The Weekly Rundown: A Tariff Reprieve for Mexico, China Strikes Back and Italy's Parallel Currency Threat

9 MINS READJun 8, 2019 | 19:03 GMT
U.S. President Donald Trump addresses the National Association of Realtors in Washington on May 17, 2019.
(ALEX WONG/Getty Images)

U.S. President Donald Trump announced on June 7 that the White House and Mexico had reached a deal to reduce the flow of Central American migrants into the United States and avert tariffs on all Mexican goods.

Stratfor's geopolitical guidance provides insight on what we're watching out for in the week ahead.

On the Record

Tariffs are a beautiful thing. It's a beautiful word if you know how to use them properly.

             U.S. President Donald Trump on his tariff threat against Mexico

On Our Radar

Squeezing Mexico. After three days of negotiations, U.S. President Donald Trump tweeted late on June 7 that the tariffs he had intended to launch against Mexico starting June 10 were "hereby indefinitely suspended." This is obviously good news for Mexico and a number of businesses facing a logistical and compliance nightmare after taking 25 years of tariff-free trade for granted. But the celebration may be short-lived, especially if Trump keeps the tariff threat hanging over Mexico as leverage.

Mexico has already agreed to deploy 6,000 National Guard troops to its southern border with Guatemala and is entertaining a U.S. demand to be designated as a "safe third country." This designation would enable the United States to deny more asylum claims, leaving Mexico and possibly Guatemala to absorb asylum seekers from Central America. Since Mexico and certainly not Guatemala would be considered "safe" by international legal standards on asylum, such a move would likely face a U.S. federal court challenge. Several big questions remain:

  • How quickly will Mexico actually be able to redirect National Guard, federal police and military units to the Guatemalan border? The National Guard only came into being in December and is still building up recruits. Military personnel will have to be redirected from other public security duties for Mexico to demonstrate a quick security response on its southern border, which could exacerbate Mexico's already significant internal security challenges.
  • Will Mexico muster enough political will to agree to U.S. asylum demands? Will the United States actually provide financial resources to Mexico and Guatemala to handle refugee flows at a time when the White House has already threatened to severely curtail aid to Central America?
  • How exactly will the White House benchmark "success"? U.S. arrests on the Mexican border last month stood at 144,000 and Trump officials are reportedly telling Mexico that arrests need to fall below 20,000 — a record low before Trump came into office.
  • Where do the demands end? Trump tweeted on June 7 that a deal would have to entail Mexico increasing agricultural purchases from the United States, a trait common to all Trump trade negotiations. But there's one giant problem: Mexican purchases of U.S. agricultural products are already at a record high. There's not much room for Mexico to showcase a concession to Trump on trade when trade levels are already so high.
  • Will Congress stand down? Now that the tariff scenario has been averted for now, it is far less likely that Congress will be able to muster a veto-proof majority to restrict the president's trade authority. The question now turns to whether Trump can use the tariff stand-down to advance the new North American free trade agreement, the United States-Mexico-Canada Agreement, through Congress.

Chinese Retaliation on Display. Trump reiterated this week that he would decide on imposing 25 percent tariffs on all remaining Chinese imports after he meets with Chinese President Xi Jinping at the G-20 summit in Japan on June 28-29. But time is running short, and there are still no signs of progress in the negotiation. Meanwhile, China is sending a clear message that it's willing to take the next step in retaliation if a truce isn't reached. In the past week, Beijing announced it is investigating FedEx over "wrongful delivery" of several Huawei packages and fining Ford on antitrust grounds, repeated threats on export restrictions of rare earth elements, and issued travel advisories to curb Chinese tourism in the United States. We'll be watching for any signs of a break in the stalemate when U.S. Treasury Secretary Steven Mnuchin and Yi Gang, China's central bank governor, meet this weekend in Japan at a G-20 gathering of finance ministers.

The Search for a New Brexit Leader. The United Kingdom's governing Conservative Party will start the process to appoint its new leader, and therefore prime minister, on June 13. With more than a dozen candidates running for the position, the contest is expected to last until late July — which means any moves on Brexit will be delayed for weeks.

