On the Record
The Chinese economy is a sea, not a pond. Storms can overturn a pond, but never a sea. ... After more than 5,000 years of hardship, China is still here. Looking toward the future, China will always be here.
Chinese President Xi Jinping, speaking Nov. 5 at the China International Import Expo in Shanghai
On Our Radar
Italian Banks Under Pressure. As Rome struggles to head off sanctions by the European Commission over its growing budget deficit, a huge cloud is hanging over the country's debt-laden banks. We're watching for several triggers that could expose the fragility of Italian banks and induce a financial panic, including the widening spread between Italian and German bonds and anecdotal reports of Italians moving their savings abroad. Rome may have no choice but to ask for European Union aid if its banks come under enough duress, but any austerity package would come with hard-to-swallow conditions that could threaten the government's survivability.
OPEC Ponders Its Next Move. U.S. sanctions on Iran are now in full force, but the White House did agree to a handful of waivers for China, India, South Korea, Italy, Greece, Taiwan, Japan and Turkey. Altogether, these markets imported an average of 1.7 million barrels per day (bpd) from July to September. With the waiver reductions factored in, it looks like Iran will be able to export around 1 million bpd for at least the 180-day waiver period. At the same time, a developing deal between Iraq and the Kurdistan Regional Government has the potential to bring Kirkuk oil production online and add another 200,000-400,000 bpd to the market. With oil prices dragging downward, we're watching to see whether Saudi Arabia and OPEC members prepare for production cuts to balance out the market ahead of their next meeting in Vienna on Dec. 6.
Dim Prospects for U.S.-China Dialogue. U.S. President Donald Trump has been trying to put a positive spin on his upcoming dialogue with Chinese President Xi Jinping, including falsely claiming that he got Beijing to ditch its Made in China 2025 initiative. Signs are still pointing toward an enduring impasse and more tariffs, however. One big clue comes from reports this week that the U.S. trade representative is considering refreshing its Section 301 case against China with an investigation into Chinese labor abuses. That investigation could be used as justification to impose tariffs on another $267 billion worth of Chinese imports when U.S.-China trade talks inevitably hit a wall.
A Paris Gathering and Big Asia Summits to Watch:
- During a Nov. 11 World War I commemoration in Paris, we're watching for important clues to come out of Turkish President Recep Tayyip Erdogan's meetings with Trump, French President Emmanuel Macron and Russian President Vladimir Putin. From sanctions relief to U.S. support for the Kurdish People's Protection Units in Syria, the U.S.-Turkey negotiation, in particular, remains a contentious one to watch.
- Israeli Prime Minister Benjamin Netanyahu may also meet with Putin; the two no doubt will be discussing how to manage Iran's presence in Syria without colliding themselves.
- Southeast Asian leaders will gather in Singapore Nov. 11-15 for their annual summit of the Association of Southeast Asian Nations (ASEAN). China, the United States and Russia will join them for the East Asia Summit Nov. 14-15, followed closely by an Asia-Pacific Economic Cooperation (APEC) meeting Nov. 17-18 in Papua New Guinea.
- Putin and Japanese Prime Minister Shinzo Abe's ASEAN sideline meeting sometime between Nov. 13 and 15 will focus once again on territorial issues, though we don't expect much forward movement beyond their ongoing economic dialogue.
- U.S. Vice President Mike Pence's meeting with Abe and Japanese Finance Minister Taro Aso in Japan Nov. 12-13 will give some clue as to how hard the United States is going to push Japan past its red lines on agriculture.
- Pence and Indian Prime Minister Narendra Modi will likely discuss Modi's "Act East" policy of deepening India's economic and defense engagements with Southeast Asia, Australia and Japan, even as New Delhi is seeking to advance negotiations in the Regional Comprehensive Economic Partnership agreement with China.
- Indonesia and Australia were set to sign their long-awaited bilateral trade deal on the ASEAN sidelines Nov. 14, but the agreement might have hit a bump because of Australia's announcement that it might follow the U.S. lead on moving its embassy in Israel to Jerusalem.
