Global Trends

U.S. President Donald Trump, the self-proclaimed "Tariff Man," is likely to be the single most important source of geopolitical risk to the global economy in the third quarter of 2019. A deepening standoff with China increases the probability that Trump will follow through with threats to impose 25 percent tariffs on all remaining Chinese imports. Tariff threats against Mexico over auto imports will continue to linger at a time during which global trade risk creates headwinds for global economic growth. Trump nonetheless appears to be operating under the assumption that the U.S. economy is on solid enough footing to justify tariffs, both as a wide-ranging negotiating tactic and as a means to drive down the U.S. trade deficit. 

Of all its trade battles, the United States will maintain a particularly hard line on China as Washington's strategic competition with Beijing deepens on nearly all fronts. A deliberate attempt by the White House to cripple Chinese tech giant Huawei Technologies Co. has narrowed what little middle ground there was last quarter for a trade compromise. And for every U.S. action designed to coerce Beijing into making greater concessions, there will be a Chinese reaction that pushes the economic giants further apart in the negotiation. For example, U.S. trade assaults on China will prompt Beijing to increase financial support for strategic sectors, such as the semiconductor industry, directly violating a U.S. demand to reduce state support and level the playing field for foreign businesses. Chinese tariff retaliation and possible boycotts of U.S. goods will counteract Washington's demand for China to buy more American products to reduce the U.S. trade deficit. Chinese attempts to push back against the United States by selectively blacklisting and fining American firms only feeds into a familiar White House complaint: that China actively discriminates against foreign businesses.

A potential Chinese restriction of rare earth exports will amplify threats to U.S. commerce that the White House is citing to legally justify Section 301 tariffs in the first place. And the unavoidable depreciation of the yuan from the stress of the trade war will be used by the White House to name and shame China as a currency "manipulator" bent on disadvantaging U.S. exporters. This burning economic dispute is meanwhile unfolding against a backdrop of rising security tensions in the South China Sea and growing pushback against Beijing in China's periphery, where the United States has the potential to apply sanctions against the Chinese government and its affiliates in the name of protecting human rights and democracy.

This geopolitical climate does not bode well for Trump and Chinese President Xi Jinping to reach a breakthrough in negotiations if and when they meet at the G-20 summit in Japan in late June. Beijing will keep the door open for future dialogue, and Trump still has the option of buying more time in the negotiation before resorting to all-encompassing tariffs. But the window for a truce is closing fast, and Xi and Trump will have enough political backing to prolong their economic war well beyond the quarter.

While Mexico has been among the main beneficiaries of the U.S.-China trade war, it has now found itself squarely in Trump's trade crosshairs. Having narrowly averted tariffs this time around, Mexico's government is facing a tight timeline and an uphill battle to appease the U.S. president. Given the Mexican national guard's questionable ability to crack down on migrant traffic coming across its southern border — coupled with escalating unrest in parts of Central America and the reluctance of countries in the region to overhaul their asylum laws — the best Mexico City may be able to hope for is a temporary lull in migrant flows as smugglers adapt to expanded border controls. Moreover, Mexico's already robust trade relationship with the United States and lack of market-based purchasing does not leave much room for the current administration to make a showy concession to Trump by increasing agricultural imports. 

Trump's tariff threats against Mexico could resurface around July 22 and again on Sept. 5, when the Mexican government is supposed to deliver to the White House its progress report on curbing illegal border crossings. Already on the edge of recession, Mexico will be careful to avoid a confrontation with the White House in an effort to steer clear of costly tariffs. After more than a quarter of a century of tariff-free trade on the U.S.-Mexico border, the economic impact of just 5 percent tariffs on Mexican imports, as Trump earlier threatened, would be tantamount to ripping up the North American Free Trade Agreement and returning to average World Trade Organization-level tariffs for most sectors. Supply chain disruptions would reverberate across the auto, electronic, industrial and food sectors. Furthermore, U.S. agricultural producers would be singled out for retaliatory tariffs, and Congress could even regain momentum to challenge the president's trade authority — though a veto-proof majority on such a measure would be far from assured. Even if Trump avoids the heavy economic and political toll that comes with disrupting North American trade through tariffs, the uncertainty that comes with merely keeping the threat alive will continue to erode investor confidence.

