Aug 25, 2018 | 15:46 GMT

6 mins read

The Weekly Rundown: U.S.-China Trade, North Korean Denuclearization and a Call for European Sovereignty

A cargo ship in Qingdao, a seaport in China's Shandong province, on April 13, 2017.
(STR/AFP/Getty Images)
Stratfor's geopolitical guidance provides insight on what we're watching out for in the week ahead.

On the Record

It is of strategic importance that we make it clear to Washington that we want to work together. But also: That we will not allow you to go over our heads, and at our expense.

German Foreign Minister Heiko Maas

On Our Radar

Get Ready for More China Tariffs. Low-level U.S.-China trade talks ended again in stalemate, paving the way for another round of U.S. tariffs to go into effect, this time hitting $200 billion worth of Chinese imports. From what we can gather, there seems to be a growing consensus among Chinese policymakers that U.S. trade assaults are a piece of a broader American campaign to weaken China in their great power competition. China therefore sees little point to negotiating ahead of midterm elections in November when it expects President Donald Trump to get even more aggressive with China on trade following the elections.

Pinning a North Korean Logjam on Beijing. China's refusal to bend to the White House's trade demands does not bode well for Trump's negotiating tactics with North Korea. In a series of tweets, Trump abruptly canceled Secretary of State Mike Pompeo's just-announced trip to Pyongyang, blaming Beijing for undermining denuclearization talks with North Korea and hinging a future Pompeo trip to Pyongyang on the U.S.-China trade dispute getting "resolved" first. Facing stalemate on both the trade and denuclearization fronts, Trump is attempting a two-pronged approach to get both Beijing and Pyongyang to bend to U.S. demands. It's not going to work, though. The old surprise cancellation tactic held more weight when a top-level meeting was on the line to kick off the diplomatic process. North Korea meanwhile will sustain the diplomatic momentum it has with China, South Korea and Russia to try and blunt U.S. sanctions and military pressure while holding out for concessions on a peace accord.

The White House Gets Serious on Autos. Details trickling out on Mexican President-elect Andres Manuel Lopez Obrador's plans to revise energy policy are pointing to yet another sticking point in NAFTA talks. The Lopez Obrador camp is trying to ensure that NAFTA 2.0 won't obstruct its plans to halt bidding rounds for new oil and gas blocks and restore the centrality of Mexico's state-owned Pemex oil company in the upstream sector. U.S. and Mexican negotiators did, however, get past a big auto hurdle in NAFTA talks. The two sides agreed that vehicles from existing factories that don't qualify for tariff-free trade under stricter wage and rules-of-origin requirements will receive a 2.5 percent import tariff. But vehicles from yet-to-be-built plants that don't meet the requirement will receive a heavier tariff as a result of a pending Section 232 investigation into automotive imports. While this agreement points to progress in the NAFTA talks, it's a worrying sign for German, Japanese and Korean automakers, who now face new obstacles to expanding production in Mexico and who can no longer discount the auto tariff threat as a mere negotiating tactic.

Italy Braces for a Rating Downgrade. Credit ratings agency Fitch will issue its assessment of Italy on Aug. 30, only weeks before the Italian government presents its budget for 2019 (a draft is expected in mid-September, followed by an official budget in mid-October). Markets fear that Rome will honor its promises to cut taxes and increase spending, which would have a negative effect on Italy's fiscal deficit. The other two big ratings agencies, Moody's and Standard & Poor's, will wait to release their assessments until after the government presents its budget. Italy is still two notches above "junk" status, which means it probably can endure a downgrade. But markets have already shown their willingness to punish Italian debt, and Rome will design its budget with one eye on domestic voters and the other on financial markets.

Germany Tends to Turkey. While Turkey braces itself for more economic punches from the White House, Germany is investing extra time into keeping relations with Ankara stable. We'll be watching an Aug. 31 meeting of European Union foreign ministers in Vienna as well as a Sept. 5-6 visit by the German foreign minister to Ankara for any details around economic assistance. We still expect Turkey to rebuff German urges to seek aid from the International Monetary Fund.

On Our Minds

The European Call to Reclaim Sovereignty. German Foreign Minister Heiko Maas wrote an impassioned appeal to his fellow Europeans to act to restore the balance in the Continent's trans-Atlantic relationship with the United States. He specifically highlighted defense autonomy and financial mechanisms, like an independent payment and settlements system, to avoid becoming hostage to U.S. policy. While some European leaders, including Maas' boss, German Chancellor Angela Merkel, would prefer to take a more cautious approach with the United States, Maas' message resonated deeply for many in Europe who see U.S. unilateralism in trade and sanctions policy as a direct threat to European security. We're wondering if the calls for financial sovereignty could even grow to the point that Europe, along with China and Russia, develops a global, blockchain-based financial payment system that would severely erode the United States' ability to financially isolate any one power.

The Saudi Reform Diversion. More signs emerged this week confirming that the Saudi Arabian Oil Co., or Saudi Aramco, had put its initial public offering plan on ice. We've been tracking how Saudi Arabia already has been pursuing alternate plans to finance its sovereign wealth fund, including an acquisition of Saudi petrochemical firm Sabic and an $11 billion syndicated loan. We're also still looking for signs of Riyadh inviting private investments from partners like China into Saudi Aramco. Nonetheless, Saudi Crown Prince Mohammed bin Salman framed the Saudi Aramco IPO as the cornerstone of his Vision 2030 reforms, and its stalling does not reflect well on him. And even as Salman has touted social reforms such as allowing women to drive as signs of major progress, costly diplomatic flare-ups won't help in assuring foreign investors of the credibility of his reform drive. We'll be watching to see how the Saudi government handles the case of another jailed activist who may face beheading in the coming days. Will Saudi Arabia be willing to risk another diplomatic spat over a front-page human rights issue?

In Case You Missed It

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How Trump's Tariffs Would Disrupt the North American Auto Industry

On Our Calendar

In the coming week, U.S. sanctions levied against Russia over the poisoning of former spy Sergei Skripal in the United Kingdom take effect and the International Court of Justice begins hearing Iran's lawsuit challenging President Trump's decision to reimpose sanctions that had been lifted as part of the Iran nuclear deal. For more, see our Geopolitical Calendar.

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