Midterm Implications. A U.S. Congress divided between a Democratic-led House of Representatives and a Republican-led Senate points to more gridlock ahead. One area to watch in the nearer term is whether we see a bipartisan congressional push to limit arms sales to Saudi Arabia. On the trade front, we're skeptical that we'll see much momentum behind congressional attempts to check the president on trade policy, especially with concerns over NAFTA survival now largely put to rest. Read more here [LINK: Measuring the Geopolitical Fallout From the U.S. Midterm Elections] on the implications of the midterm elections.
A Potential Provocation Over Taiwan. Taipei is mulling granting the U.S. Navy access to Taiping [LINK: U.S., Taiwan: Washington Ponders a Military Presence on a Taiwanese Island], the largest island in the South China Sea. We've already seen the United States step up naval patrols in the area, including through the Taiwan Strait. But U.S. naval access to Taiping or Taiwan itself would be crossing a big line with Beijing and could compel a more direct response.
Referendum Battles in Mexico. Mexico's President-elect Andres Manuel Lopez Obrador's legally dubious referendum on Mexico City airport construction was a big populist stunt, but his rivals are now using the same tactic against him. In hopes of leveraging local opposition to the project, the Institutional Revolutionary Party is requesting a referendum on one of Lopez Obrador's pet projects — the Dos Bocas refinery in Tabasco — to reduce gasoline imports from the United States and centralize more control under state-run Pemex. Needless to say, Mexico's escalating referendum battles over major projects are not going to inspire much confidence in investors.
Eritrea Set for Sanctions Relief. Following a surprise U.S. policy shift, the United Nations Security Council will vote on the removal of Eritrean sanctions on Nov. 14. If the proposal passes, Eritrea would be relieved of targeted sanctions that have been in place since 2009 for the country's alleged support of al Shabaab militants in neighboring Somalia. This vote could mark another step forward in the shifting regional dynamic in the Horn of Africa, which has seen a boon in terms of security stability and investment prospects.
On Our Minds
Can the White House Scuttle China's Trade Plans? China will be working hard to accelerate its trade talks with Japan and South Korea and its negotiations on the Regional Comprehensive Economic Partnership at the ASEAN and APEC summits. But the White House is also actively trying to find ways to disincentivize trading partners from signing such deals with Beijing. The new United States-Mexico-Canada Agreement, for example, includes a clause that requires a signatory to inform and submit for review a pending trade agreement with a "non-market" country. The United States would then have the right to withdraw from the trade pact or replace it with a bilateral agreement. We can expect the White House to impose a similar condition in its trade talks with Japan. And while Tokyo is willing to bend a bit in a trade deal with the United States to mitigate the threat of U.S. auto tariffs, it also needs to balance that need with an imperative to grow its economic ties with its largest trade partner, China. Japan may be able to pull off that balance, but another key case study to watch will be trade talks between Canada and China to see how much the United States is willing to interfere with trade talks involving China.
Preparing for a Post-OPEC World. OPEC is facing multiple threats: Two of its largest members, Iran and Saudi Arabia, are locked in fierce competition, rising non-OPEC production from the United States is making it harder to control the market, a NOPEC bill in the U.S. Congress is threatening to strip sovereign immunity for OPEC members in antitrust cases and non-oil alternative sources for energy are gaining market traction. Saudi Arabia is now seriously studying a potential world without OPEC. Saudi Arabia still wants to be able to manage the oil market, but it may have to rely more on bilateral relationships, particularly with Kuwait and the United Arab Emirates, to do so.
In Case You Missed It
On Our Calendar
In the coming week, U.S. President Donald Trump joins French President Emmanuel Macron and other world leaders in Paris to mark the centennial of the armistice that ended World War I and the Association of Southeast Asian Nations holds its annual summit in Singapore. For more, see our Geopolitical Calendar.
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