On the Record
If you want to negotiate, the door is open. If you want a trade war, we'll fight you until the end.
Kang Hui, an anchor on China's state broadcaster CCTV
On Our Radar
U.S. Declares War on Huawei. The White House launched a double whammy against Huawei this week. President Donald Trump signed an executive order blocking Huawei equipment from being sold in the United States but more importantly, the U.S. Commerce Department placed the Chinese tech giant on its blacklist, which will make it difficult for Huawei to use much-needed U.S. technology in its products. Huawei has stockpiled enough chips and other components to last at least three months but China will likely demand that the United States lift its restrictions as part of any trade talks. If the Trump administration refuses, Beijing may finally take off the gloves in its economic fight with the United States and take reprisal moves against U.S. companies with business operations in China. Thus far Beijing has refrained from taking such actions, but the more the U.S.-China trade war evolves into a broader economic war, the more likely China will put the option on the table.
Already China's leadership may be planting the seeds to do so. Chinese state media has become increasingly nationalist over the past two weeks, laying the groundwork to shape public sentiment to back a Chinese strategy that could entail playing hardball on multiple avenues with the United States, which could include imposing additional tariffs on U.S. goods.
Tensions Escalate in the Persian Gulf. There is clearly a deepening strain in the U.S.-Iran relationship that is forcing us to consider the increasing possibility of military conflict. This week saw a significant uptick in tension between the United States and Iran, as the United States withdrew nonessential personnel from its embassy in Baghdad in response to what the government said was a credible threat against U.S. forces in Iraq, and a number of European powers put their training missions with Iraqi defense forces on pause. There is a risk that a potential attack on U.S. assets in Iraq by one of the many Iranian-allied militia forces in the country could spark a bigger conflict between the United States and Iran.
Meanwhile, four oil tankers were attacked off the coast of the United Arab Emirates and Yemen's Iran-supported Houthi rebels attacked a Saudi pipeline. These events have heightened the risk for the energy and shipping industries in and around the Arabian Peninsula. Though the oil tanker and pipeline incidents cannot be clearly and directly attributed to Iran, it remains possible they are Iranian-directed retaliation against additional sanctions.
As for now, global powers including the European Union, Russia and China remain firmly against any U.S.-led military operation against Iran. We'll be closely watching Iranian and Iranian-allied actions — nuclear-related activity outside the bounds of what Iran has agreed to publicly or militant attacks in Iraq, for example — that could trigger a U.S. response in this heightened threat environment.
U.S. Tariff Strategy Threatens Some Trade Negotiations. As expected, President Trump now has a Commerce Department report in hand that will allow him to make good on his threat to impose a sweeping 25 percent tariff on U.S. automotive imports — with six months to decide. The main targets have long been the European Union and Japan, while Mexico, Canada and South Korea are reported to have been granted exemptions. Although reports say initial drafts of Trump's executive order stipulated a need for deals with the European Union and Japan to "limit or restrict" exports, the final version left out this requirement and opted for more vague language. Japan has rushed to assure its auto industry that the United States will not demand export volume caps. But under the threat of tariffs, Tokyo will compromise to protect its U.S. exports, including shifts in the auto sector and some opening of its domestic agriculture sector. For the European Union, the possibility of auto tariffs could be used as a lever to force the bloc's hand on the inclusion of agriculture in trade talks. The European Commission does not have a mandate to include agriculture in the talks and the Trump administration knows the only way a deal passes Congress is if it is included. Further complicating matters is the fact the Trump administration is negotiating with a lame duck European Commission. A new one will be appointed by September or October, just a month before the six-month window closes.
Theresa May's Time Is Up. The political crisis in the United Kingdom keeps intensifying, as Prime Minister Theresa May promised her Conservative Party that she will announce the date of her resignation in June, and the talks between the government and Labour over a joint Brexit plan ended without an agreement. May's next move is to put the withdrawal agreement bill to a vote in the House of Commons in June, hoping that a strong performance by the Brexit Party, which wants a hard exit from the European Union, in next week's European Parliament elections will persuade Conservative members of Parliament to finally make Brexit happen. But even if the Commons rejects May's Brexit plan again, the rejection probably will not mean an immediate hard Brexit, as the Conservatives will then have to appoint a new leader, and then the Commons will begin its summer recess. These are all time-consuming developments that will probably delay any crucial decisions on Brexit.
On Our Minds
Colombian Peace Deal Under Threat. The release of a former militant leader wanted for drug trafficking is driving uncertainty over whether the rest of the rebels of the Revolutionary Armed Forces of Colombia (FARC) will lose faith in their peace agreement with the government. Colombia's Special Jurisdiction for Peace (JEP), a government entity overseeing amnesty agreements with the FARC, released Seuxis Hernandez this week. Hernandez faced extradition to the United States on charges of trafficking cocaine. But the Colombian government is simultaneously appealing the decision at the JEP and considering opening a new criminal investigation against Hernandez. Should Hernandez end up with new charges against him, the remainder of the rebel leaders may lose faith in the overall peace agreement. They likely would then drop out of the deal and retaliate through terrorist bombings and return to violent criminal activity across Colombia's rural hinterland.
Another Mandate for Modi? The world's largest democratic contest is drawing to a close. On May 19, the seventh and final phase of India's general election will take place. After five years in power, Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) is hoping for another majority victory when results are announced May 23. But the electorate could deliver a fractured mandate in which the BJP finds itself at the center of a coalition under its National Democratic Alliance — if it returns to power at all. That outcome would likely stoke investor concerns that India's already fractious political system will enter an even more contentious phase that can hinder long-pending reforms on land and labor. Whatever government takes power in New Delhi, its primary challenge will hinge on creating more jobs in a rapidly expanding economy, asserting India's power in a challenging geopolitical environment and delivering a higher standard of living for a huge population.
The White House on Pacific Island Time. Next week, the White House will turn its attention to an often-neglected arena of the U.S.-China great power competition. On May 21, President Trump will hold a first-time exclusive meeting in Washington with his counterparts from the three tiny Pacific island countries of Palau, the Republic of the Marshall Islands and the Federated States of Micronesia. On the agenda will be the future of relations under their respective compacts of free association with the United States, through which Washington has long channeled defense and economic benefits, and relations with Taiwan. With the financial aspects of these arrangements phasing out in 2024, these countries face an uncertain future — worrisome to Washington as Beijing expands its outreach in the vast maritime expanse of Oceania.
Brazilian Protests Highlight Broader Pension Issue. Tens of thousands of Brazilians rallied on May 15 against President Jair Bolsonaro's efforts to freeze public education spending. The protests attracted our attention because they also featured labor unions opposing the government's pension reform plan. The pension reform is intended to reduce Brazil's heavy social security burden, estimated at nearly 45 percent of the federal budget for 2018. But reforming the pension system will be broadly unpopular, since it would delay pension payouts. Rising union resistance to the pension reform will be crucial to monitor, because protester turnout against the reform may grow due to Bolsonaro's politically polarizing rhetoric. If mass protests turn legislators against the reform, then investors and holders of Brazilian debt will begin to worry more about the country's longer-term financial stability.
In Case You Missed It
On Our Calendar
In the coming week, voting in India's general election ends, with results scheduled to be released on May 23; voting begins in European Parliament elections; and U.S. President Donald Trump visits Japan. For more, see our Geopolitical Calendar.
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