The Weekly Rundown: U.S. Tariff Risks, Testy Times for NATO and Saudi Reforms Show Signs of Stalling

8 MINS READJul 7, 2018 | 18:13 GMT
A worker handles steel cables at a factory in Nantong, China, on July 3, 2018.

A worker handles steel cables at a factory in Nantong, China, on July 3, 2018. The United States imposed 25 percent tariffs on $34 billion worth of Chinese industrial goods on July 6, to which China responded in kind.

(AFP/Getty Images)

On the Record

Continued German underspending on defense undermines the security of the alliance and provides validation for other allies that also do not plan to meet their military spending commitments, because others see you as a role model.

                                                                         U.S. President Donald Trump, in a letter to German Chancellor Angela Merkel

On Our Radar

The Trade Danger Zone. In a largely expected yet foreboding move, the White House imposed 25 percent tariffs on $34 billion worth of Chinese industrial goods, to which China responded with an equal amount in tariffs on mostly U.S. agricultural goods. The next round is due in August, when the White House is expected to drop another $16 billion in tariffs, to which China will respond in kind. The political timeline is growing precarious for Donald Trump, the tariff-embracing American president. If the White House follows through with its threat to impose some $400 billion in tariffs in response to Chinese retaliation, it still would have to follow a 60- to 90-day process before implementation, during which the Commerce Department publishes a list of items it wishes to target followed by a review period. That would mean the White House would effectively be igniting the trade war bomb on the cusp of midterm elections in November. As the Federal Reserve has noted, businesses are already scaling back or postponing plans to expand capital spending over these trade frictions. The $97 billion gain from the White House's corporate tax reduction is also at risk of evaporating, with some estimates pointing to the U.S. manufacturing industry facing a roughly $100 billion loss from tariffs. The United States and China are likely to come back to the negotiating table, but the question is when, and will talks be enough to avert a tariff spiral of doom? Beijing may want to bide its time to see if the White House begins to squirm under growing political pressure at home.

Testy Trans-Atlantic Ties. Trump will arrive in Brussels on July 11 with guns blazing to demand an increase in defense spending from NATO partners. Many NATO allies already know what to expect from the American president after receiving strongly worded letters demanding as much ahead of the NATO summit. To little effect, they will try to widen the discussion toward a broader evaluation of their commitment toward defense, including commitments to missions abroad as well as recent investments in military modernization programs. A tense showdown between allies at the NATO summit would come right before Trump is expected to meet with Russian President Vladimir Putin on July 16, a summit that many NATO member states, particularly the eastern flank ones like Poland, are apprehensively watching for any sign of weakening anti-Russian resolve by the United States.

Re-Raising the Hormuz Threat. As the United States prepares to place sanctions on Iran's oil exports, Tehran has returned to a familiar threat: blocking regional oil exports through the Strait of Hormuz. Talk is talk and Iran's ability to shut down the strait and cut off the 18 million barrels of oil that transit it daily is limited. Iran would only resort to attempting such an action in the event of a broader military conflict. Instead, Iran is likely to return to its usual harassment activity in the Persian Gulf against possibly American, Emirati and Saudi vessels. We're also watching for any signs of Iran targeting Emirati and Saudi offshore oil and gas infrastructure near Iranian-claimed waters. Isolated incidents risk further escalation, but a broader and sustained threat to Middle East oil exports from Iranian retaliation is unlikely at this stage.

AMLO Priorities Take Shape. The new Mexican government doesn't take office until December, but we're already getting some hints of policies to emerge from Mexico's populist President-elect Andres Manuel Lopez Obrador. So far, his government appears to be taking a relatively pragmatic course, with career moderate politicians being considered for key Cabinet posts. Notably, Carlos Urzua, the nominee for treasury secretary, said a priority of the government will be to roll back 2014 energy reforms that allow fuel stations to freely set prices and will instead set the price of fuel according to yearly inflation. Lopez Obrador's pick for interior secretary, Olga Sanchez Cordero, meanwhile has floated decriminalizing the production and trafficking of marijuana and opium. If the United States interprets such a shift as curtailing enforcement against drug trafficking to the United States, this could be yet another sore point between Mexico and the United States.

The Migrant Bargain. German Chancellor Angela Merkel barely managed to keep her government in place after her Christian Democratic Union party reached a migration agreement with its coalition partners in the Christian Social Union and the Social Democratic Party. But Merkel still needs cooperation from other EU member states to receive migrants who do not qualify for asylum in Germany. Italy, one of the main entry points for migrants reaching the European Union by sea, is key, but Rome will not help Berlin without getting anything in return. We also will be watching to see whether Rome uses this opportunity to make demands to Berlin on issues that go beyond immigration (for example, fiscal deficits in the eurozone) in return for its cooperation. In the meantime, Austria is still threatening to close its borders, which could disrupt the movement of goods and people in Central Europe if other countries follow suit.

On Our Minds

Reality Check on Vision 2030. While a lot of media focus tends to fixate on Saudi Crown Prince Mohammed bin Salman's overseas investment tours and social reforms at home, signs are collecting that Saudi Arabia's critical reform drive is already stalling out. Low-hanging reform targets are being missed across ministries, job fairs designed to bring Saudis into private sector jobs are producing dim results and it looks like the Saudi Aramco initial public offering plan has been put on ice indefinitely. There was a burning urgency to kick off big reforms in 2015 when oil prices collapsed to around $30 a barrel, but with prices heading for $80 a barrel and higher, the momentum behind Saudi Arabia's ambitious Vision 2030 plan is languishing. Will Salman have enough political capital to push tougher economic reforms, like removing fuel and water subsidies, while the kingdom is cushioned with higher oil prices? Or is enough resistance lurking to force the crown prince down a politically cautious and economically costly path.

The Intersection of Law and Science. The past week saw the European Union reject a controversial online copyright law and a Chinese court ban memory chips from U.S. firm Micron Technology over an alleged patent infringement. As the next industrial revolution evolves, the ownership, trade and movement of information, rather than physical goods, is paramount. Whereas regulation traditionally has trailed technological development, the development and application of intellectual property rules will play a big role in shaping the global tech competition. This is a key point on our minds as we analyze the evolution of the U.S.-China tech competition with the European Union straggling behind.

More Belt and Road Pushback. China is facing rising pushback on Belt and Road Initiative projects in Southeast Asia. Myanmar said it will reduce the scale of a China-led special economic zone in Kyaukpyu, while Malaysia has suspended a $20 billion project for an east coast rail link to the Strait of Malacca. We already have seen similar resistance over debt concerns and corruption on Belt and Road projects elsewhere. The question we are exploring is whether mounting political opposition to Beijing in strategic parts of the Chinese periphery will lead to an adjustment in China's investment tactics.

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On Our Calendar

In the coming week, U.S. President Donald Trump plans to announce a nominee to the Supreme Court to replace retiring Justice Anthony Kennedy, Trump visits the United Kingdom and Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas meet separately with Russian President Vladimir Putin in Moscow. For more, see our Geopolitical Calendar for the week of July 9.

Join the Discussion

What actions and changes do you expect from Mexico's next president, Andres Manuel Lopez Obrador?

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