On the Record
It is, and will always remain, a matter of deep regret to me that I have not been able to deliver Brexit. ... I will shortly leave the job that it has been the honor of my life to hold — the second female prime minister but certainly not the last. I do so with no ill-will, but with enormous and enduring gratitude to have had the opportunity to serve the country I love.
British Prime Minister Theresa May,
announcing her resignation, effective June 7
On Our Radar
The White House Hunt for Currency Manipulators. The Trump administration has pursued a multipronged approach to target countries — including China, Germany, Japan, Mexico and Vietnam — that it believes engage in currency manipulation to sell their goods more cheaply in the United States. The Office of the U.S. Trade Representative has made it a point to include currency manipulation clauses in its free trade agreements, while the Treasury Department has modified its criteria for labeling a country a currency manipulator (potentially making Vietnam the first country in 25 years to get slapped with the label). Now, the Commerce Department is proposing that currency manipulation be considered an export subsidy — and thus subject to countervailing duties. This could lead to an increase in U.S. trade investigations over currency manipulation, raising more hackles at the World Trade Organization.
There are two key constraints to bear in mind, however. First, investigations are done in coordination with the U.S. International Trade Commission, an independent bipartisan agency, which must determine that an export subsidy has harmed a domestic industry. Second, the investigations are narrow and must be product- and industry-specific, so they can't be launched against a country as a whole. Nevertheless, the Commerce Department's proposal is wide ranging. We still have to see exactly how it defines "currency undervaluation" as the White House tries to net currency manipulators.
So Long, Farewell, Theresa May. Theresa May has finally given up on delivering Brexit, which means that the next British prime minister could be a hard-liner who thinks that a no-deal exit from the European Union is an acceptable outcome for the negotiations between London and Brussels. Even as the threat of a disorderly Brexit is now higher, it does not mean that the worst-case scenario is the most likely nor the most imminent. It will still take around two months for the governing Conservative Party to appoint a new leader. And even a hard-liner is likely to try to reach an agreement with the European Union before unilaterally deciding to leave without a deal. The British Parliament could also mitigate the threat of a no-deal Brexit by holding a vote of confidence against the new prime minister and driving to early elections.
European Bargaining Intensifies. Between May 23 and 26, voters in every member of the European Union will elect their representatives in the European Parliament — and the likely outcome is a fragmented legislature where the two largest center-right and center-left parties have to negotiate with formerly smaller parties to pass legislation. The vote will also mark the beginning of intense negotiations between EU governments to appoint the next president of the European Commission, the bloc's influential executive arm. With both Germany and France eyeing the Commission presidency, we expect long negotiations where other crucial positions (such as the presidency of the European Central Bank and the European Council) become bargaining chips among EU leaders.
Iran Contingency Planning. The coming days should give us a better sense of how much of an appetite the White House and certain Gulf partners actually have for a military confrontation with Iran. We'll be watching Saudi Arabia's "emergency summit" of regional leaders (excluding Qatar) on May 30 in Mecca, where Riyadh will draw attention to recent and rising examples of Iranian aggression, including oil tanker attacks near the Strait of Hormuz (the Pentagon has attributed these attacks to Iran) and a Houthi drone attack on the Saudi East-West Pipeline. We'll be looking for signs of fault lines within the Saudi-led alliance against Iran as countries like the United Arab Emirates still have a lot to lose economically from a war scenario and traditional mediators like Oman and Kuwait try to establish back-channel communications between Tehran and Washington to at least avoid a military escalation as U.S.-Iran tensions escalate overall. A White House decision to send an additional 1,500 troops to the Middle East (mostly in support of new defense systems that have been deployed to the region) still fits in the expected framework of defensive contingency planning for Iranian retaliation and does not yet point to a bigger (and politically unpopular) military engagement.
Another Surgical Sanctions Strike by the United States? U.S. Energy Secretary Rick Perry visited Ukraine on May 21 and gave the strongest indication yet that the United States was serious about sanctioning Nord Stream 2, the Russian undersea natural gas pipeline to Germany that would bypass Poland, Ukraine and the Baltics as transit states. Perry said that a U.S. sanctions bill would come in the "not too distant future," adding that "The United States Senate is going to pass a bill, the House is going to approve it, and it's going to go to the president and he's going to sign it." While Russian officials and sources affiliated with the pipeline project have downplayed the potential for such sanctions to actually pass, it is nevertheless worth taking seriously, as potential bans on pipe-laying vessels could be a death knell for the project, which is currently under construction and is set to come online by early next year. If implemented — still a big if — such sanctions would not only deepen economic pressure on Russia to a significant degree but could also drive further political frictions between the United States and EU powers like Germany over sanctions policy.
Watching for a North Korean Missile Test. With the White House consumed by Iran and escalating trade tensions with China, North Korea is still struggling to sustain U.S. attention. One way to do this is to pop off unannounced missile tests. And North Korea's public displeasure has been mounting for weeks since the U.S. first-time seizure of a North Korean cargo vessel for alleged smuggling. While Pyongyang thrives on unpredictability, this weekend offers a choice opportunity to maximize the effectiveness of such a test with U.S. President Donald Trump in Japan, South Korea preparing for military drills and the American public engrossed in the three-day Memorial Day weekend. As long as North Korea remains within the scope of its promised moratorium on longer-range tests that threaten the U.S. mainland, the White House will likely downplay the test and play up outreach. However, Pyongyang's brinksmanship risks at every step provoking the White House to react and escalate tensions.
