global Overview” and the key points of analysis for each of the risks.
The order in which the risks are presented does not represent a ranking of
their importance. They have been arranged so as to highlight connections among
them and to better illuminate the overarching structure of global risk for our readers.
This era of tremendous change will engender a full range of new policy
options that have until now been unfeasible. For both corporations and nations—andfor the liberalist international order upon which Japan relies—the ability to taketimely advantage of the strategic moments likely to arise over the next few years will
be decisive.
We sincerely hope that this English-language summary report will provide
readers with valuable perspectives that serve them sell in line with their interests.

January 2019

PHP Global Risk Analysis Project, PHP Research InstituteGlobal Overview
Beginning a Troubled Transition to a New International Order

We are now seeing a power shift from the developed nations of Japan and theWest to China and other emerging economies, along with backlashes against thetrends of globalization in developed states and new synergies between
authoritarianism and emerging technologies. These new realities are chippingaway at the grand design of the post–World War II era, which sought to integrate
authoritarian powers into the liberal international order.
 The rise of China, a power rejecting liberal democracy, has presented a
success story differing both politically and economically from the developednations. The trends of liberalization and democratization are in decline
around the globe.
Emerging technologies including artificial intelligence, big data, automation, andnanotech are engendering multifaceted and deep-reaching change, making thema key focus of competition as various actors strive for supremacy. Clashes in thehigh-tech sphere are no longer restricted to the military and economic arenas;
they now impact everything from values to political regimes.
 Zero-sum consideration of national interests has intensified in the high-tech
realm, particularly in terms of technological geopolitics and the competition
to achieve technological supremacy.
 As emerging technologies are implemented in society, the possibility growsthat authoritarian regimes paying scant heed to people’s privacy and otherrights will find themselves in an advantageous position. Dictatorships will
opt for surveillance-oriented infrastructure along the lines of the Chinesemodel in their efforts to preserve their regimes.
 As societies continue to fracture even in developed nations, concerns will risethat governments will move to adopt “softer” supervision of their populaces
with AI and big data tools, moving gradually toward more authoritarianpositions.
 There is a need to create new international rules in line with the reality of thenew age in which we find ourselves.
In developed states, people who feel threatened by the forces of globalizationand openness will be fervent supporters of “our country first” modes of thinking.
We will see continued backlash against openness, as evident in protectionist
trade policies and opposition to immigration.
 There has been growing recognition that the openness of liberal democracy is
being exploited by authoritarian powers, via mechanisms like technology
transfers and the “sharp power” exercised by China and Russia. However,

suppressing or rejecting this openness would go to the very heart of theliberal order making it difficult to achieve consensus among the countries ofthe West on how to address this.
As the United States continues to adhere to its “America first” policy and Europe
sees its centripetal force dwindle, China and Russia will seek to create a more
multipolar world with less American influence. The realignment of partnerships
in the Middle East will accelerate, and as American dominance wanes, the“jungle will grow back,” as argued by the historian Robert Kagan.
 Regional powers will seek to expand their spheres of influence, while smaller
states will engage in strategic hedging as they wait to see which way thecards fall.
 The Trump administration will pursue “peace through strength” approaches
only in cases where American interests are clear. As the United States,
lacking clear-cut designs for regional orders, draws down its participation in
those regions, it will trigger “cannibalization” among US allies (such as
Turkey and Saudi Arabia, or Japan and South Korea).
 US financial dominance will remain solid, but there will be increased moves
to lessen the importance of the US dollar as a result of Washington’s recklessreliance on economic sanctions against Iran and other states.

From “Chimerica” Toward Strategic DecouplingThe Sino-American relationship will shift from one of mutual reliance to a moreadversarial mode.
 The October 2018 speech by US Vice President Mike Pence at the Hudson
Institute was a strong presentation of America’s readiness to engage instrategic competition with China.
 US strategy is increasingly aligned toward preventing China from mounting
effective challenges to American supremacy in the military, economic,technological, and ideological realms.
The Trump administration will wield tariffs and investment restrictions to put
the brakes on increased Sino-American economic integration as a means of
extricating the United States from the present threat of “economic mutualassured destruction” that the two nations face. The mutual dependency now
seen, described by Niall Ferguson as the “Chimerica” relationship, will gradually
give way to strategic decoupling aimed at reducing American vulnerability to its
Chinese partner.
 Once the decoupling process is complete, will there be a full-scale cold war
between the two sides? The strategic decoupling may provide anopportunity to reconsolidate the supremacy of the liberal international order.
 There will be an inevitable reconfiguration of global supply chains,prompted by Brexit and other factors.

