On the Record
Ask yourself: Would the Iron Lady be silent when China violates the sovereignty of nations through corruption or coercion? Would she allow China to control the internet of the future? ... Insufficient security will impede the United States' ability to share certain information within trusted networks. This is just what China wants – to divide Western alliances through bits and bytes, not bullets and bombs.
U.S. Secretary of State Mike Pompeo, invoking Margaret Thatcher in an appeal to London to block Huawei
On Our Radar
Back to Trade War Territory. Although the U.S.-Chinese trade negotiation is on the rocks once again, it is still very much alive. The tactic used by U.S. President Donald Trump of piling on tariffs over a last-minute negotiations logjam was not particularly shocking. It was also no secret that enforcement of any agreements reached would be the thorniest issue — and the most likely to create an impasse. Nonetheless, a stream of increasingly positive signals that had emerged in recent weeks was abruptly broken late last week. China red-lined the draft deal and pushed back on U.S. demands to implement a series of legislative changes instead of trusting Beijing to make the sovereign decision over how its pledges would be guaranteed. Here's what we'll be watching:
- Even more tariffs? The United States followed through with the tariff hike from 10 percent on $200 billion worth of Chinese goods to 25 percent, but it has not formally launched the process to impose a 25 percent tariff on a further $325 billion in imports. The White House has reportedly given Beijing up to a month to return to the table with a compromise before moving on that tariff expansion. Even if the White House begins the formal process to expand tariffs, it would still be two to three months before they could take effect.
- Scrutinizing outreach. During that window, it will be crucial to watch for any follow-up meetings between the sides. Any and every political interaction between the United States and China will fall under intense scrutiny as observers scan for signs of movement — either toward compromise or confrontation.
- Will China hold fire? Its retaliatory options include increasing existing tariffs on agricultural and chemical products, metals and other goods; reversing its easing of auto tariffs; reducing U.S. farm and energy imports; and increasing barriers to U.S. investment.
- Room for movement? The core structure of the deal has been altered. Considering this week's tariff pile-on and the potential for Chinese retaliation, is there a path to craft a new version, starting with a pullback from the latest escalation?
Trump's move to break the tariff cease-fire does not bode well for Europe or Japan, which both are anxiously waiting to see if the president moves ahead with auto tariffs by a May 18 deadline, or delays the decision. Even if the United States decides to grant waivers on auto tariffs, U.S. trading partners will have little confidence in the White House's respect for tariff truces.
The White House Corners Iran. In the course of a week, Iran has announced its intent to pull back from some of its commitments under the Joint Comprehensive Plan of Action nuclear deal, the United States has deployed a carrier and bomber task force to the Persian Gulf, piled sanctions on metals on top of energy and financial sanctions, and circulated leaks that Iran has authorized militant proxies to attack U.S. targets. While Iran's actions are likely to be more restrained than its rhetoric at this stage, the probability of a military scenario is steadily escalating. Here's what we'll be watching:
- Iran's dual signaling. Iran has threatened to return to higher levels of uranium enrichment and to restart work on its Arak heavy-water nuclear reactor unless the European Union provides it with a strong economic safety net within 60 days. This shows that Iran is trying to keep the door open to dialogue with Europe while still trying to telegraph its determination to fight back both domestically and to the White House.
- The limits on Iran. Here's the problem: Iran already knows there is little the European Union can do to resist U.S. sanctions right now. Iranian activities that breach the nuclear agreement or a resumption of ballistic missile testing as part of its retaliatory campaign would increase the potential for the European Union to impose its own sanctions on Iran, albeit on a much more limited scale than U.S. measures. It would still take a unanimous vote by EU members for sanctions to move forward. While Eastern European countries like Poland will be eager to showcase their alignment with the White House against Iran, countries with tighter Iranian economic ties like Austria could serve as blocking votes.
- The IAEA weighs in. The release of an International Atomic Energy Agency report on Iranian compliance is due in a couple weeks. If the United States actively discredits the IAEA reports with allegations that Iran is already in breach of the nuclear agreement, it would be a sign that the White House would be trying to justify military action.
- Iranian movements. Beyond the rhetoric and intel leaks, an increase in Iranian naval movements and visible escalation in Iranian proxy movements, especially in Yemen, Iraq and Syria, would be an important signal to take note of.
