Predicting the outcome of secret agreements
Mexican trade wars, visualizing uncertainty, and Kamala Harris' enduring odds
One of the great parts about being in political risk is that there’s always something new.
I once wrote an article based on Queen Elizabeth’s husband receiving an Australian knighthood. You may have a day jumping between predicting for next month and for 2045. A project might require a deep dive on countries on every continent.
But I don’t think I expected that I would analyze an international agreement that we only know about because the President of the United States waved around a piece of paper and a Washington Post photographer was able to make it semi-legible.
What are we to make of this?
On the one hand, we should take this seriously. This agreement appears to have been crucial to warding off escalating tariffs on US trade with Mexico, which could have cost 400,000 jobs and $41 billion. If this agreement was the deciding factor, and a huge amount hinges on whether it’s enacted, then it’s important that we understand what’s in it.
On the other hand, how much can we make out of a document that the Washington Post can only get to this level of specificity?
“[UNREADABLE] other party. The parties further intend [UNREADABLE] an agreem[ent] [UNREADABLE] to burden-sharing in relation to the processing of refuge[es] [UNREADABLE].”
Mexico’s Foreign Minister has denied that there is an agreement. He characterized the recent talks as ending with a 45-day delay to show that existing practices are working. Another 45-day period for negotiations would follow if the US objected to the results. It’s less of an agreement than a 90-day cooling off period. This account broadly fits with the one paragraph we can read from the photographed paper.
So how to interpret an agreement that isn’t an agreement, where the only sources we have are two politicians with their own agendas and a few fragments snapped by a fast-thinking photographer?
What happened last week and what will happen in 45 days? A few points:
In the absence of hard evidence, we should go with the most likely scenario that fits the facts. There was significant pressure to avoid the tariffs and this agreement was a largely face-saving measure to get the US to back down. Mexico made some commitments, but nothing major and it avoided potentially devastating tariffs.
Migration flows tend to drop during the summer, so both sides will likely be able to say that the agreement worked without any other significant changes.
Those two points suggest that there will not be a renewed threat of tariffs in August. However, Trump appears to believe that the agreement is significant and was reached via the threat of tariffs. It could be that this becomes a template for other situations.
In short, we don’t know what will happen. But my best guess is that this could be the end of one threatened trade war and the justification for many others.
The next one may be here by the end of the month.
Political Risk Monitor
The PRM was focused on the US-Mexico trade war over the past two weeks. Mexico was the top mover, getting up to third-place in the overall rating. That’s its highest position yet, a reflection of the consternation that the almost trade war set the political risk industry.
Elsewhere, Sudan re-emerged as a major topic of discussion, as Khartoum saw a general strike and attack by paramilitary forces on civilians. The relative discussion between Mexico and Sudan is a reflection of the political risk world’s priorities and coverage choices. The possibility of tariffs saw far more discussion than the reality of fatal protests.
That is not to condemn all coverage of the trade disputes - the leading section of this newsletter would not be able to hold up against that. But it’s to remember when tracking the political risk industry that there is a constant bias towards matters that affect wealthy nations, international trade, and ones that are speculative. It is relatively easy to write a column based on a source at a DC think tank about what might come. It is hard to report what is happening in Sudan right now. Articles from there, and the reporters that make them happen, should be appreciated all the more.
Tip of the Cap
Jessica Hullman of Northwestern and Matthew Kay of the University of Michigan have a project focused on visualizing uncertainty. Their first two entries on Medium are great studies of one of the most fundamental problems of political risk: how do we accurately communicate what we know, while keeping the other person aware of what we don’t know.
This problem came up a lot in 2016. I remember being asked frequently what would happen with the Brexit referendum and the US presidential election. I, like most others, forecast Remain and Clinton victories. I was much less confident about the Brexit vote, because of the high number of undecided voters in the polls, but it was difficult to describe this context succinctly.
“Remain will probably win, but there’s a strong chance that Leave wins. Clinton will also probably win, but Trump could, but that chance is less than Leave, but the two aren’t related, so Brexit going the other way shouldn’t be an indicator...” does not trip off the tongue. You probably got bored halfway through that sentence.
When we try to visualize information, we further strip out the chance for context, as a general sentiment is reduced to a single point on a scatterplot. Hullman and Kay’s work on new graphical displays, like bell curves in a line chart, combine context and information in a single view. It’s a fascinating approach and I’m looking forward to what else they come up with.
Bookies bullish on Kamala
One of the constant disconnects between the Bookie Tracker and polling averages has been Kamala Harris.
Despite now trailing in the polls behind Elizabeth Warren and tied with Pete Buttigieg, she has consistently led both in the Bookie Tracker.
A simple metric is the ratio between polling averages and odds from the betting agencies. For Biden, Sanders, and Warren, it’s roughly equal. For Harris and Buttigieg, it’s more than 2:1. Both candidates are projected to win the nomination much more than their polling numbers say, at least compared to their rivals.
Kamala’s position becomes unique when including the markets for the Vice Presidential nomination.
I am not putting a huge amount of faith in the VP markets yet. Tulsi Gabbard, Hillary Clinton, and James Mattis are not credible candidates. But Harris’ position here, combined with her overperformance in the more liquid presidential nomination markets say something about how the expert oddsmakers and the markets view her.
There is a clear conception across the betting agencies that despite her polling numbers, Harris has strong fundamentals - the same that would lead to her being chosen for VP. FiveThirtyEight’s analysis of the five corners of the Democratic Party concluded that Harris had the widest appeal to the constituencies that would decide the race. The betting markets appear to reflect that.
Their odds suggest that Harris is well-positioned to sustain her campaign through the early primaries, and that her numbers will pick up as 2019 heads into 2020.
Thanks for reading. If you like this newsletter, please pass it along!
Chris
About Two Lanterns
Two Lanterns Advisory is a political risk consultancy based in Cambridge, Massachusetts. For information on training courses in political risk, hiring an in-house consultant, or commissioning reports, check us out at http://www.twolanterns.co.