Making Fort Trump a Reality. Polish President Andrzej Duda will meet with Trump at the White House on June 12. Poland is eager to lock in U.S. security guarantees while it has the White House's attention and will be looking to advance an agreement on a permanent U.S. military presence in Poland. We'll also be looking for any U.S. assurances to Poland on a potential sanctions push that could derail Nord Stream 2, a pipeline project that Warsaw fears will tighten Russia's energy grip in Europe.

A Violent Transition in Sudan. Sudan's political transition away from longtime leader Omar al Bashir turned violent this week following a brutal crackdown on protesters outside the army's headquarters in Khartoum. As the situation becomes increasingly volatile, it will be important to monitor international pressure from the United States, Ethiopia and especially Saudi Arabia and the United Arab Emirates on Sudan's military leadership. While Washington has tried dangling improved ties in front of Khartoum, Saudi Arabia and the United Arab Emirates have taken the initiative to shore up their influence in the Red Sea country at the expense of other regional players like Qatar and Turkey. Moreover, it will be critical to track developments for signs of deeper divisions within the Sudanese military, as splits would undermine the ability of its leaders to negotiate with wary protesters, delaying progress and fueling greater angst and likely violence in the days ahead.

On Our Minds

Rome and the Mini-BoTs Threat. As Rome gets ready for tough negotiations with the European Commission over its expansionary fiscal policies, Italian lawmakers are also signaling to Brussels that they have options. Last week, the Italian Parliament approved a nonbinding resolution calling for the creation of "mini-BoTs" — that is, bonds in small denominations (ranging from 5 euros to 100 euros) that Italians could use to make payments to the state (for example, taxes). The defenders of the idea claim that the mini-BoTs would increase the money supply and boost economic activity, but its critics argue that they would amount to a parallel currency that would precede an exit from the eurozone. Argentina introduced similar quasi-currencies during the peak of its crisis in the early 2000s, but with a big difference: The country controlled its currency. Italy is a member of the eurozone, which increases the chances of the mini-BoTs triggering a run against Italian banks if savers believe the country is about to leave the euro.

Judgment Day for Big Tech Approaches. Washington is finally making moves to challenge Big Tech on antitrust grounds. The Justice Department and Federal Trade Commission are splitting oversight over the Big Four — Amazon, Apple, Facebook and Google. This is an issue that has broad bipartisan support, but there is a big question of whether U.S. regulators will be able to go beyond sticking these companies with stiff fines and whether a much deeper restructuring of antitrust law is in the cards. As currently designed, U.S. antitrust law prioritizes competitive consumer pricing as the main determinant in assessing whether a company operates a monopoly. Google is under scrutiny for its dominance in advertising and searches globally, but many of its services are free. Will U.S. antitrust law redefine how users are "paying" for their services via other means – that is, through data and privacy sacrifices?

Abe Gives Iran Mediation a Go. Japanese Prime Minister Shinzo Abe will head to Tehran this week in a long-delayed bid to mediate the mounting standoff between the United States and Iran. Tokyo's foray into thorny Mideast disputes is unusual, but these are interesting times for Japan as a key middle power trying to find its footing in a climate of great power competition. Japan is already reeling from blowback from the U.S.-China trade war even as it works to ward off threatened U.S. auto tariffs with a bilateral deal and ensure any potential U.S.-North Korea compromise considers Japan's security. In this difficult balancing act, Abe has gone out of his way to keep Japan's relationship with the United States amicable and to personally showcase a chummy relationship with President Trump to maintain a channel of influence with the White House. With his party facing upper house elections in July, Abe is contemplating calling lower house snap elections as well — and some high-profile foreign diplomacy fuels his image as a leader with global clout. We'll be watching to see if Abe invites Iranian President Hassan Rouhani to the June 28-29 G-20 summit in Osaka as a way to arrange for a conversation with the Americans there. While Iran is eager to develop a political relationship with an important energy client like Japan and will keep back channels open to avoid military conflict with the United States, Tehran still sees little point in engaging with the current White House under "maximum pressure" terms.

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On Our Calendar

In the coming week, Japan and the United States hold trade talks, Polish President Andrzej Duda meets with U.S. President Donald Trump in Washington, the British Conservative Party holds the first of a series of ballots to choose Theresa May's successor and G-20 energy ministers meet in Japan. For more, see our Geopolitical Calendar.

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