The threat of auto tariffs will meanwhile continue to loom large as Trump waits for U.S. trading partners to come to him with a "solution" by November, in the form of voluntary export restraints and/or acceptance of U.S. quotas. While Japan has a better chance of negotiating a trade compromise with the White House that includes agriculture and autos, EU leaders, too divided and consumed with horse-trading over political positions in the European Union for most of the quarter, will resist the White House's ultimatum on restricting auto exports to the United States. As a result, there won't be much movement in Continental trade negotiations with the Trump administration. 

The White House has already raised the WTO's hackles by stretching the definition of national security to justify a variety of tariffs, all while discrediting the global trade body's authority to arbitrate trade disputes. With a Dec. 10 deadline pending for the United States to lift its siege on the WTO Appellate Body or else drive it into paralysis, European leaders will prepare for the worst and work on convincing other WTO members to sign onto an ad hoc solution that would have former WTO appeals judges settle trade disputes under WTO arbitration rules until a compromise — likely with the next White House — can be found. 

The European Union's creative workaround at the WTO points to a growing assumption among U.S. allies and adversaries alike that negotiation with the current White House may be futile. Erratic U.S. negotiating tactics and the elusiveness of a final, negotiated settlement will bruise business confidence and investor sentiment globally. Hamfisted diplomacy will also convince a number of powers, including China, Europe and Iran, that seeing out the result of the 2020 U.S. election makes more strategic sense than entertaining heavy concessions in a negotiation with the Trump White House over a deal that may or may not last. 

In the face of yet another major tariff escalation, China will erect stronger capital controls and draw on its reserves to defend its currency, the yuan. China's Central Bank will intervene to avoid a steep and sudden devaluation because a depreciation beyond 7 yuan to the dollar will exacerbate China's economic slowdown and place greater stress on emerging market currencies. Heavy downside risk from the White House's trade wars will drive the U.S. Federal Reserve to ease interest rates this quarter.

The European Central Bank has already abandoned plans to tighten monetary policy this year as crises of the European Union's own making roil the bloc. We do not think this quarter will end in a no-deal Brexit, but an escalation of political chaos in the United Kingdom, along with a drawn-out confrontation between Rome and Brussels over Italy's expansive fiscal policies, will continue to sap at European growth amid rising global trade frictions.

For energy markets, between the opposing forces of slowing consumer demand and the threat of military conflict in the Persian Gulf creating a sharp supply disruption, oil prices will remain in flux. When the Organization of Petroleum Exporting Countries meets early in the quarter (with its expanded retinue of crude-producing partners, a collective known as OPEC+), Saudi Arabia and Russia will drive an agreement to extend production cuts into the second half of the year as the world's biggest oil producers try to contend with rising U.S. inventories and weaker global demand.

An aggressive U.S. move in the second quarter to ban Huawei from selling and operating in the United States and, more importantly, to proscribe U.S. tech suppliers from working with the company goes well beyond trade leverage and fits into a broader White House strategy to cripple China's tech giants as a U.S.-China battle for technological dominance intensifies. If Xi and Trump agree to de-escalate the trade war this quarter, the White House could offer a selective and partial relaxation of export controls on goods and/or licenses that fall outside of highly strategic applications — specifically, dual-use technologies that could be used for security, surveillance or defense purposes. Pressure from affected U.S. businesses and ongoing court challenges could also have the effect of weakening U.S. restrictions against Huawei.

Uncertainty surrounding the U.S.-China trade negotiation and the viral nature of U.S. export law, in which even a minimal amount of U.S. components, software and technology could subject a company to sanctions, will accelerate Chinese efforts to shore up indigenous semiconductor development. Huawei will further seek to roll out an independent operating system for smartphones to maintain the company's global market share. China will struggle to reduce its reliance on major international chip providers — such as Intel Corp., Samsung Electronics and the Taiwan Semiconductor Manufacturing Company (TSMC) — that are now liable for U.S. sanctions. But over time, the rise of Chinese competitors in the chip manufacturing sector and the rollout of Chinese software alternatives — such as Huawei's mobile operating system challenger to iOS and Android — are likely to contribute further to the fragmentation of the global tech sector. 

