On the Record
We want to preserve that deal because we don't want Iran to have nuclear weapons, but if Iran breaks that deal then we are out of it as well.
British Foreign Secretary Jeremy Hunt
On Our Radar
It's a Go for Iran's Nuclear Program. Iran has followed through with its threats to reduce its implementation of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal due to the European Union's inability to protect Iranian interests in the JCPOA and the United States leaving the pact. Iranian Foreign Minister Javad Zarif announced on July 1 that his country's stockpiles of low-enriched uranium had exceeded levels allowed by the JCPOA. A bigger move may be made beginning July 7, when Iran could start increasing its enrichment level beyond 3.67 percent, which would be an even more provocative move. The United States and Israel will consider overt and covert options in dealing with Iran's nuclear program and the move could provide a trigger for action. The United States has already requested an emergency meeting of the International Atomic Energy Agency. In the meantime, Iran's actions could be enough to provoke European powers to begin pushing for the reapplication of U.N. Security Council and European sanctions on Iran. Nevertheless, the Iran nuclear deal's last thread might soon break.
At the same time, British marines seized an Iranian tanker off the coast of Gibraltar on July 4 on suspicions it was violating EU sanctions by carrying oil to Syria. Iranian hard-liners have threatened to seize a British vessel in response. For the United Kingdom, detaining a tanker is aggressive sanctions enforcement. But given Iran's overall confrontational strategy, all eyes should be focused on the Persian Gulf and the Strait of Hormuz for a possible Iranian response and another crisis point between Iran and the West.
EU Nominates New Leaders. Germany and France took the European Union's two top leadership prizes on July 2 after a marathon summit. German Defense Minister Ursula von der Leyen will become the new president of the European Commission and the International Monetary Fund's managing director, Christine Lagarde of France, will become the new president of the European Central Bank (ECB), both pending the approval of the European Parliament. The negotiations that led to these nominations not only showed how difficult decision-making has become in the European Union but also how Germany and France are willing to take direct control of these institutions, even if it means sidelining EU member states in Eastern and Northern Europe. While von der Leyen is an unknown quantity, Lagarde is good news for Southern Europe, as she likely will continue the ECB's expansionary monetary policy.
Rome Escapes Sanctions Over Debt. A European Commission entering the final months of its mandate decided that picking a fight with Italy was not a good idea, and chose to believe Rome's promises that Italy's deficit will be lower than originally thought. This decision means the European Union will not sanction Italy, which sent relief to debt markets. Italy's long-term problems (namely, massive debt and insufficient growth) remain unaddressed. The next date to watch is in October when Italy will release its budget plans for 2020. The budget not only will open the door for new fights within Italy's governing coalition, but also with Brussels, especially if the new European Commission decides that Rome is not doing enough to lower its deficit.
Market Access in China. All eyes will turn next week to the revived U.S-China trade talks to determine how long the fragile truce lasts. Sticking points swirl around U.S. restrictions on Huawei, as Congress debates how to deal with President Donald Trump agreeing to loosen some curbs on the Chinese telecom giant, while Beijing makes the easing of the U.S. ban on Huawei a condition on which to resume agricultural purchases. Beijing also reiterated that any final deal is conditional upon the complete removal of U.S. tariffs, a condition the United States has rejected because it wants to keep tariffs as an enforcement mechanism, though some wiggle room may remain on both fronts. It will be crucial to see whether both sides modify their positions over the tariff removal and whether the White House relaxes restrictions on Huawei.
Sharing the Power in Sudan. African Union and Ethiopian mediators announced a breakthrough power-sharing agreement in Sudan on July 5, sending Khartoum and other major urban areas into a state of revelry. The deal calls for the creation of a sovereign council that will rule for roughly three years and be comprised of five military officials, five civilian opposition figures and one additional civilian figure to be named later. Initial reporting suggests that the last civilian seat may be reserved for a retired military figure now in civilian life. Looking ahead, it will be important to monitor whether the two sides can agree on who occupies that final seat, since whoever controls it will likely have the upper hand in Sudan's transition from the longtime rule of President Omar al Bashir.
On Our Minds
Vietnam in the U.S. Crosshairs? The U.S. Commerce Department announced on July 2 that it would impose tariffs on some steel from Vietnam. Though limited in scope, the tariffs remind Hanoi of the risks that come with its growing trade surplus with the United States. Hanoi has responded by ordering a further crackdown on mislabeled products and considering an increase in U.S. liquefied natural gas imports — in addition to an order of Boeing and GE equipment worth $20 billion. Vietnam also is broadcasting the relaxing of restrictions on currency-hedging tools as a step toward loosening the financial sector and may seek to increase purchases of U.S. weapons. Questions remain whether these efforts will be enough to remove the country from the White House's crosshairs given lingering U.S. concerns over Vietnam's currency manipulation, nontrade barriers and need for labor reform.
India Inches Forward on Mega Trade Zone. India scored key concessions this week pertaining to its pharmaceutical and agricultural interests in the latest round of talks on the proposed Regional Comprehensive Economic Partnership (RCEP), which includes the 10-member Association of Southeast Asian Nations plus India, China, Australia, South Korea, New Zealand and Japan. India has been the main outlier in negotiations as it wants terms that would boost its exports to offset its trade deficit, especially with China. In future talks, India's challenge will remain the same: to maximize its exports under RCEP while minimizing the space for a surge of Chinese imports that can stifle job growth, hindering the government's "Make in India" campaign.
Pipeline Politics in Mexico. Mexico's government is moving to renegotiate seven contracts with natural gas pipeline operators as part of the current administration's effort to implement national energy policies, though such a move could have longer-term repercussions. An unexpected renegotiation of contract terms may make foreign investors wary of sinking considerable sums of money into future pipeline projects. This, in turn, will risk creating bottlenecks for U.S. natural gas exports as Mexican demand grows but transport capacity for it does not.
Sand Wars in Southeast Asia. The tail end of the week brought revelations that Malaysia has been denying Singapore a key commodity for the past nine months: sand. Although less glamorous than the tit-for-tat trade wars roiling world markets, embargoes and oil cutoffs, the loss of over nine-tenths of Singapore's sand imports is of vital importance to the island city-state. Imported maritime sand is used to reclaim land for new infrastructure projects. Without a steady supply, projects such as Singapore's massive Tuas mega port will become harder to execute — challenging Singapore's bid to remain the preeminent regional maritime hub in the age of China's Belt and Road Initiative. Sand is a key construction material and land reclamation/island expansion is also a key strategic component of China's maritime strategy in the region. As we see both the Belt and Road Initiative (which in turn increases competition for Singapore's ports) and China's actions in the South China Sea become more contentious, sand exports have the potential to become more and more geopolitical.
In Case You Missed It
On Our Calendar
In the coming week, U.S.-China trade talks are expected to resume after breaking down in May, Greece holds parliamentary elections and defense ministers from the members of the Association of Southeast Asian Nations meet in Thailand. For more, see our Geopolitical Calendar.
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