Pompeo will be meeting Russian President Vladimir Putin and Foreign Minister Sergei Lavrov on May 14 in Sochi, Russia. Iran, along with Venezuela, will likely be on the agenda, which will possibly also include arms control. Will Russia see the rise in U.S.-Iran tensions as an opportunity to send advisers to Iranian military and nuclear sites to raise the cost of a strike?
Deja Vu in North Korea. North Korea is firing off missiles once again, having broken its long flight-test hiatus this week. But the launches do not mean that North Korea has broken its promises to the U.S. and South Korea: Pyongyang maintained these two sets of tests carefully within the confines of its de facto moratorium on launches of long- and intercontinental-range missiles. Pyongyang is trying to grab U.S. attention and remind Washington of how much of a headache it can become if the United States does not adopt some negotiations flexibility. The approaching U.S. election cycle is adding urgency for North Korea. Much like Israel and Saudi Arabia, North Korea sees the presidential contest as introducing uncertainty about the window of opportunity it has with Trump in the White House. Going forward, we are watching to see whether North Korea regularizes these short-range tests and whether the two sides manage to resume contact — and move back toward some sort of compromise.
Meanwhile, in Venezuela. A week after an attempted opposition uprising fizzled, Venezuela's government is striking back. The government arrested the deputy head of the opposition-controlled legislature as well as a high-ranking National Guard general who supported the uprising. Several opposition legislators have sought refuge in foreign embassies to escape the crackdown. The growing willingness to arrest proponents of regime change points squarely to President Nicolas Maduro's next target: opposition leader Juan Guaido. The White House has set Guaido's arrest as a red line, making Maduro hesitant to act against him. But as he fights to preserve his government, Maduro will press closer to arresting Guaido in coming weeks. After all, it will become more difficult for Washington to support regime change in Venezuela if no new leader stands ready to take over. Guaido's arrest would put the Trump administration in the difficult position of deciding whether removing Maduro through military force is worthwhile, especially as tensions with Iran rise.
Eyes on Turkey. Turkey's ruling Justice and Development Party (AKP) is going to do whatever it takes to eke out a win in the June 23 rerun of the Istanbul mayoral election now it has succeeded in winning a ruling invalidating the opposition Republican People's Party candidate's March 31 victory in the longtime AKP stronghold. Over the next few weeks, the government can be expected to try and whip up nationalist sentiment over energy rights in the eastern Mediterranean, the ongoing Gaza conflict and competition in Syria. At the same time, Turkey will have to be careful not to invite punitive measures while trying to score an electoral victory in troubled economic times. The European Union is loudly protesting Turkey's drilling in northern Cypriot waters, but will be wary of sanctioning Ankara with migrant season around the corner. Turkey is also high on the U.S. watch list for Iranian sanctions violations.
On Our Minds
Clouds Gather Over the Global Economy. Estimates vary, but should the United States resort to tariffs on all Chinese imports, global growth would likely decline by around 0.2 percent, with Chinese growth slipping by 0.6 to 0.8 percent and U.S. growth dropping by 0.3 percent. With the U.S.-China trade war on the rise again, a White House decision on auto tariffs looming, and U.S.-Iran military tensions rising, it's time to take a step back and consider the potential global economic impact. The U.S. economy has been running pretty strong, eurozone growth is still relatively sluggish and China's economic stimulus is being put to the test. The right combination of geopolitical risk runs the risk of hitting all three economic pillars and driving down an already tepid outlook for global growth.
USTR Report on Currency Manipulation. For the first time in a quarter century, the United States may be on the verge of adding another country to its list of currency manipulators. The Trump White House has made currency manipulation a key point in trade policy and intends to include currency clauses in all free trade agreements under negotiation or revision. For context, the Treasury Department is required to produce a report on currency populations of major trading partners twice a year – in October and April – and uses three criteria outlined by Congress to do so: persistent one-sided currency interventions, a large trade surplus with the United States and a large current account surplus. Now, the Treasury Department has reduced the current account surplus criteria from 3 percent to 2 percent of gross domestic product, expanding the basket of potential violators from 12 to about 20 countries. But instead of ensnaring China or the European Union — two of the White House's biggest trade targets — the revision could technically earn Vietnam the label of currency manipulator, as it would meet all three criteria. Considering that Hanoi is a key security ally for the United States, this is another trade friction point that could create a choppier foreign relations atmosphere than what the White House intended.