Ongoing U.S. diplomatic efforts to pressure countries in Europe, Latin America and Southeast Asia into imposing similar bans against Huawei equipment on national security grounds are already stalling. This is because most countries are unwilling to tolerate the much higher costs and implementation delays for 5G networks that would come with blacklisting Huawei. But the broad reach of U.S. export controls against Huawei will now give many of these governments and relevant telecommunications partners pause as they weigh a much bigger compliance risk in dealing with the Chinese firm. 

Even as its efforts to defang Chinese tech leaders gain momentum, the U.S. government has also made a point of targeting the exact Silicon Valley tech giants that Washington relies on to outperform China in a global race for technological supremacy. In line with Stratfor's 2019 Annual Forecast, bipartisan momentum is quickening behind U.S. efforts to scrutinize Big Tech over antitrust, privacy and free speech concerns. Google and Facebook are likely at the top of the list for the Federal Trade Commission and the Justice Department, which share oversight duties over the United States' largest tech firms. U.S. tech companies will also remain a prominent target in the European Union, where Ireland has launched a probe into Google for violating the European Union's General Data Protection Regulation on privacy protections. 

As well as juggling trade wars, the White House will also have to balance competing foreign policy priorities. Iran remains at the top of that list. The Trump White House is operating under an assumption that its ability to choke off Iranian exports and inflict heavy economic pain on the Islamic Republic will drive Tehran to the negotiating table or, better yet, instigate a grassroots overthrow of the clerical regime. Neither is likely to happen, though — and certainly not this quarter. At most, Tehran could rely on third-party mediators to establish a deconfliction channel with the United States as military frictions rise. Trump appears well aware of the political flack he would receive by committing the United States to yet another massive military conflict in the Middle East and so is likely to exercise some restraint in trying to avoid a costly military scenario with Iran. But there are a number of triggers that will arise this quarter, such as Iran telegraphing threats to shipping in the Persian Gulf and restarting parts of its nuclear program, that will embolden White House hawks to argue for punitive strikes against Iran.

A lingering threat of military confrontation between the United States and Iran will detract from Washington's focus on its burgeoning great power competition with both China and Russia. Beyond high-stakes economic battles, the potential for skirmishes between the United States and China in the South China Sea and in the Taiwan Strait will rise as the U.S. Navy and Coast Guard steadily expand their footprint in China's near abroad. Russia, meanwhile, will oscillate between instigator and mediator in multiple theaters that have the potential to dominate the White House's attention. While Russia already provides significant political and economic backing to Iran and Venezuela, it can always dial up military support should it see an opportunity to generate leverage against a highly distracted White House. U.S. attempts to coax Russia and China into a trilateral strategic arms control treaty are unlikely to gain much momentum this quarter as arms buildups continue on all sides. 

Unlike most countries dealing with the current White House, North Korea is trying to accelerate negotiations while Trump is still in office. Now that the United States has little choice but to plan for a military contingency around Iran, Pyongyang will have more room to push the line on missile testing while trying to break through a stalemate in negotiations. North Korean leader Kim Jong Un remains confident that Trump would rather keep North Korea in diplomatic limbo and call it a foreign policy win than return to a military confrontation with Pyongyang. 

When compared to a prospective nuclear-equipped nation, Venezuela inevitably falls much lower on the list of U.S. foreign policy priorities. Even as the persistent threat of another coup attempt and the specter of greater Russian involvement in Venezuela will vie for Washington's attention, the White House is unlikely to risk a messy military intervention at this stage to force regime change. A steady intensification of U.S. sanctions and ongoing backchannel dialogue with military leaders to try and crack the rule of President Nicolas Maduro will be the White House's preferred method of managing Venezuela as the country descends further into chaos.

• June 25-26: OPEC+ members meet in Vienna, Austria.
• June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
• Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods. 
• July: If the U.S. economy continues to grow, this month will mark the longest U.S. economic expansion in its history. 
• July 7: The 60-day deadline Iran gave to the European Union expires, after which time Tehran vowed a partial nuclear restart.
• July 22: 45-day review of the U.S.-Mexico deal on border security. 
• Sept. 5: 90-day review of the U.S.-Mexico deal on border security.