China will seek to avoid all-out confrontation with the United States as it
continues its efforts to become an innovation-based economic superpower. Whilecontinuing to capture what technologies it can from Japan, Europe, and othereconomic players, it will pursue a self-driven path to success.
President Trump’s preference for direct deal-making makes it difficult to predictwhether China and the United States will head straight toward confrontation. If
the Trump administration adopts a confrontational stance as a means of puttingpressure on China, making changes to the requisite conditions for negotiations toproceed, it could in the end force America to make poor compromises in diresituations.
 Even if Washington and Beijing do reach a compromise, it will do nothing toalter the fundamental structure of their confrontation. With its bureaucraticorganizational culture, China is unlikely to place much faith in the highly
unpredictable Trump administration—meaning, in times of crisis, that it will
prove difficult to find points on which to cooperate.
 For North Korea and other states, this period of Sino-American standoff will
provide greater opportunities to shore up their regimes.

Welcome to the Gray World







We will see the emergence of a “gray world,” in which the main expectedscenarios are more difficult to plot out at the higher strategizing levels, as well asat the lower levels where policy is planned and implemented.
 Conditions that are not clearly demarcated in black and white are aparticular weak point for Japan’s governmental and private sectors alike.
While the confrontation between China and the United States is likely to take on
more acute forms, its final denouement remains murky. Even if the end result is
destined to be a new cold war between the nations, uncertainty will remain highuntil we get there, and conditions will continue to be right for miscalculations
along the way.
 It is not risk free to avoid choosing either side to back in this confrontation,
due to the considerable potential for ending up wedged between the twosuperpowers.
Competition will heat up among actors seeking to define the rules governing thedata-driven societies and economies that will impact national influence. We
should see constant alignment and realignment, mainly involving the UnitedStates, China, and Europe, as this process unfolds.
The global economy will be exposed to risk of a slowdown due to the US-China
trade war. Economic policy regimes will trend away from monetary relaxationand toward increased government spending; the adjustments called for during
this regime shift will pose challenges.

Uncertainty will burgeon as nations prioritize domestic political concerns overraisons d’etat.
 In the United States, President Trump’s personality will continue to be afactor increasing uncertainty. There are limits to what Japanese Prime
Minister Shinzo Abe can hope to achieve through his personal relationshipwith the US leader.
 The emergence of personalist dictatorships will reduce global stability.
 Business will stagnate due to worries about the predictability of government
policy approaches (for instance, the waivers issued by the United Statesallowing certain nations to purchase Iranian oil despite sanctions preventingexports).
 The year 2019 will see elections in countries including Thailand, Moldova,Ukraine, Indonesia, India, Australia, Belgium, Greece, Israel, South Africa,Canada, and Argentina. In Europe, the presidents of the European Council,
the European Commission, and the European Central Bank are all coming to
the ends of their present terms in office, and European Parliament elections
are slated for late May.
Major powers will engage in military competition in multiple domains,expanding their high-tech armaments while also continuing to test opponents’
will in “gray zones” falling short of warfare, such as through cyber attacks, law
enforcement, and operations to manipulate public opinion.
 Cyber defense does not fit neatly into existing legal frameworks, whether
international or domestic. Japan’s legalistic approach, through which it aims
to avoid all legal risk in this domain, will not be sufficient to address thethreats.
Software integration will proceed in all industrial fields, and corporate
collaboration going beyond traditional industry divisions, along with market
entry by firms from other industries, will increasingly be the norm. The leading
companies of the past will find their positions threatened.
International agreements on environmental issues will be increasingly difficult tostrike, as exemplified by the US withdrawal from the Paris Agreement on climatechange mitigation. At the same time, pro-environmental organizations will
increasingly sound the crisis alarm. Entirely separate from the stagnating
negotiations among governments, individual countries could respond todevastating natural disasters and extreme weather by moving swiftly to beef up
their environmental regulations, and investors could adopt more stringent
standards for their ESG investment.