Gridlock in Washington. A blow-up this week between President Trump and Democratic congressional leaders over Trump's ultimatum to end all investigations against him, resulting in the usually politically cautious House Speaker Nancy Pelosi to even raise the impeachment threat, is now threatening to fundamentally derail the U.S. legislative agenda up to 2020. An agreement on infrastructure spending, health care reform and immigration reform were already a big stretch, but more immediately, the gridlock could also shut the window for Congress to pass the United States-Mexico-Canada Agreement, the new North American free trade agreement. If the gridlock endures long enough, it could also result in another crisis in budget talks to fund the government past September.
On Our Minds
A Tight Window to Talk Trade. As we watch for any signs of life in the U.S.-China trade negotiation, we have to consider the consequences of linking the U.S.-China tech and trade negotiations. While in the past, both the White House and Beijing kept their tech battle and trade battle fairly compartmentalized as a way to improve the odds of getting a trade deal, the White House's salvo against Huawei now takes the tech battle to a level where the two sets of negotiations are bound to get entangled. In fact, President Trump himself said that Huawei could be included in a trade deal. There is still a big question of whether the Huawei controversy will help or hurt the prospects for a trade deal, however. On the one hand, it gives the United States more leverage to harden its demands on Beijing and puts China in a particularly vulnerable spot to coerce a deal. On the other hand, Beijing is already accelerating state support to its semiconductor industry — fueling one of the White House's chief complaints against China. And even if there is a settlement that eases export restrictions on Huawei, China knows perfectly well that the United States will remain committed to crippling the Chinese tech sector through whatever means possible.
What Does a China Escalation Mean for the EU and Japan? If the White House decides it will be worth escalating to an all-out trade war with China, then it will be more compelled to ease up on trade frictions with other partners to mitigate the economic cost. To that end, we saw the White House reach a deal with Mexico and Canada that lifted steel tariffs in exchange for them lifting retaliatory tariffs against U.S. agricultural producers. We'll have to see whether a priority on the U.S.-China trade front will lead to an easing in White House demands or a delay in negotiations with Japan and the European Union, as both try to ward off the threat of U.S. auto tariffs.
Two Big Shake-Ups to the Global Tech Sector. U.S. export restrictions on Huawei are already causing a major disruption as major tech companies like Google, which has restricted Huawei's use of the Android operating system, and ARM, a critical chip supplier to Huawei, have been forced to comply with the White House ban. At the same time the United States is trying to cripple Huawei, we saw confirmation this week of our forecast that U.S. antitrust interests would impair U.S. tech giants in its broader competition with China. In a landmark court case, a U.S. district judge ruled in favor of the Federal Trade Commission against Qualcomm, a global leader in 5G technology and in the development of standard-setting patents. Qualcomm's business model is now at risk of breaking up, playing to the advantage of its chief competitor Huawei and other foreign competitors like Samsung.
U.S.-China Maritime Competition on Display. Amid heightened trade tensions and mounting great power competition in the Asian maritime space, both the United States and China are set to lay out a bit of their broader vision at the May 31-June 2 Shangri-La Dialogue in Singapore. The U.S. Department of Defense will present a new Indo-Pacific strategy, articulating key points of this long-touted shift in regional focus partly to deter China's broad maritime ambitions. While this is a broad policy, it will be important to watch for details about U.S. efforts to expand its countermeasures beyond freedom of navigation patrols and to pull in other key regional players to help. Notably, the U.S. Senate this month revived the proposed South China Sea and East China Sea Sanctions Act. If passed, this act could give Washington a potent threat to wield against core Chinese state-owned enterprises involved in Beijing's South China Sea buildups, although it would be limited by U.S. considerations about collateral damage in going after these big players. While China normally refrains from making big policy speeches at the Shangri-La gathering, it is sending its defense minister for the first time in nearly a decade to give a speech on China's role in the Indo-Pacific. Look for details of China's perception of the maritime dividing line between the two great power spheres of influence. With these two titans articulating their regional intentions, it will be important to see how middle powers such as Japan, Australia and the Association of Southeast Asian Nations receive the dual messages given that their balancing act will be critical.
Modi's Big Win. Indian Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) will remain in power for another five years after clinching a landmark victory in India's general election. The BJP won 303 of the 542 seats in Parliament's lower house when results were announced May 23. The opposition Indian National Congress — historically India's dominant party but on a downward slide in recent years — failed to revive its fortunes after securing only 52 seats. The BJP's back-to-back majorities — it also won India's 2014 general election — cement its status as the dominant pole in Indian politics. The BJP's win also means that India for the first time will experience a decade of rule under a non-Congress party. Over the next few years, the BJP-led government's gaze will shift to politically challenging land and labor reforms desperately needed to boost India's lagging industrialization and unleash labor-intensive economic growth. But more immediate fires will consume Modi's attention, including managing a cooling economy, reviving tepid investment, containing social fissures despite appeals to Hindu nationalism and balancing India's competing relationships in an era of great power competition.
In Case You Missed It
On Our Calendar
In the coming week, U.S. President Donald Trump wraps up his state visit to Japan, Saudi Arabia hosts an "emergency summit" of Arab leaders to discuss regional tensions with Iran and U.S. Secretary of State Mike Pompeo visits Canada and Germany. For more, see our Geopolitical Calendar.
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