PHP Global Risk Analysis Project

Global Risks 2019
1. Full-Blown US-China Competition for High-Tech Supremacy• Intensifying competition to take the lead in emerging technologies• Liberalism versus authoritarianism in the digital space• Restrictions on corporate activity due to more stringent regulatory approaches
from China, the United States, and other states
2. Cyber Attacks on International Sports Festivals; Extended Islamic State
Influence Online• Potential for long-lasting damage to infrastructural functional capacity atlarge-scale international sports festivals• Growth in Islamic State supporters rooted in increases of cryptocurrency users
and foreign laborers in Japan
3. Growing Risk of Inadvertent Military Incidents Due to Intensifying US-ChinaRivalry• Deepening strategic competition between Washington and Beijing• Accidental clashes between Chinese and American military forces in the South
China Sea
• Heightened tension between the two superpowers in connection with theTaiwan situation
4. Recession in the US Economy Triggered by Multiple Factors• A cyclical reaction to the growth of recent years, combined with protectionist
trade policy and rising interest rates, to weigh down the American economy• Three negative accelerators that could plunge the US economy into a tailspin
5. “Our Country First” Nationalism: The Beginning of the End for Europe?
• Movements sparked by nationalist administrations in European states pushingback against the trend toward European integration• Potential for dramatic political shifts if a Eurosceptic “nationalist coalition”
performs strongly in European Parliament elections• Continued political paralysis in Britain as actors seek to avoid a “no deal” Brexit6. Russia’s Influence-Extending Efforts Amid Superpower Competition• No change in the Russia-China rapprochement trend, even as Moscow andWashington look for ways to relaunch dialogue• Formation of Russia-led ad-hoc partnerships excluding America in the Middle
East• Russian aims to enhance Indo-Pacific presence through its Greater Eurasia
Strategy
7. Opportunities and Threats Arising from China’s Sudden Change of Attitude• A dead end for China’s economy brought about by US President Donald
Trump’s hardline economic stance toward the country• Friendly Chinese diplomatic overtures aimed at undermining the American
strategy of decoupling from China’s economy• Indo-Pacific nations increasingly squeezed between China and the United States
8. Increasing Illusions of Korean Reunification and Neutrality and a Crisis in theUS-Korean Alliance• Illusory goals of a “neutral Korean peninsula” spread by the intensifying
Sino-American strategic rivalry• The South Korean Moon Jae-in administration’s moves to shelve thedenuclearization process in favor of stoking anti-Japanese sentiment in pursuit ofKorean reunification• A decisive crack forming in the US-Korean alliance following President Trump’s
unilateral declaration on the reduction of the US troop presence in South Korea
9. Instability in the Middle East Triggered by US Pressure on Iran• Heightened Iranian instability from the Trump administration’s “maximumpressure” approach• Growing risk of localized clashes between Israel and an Iran increasingly willingto extend its reach abroad• Heightened unpredictability due to new generations taking power inpetroleum-producing monarchies
10. Latin America as the New Front in US-China Competition to Redefine
Hegemony• Accelerated Chinese moves to spread influence in Latin America and US
pushback in the areas of trade and development assistance• Development of migration and refugees as international issues throughout theLatin America/Caribbean region• Heightened political risk from the rise of populism

Project Members

Masafumi Iida
Senior Research Fellow
National Institute for Defense Studies
Satoshi Ikeuchi
Professor
Research Center for Advanced Science and Technology
The University of Tokyo
Masafumi Kaneko
Executive Officer/Senior Research Fellow
PHP Institute, Inc.
Haruyoshi Mabuchi, CFA
President
Bouquet de Fleurettes
Seiya Nakajima
Visiting Professor
Fukui Prefectural University
Toshio Nawa
Executive Director/Senior Security Analyst
Cyber Defense Institute, Inc.
Izuru Sugawara
CEOGlobal Risk Advisory
Analyst of International Politics
Koichi Tajima
Division manager
Research Division, Japan Credit Rating Agency Ltd
Toshiyuki Yasui, Ph.D., PMP
Guest Professor
Graduate School of System Design and Management, Keio University