On the Record
U.S. companies can sell their equipment to Huawei. We're talking about equipment where there's no great national security problem with it.
U.S. President Donald Trump at the G-20 summit
following talks with Chinese President Xi Jinping
On Our Radar
Trump and Xi Declare a Truce. In line with the leaks and signaling in the days leading up to the G-20 summit, U.S. President Donald Trump and Chinese President Xi Jinping agreed to another cease-fire in their trade war on June 29. The suspension of Trump's threat to impose tariffs on an additional $300 billion worth of Chinese goods appeared to be Xi's precondition to even sit down with the American president. China threw out its usual low-hanging concession to buy more agricultural goods. Trump notably did a U-turn on Huawei, saying that U.S. companies can sell their equipment to the Chinese technology giant so long as it does not pose a national security threat to the United States. That said, Trump mentioned that loosening U.S. export controls on Huawei would come only "at the end" of the negotiation for a final trade deal. This time, Trump did not place a timeline on the negotiation, but several big hurdles still stand in the way. Will the White House ease up on its demands that Beijing overhaul its domestic laws? Will Beijing accept that the United States will maintain some tariffs as its enforcement strategy? Will Trump risk a congressional backlash by watering down some of his demands on China's industrial practices to clinch a deal for his 2020 campaign? With or without a trade deal, China will keep its attempts to reduce its dependency on U.S. tech suppliers and industry in overdrive as its broader competition with the United States deepens.
With the G-20 out of the way, we now have to turn our attention to a number of peripheral issues that the White House tamped down in the days leading up to the summit, but that could now bubble up again and muck up the fragile detente between Trump and Xi.
- July 1 marks the 22nd anniversary of the British handover of Hong Kong to China, an ideal setting for anti-Beijing protests to regain their momentum.
- The 30-day period for the U.S. Congress to review a $2 billion sale of M1A2 Abrams tanks and anti-air and anti-armor weapons to Taiwan will be up the coming week, giving the green light to the Pentagon and State Department to move ahead as they also review a potential sale of F-16s to Taiwan.
- Some members of Congress are pushing the White House to follow through with sanctions against China over the internment of Uighurs in Xinjiang province. We'll also have to see whether U.S. Vice President Mike Pence finally follows through with a speech criticizing China's human rights record.
- There's also a bipartisan push in the U.S. Senate to advance the Fentanyl Sanctions Act, which could target Chinese-based pharmaceutical and chemical companies, financial institutions and trackers in the name of combating America's opioid crisis.
- Within the next couple of weeks, the U.S. Commerce Department's Bureau of Industry and Security will be releasing more detailed guidance on proposed export controls over emerging technologies as a follow-up to the 2018 Export Control Reform Act. If the bureau proceeds with broad definitions of emerging and foundational technologies in areas like artificial intelligence and biotechnology in citing U.S. national security risks, this will only increase the level of disruption in the global tech industry. Given Trump's olive branch to Xi over Huawei, Beijing will be watching closely to see whether the Commerce Department actually scopes down and tailors its definitions.
Erdogan Exposed. In Turkish President Recep Tayyip Erdogan's own words, he who loses Istanbul loses Turkey. Even after maneuvering to get a redo of Istanbul's mayoral election, the ruling Justice and Development Party (AKP) suffered an even bigger loss on June 23 than the first vote in March and was forced to concede to the main opposition Republican People's Party candidate Ekrem Imamoglu. It's still a long road to Turkey's 2023 general election, and Erdogan can be expected to employ a variety of tactics, from constricting municipal funds to his political rivals to drumming up criminal charges against opponents, to try and decapitate a now much more emboldened opposition. But with the AKP's electoral weakness now exposed, Erdogan is also facing rebellion within his own ranks. Former Deputy Prime Minister Ali Babacan and former President Abdullah Gul, two AKP heavyweights, are rumored to be starting a new, rival party to the AKP. More immediately, Erdogan will also have to manage the economic and security fallout from his foreign policy agenda. Russia is expected to deliver S-400 missile defense systems to Turkey in the first half of July; U.S. sanctions against Turkish defense companies and the sidelining of Turkey from the multinational F-35 fighter jet program will likely follow.
Iran's Nuclear Option? The Joint Comprehensive Plan of Action (JCPOA) nuclear deal is hanging by a thread, and that thread could break as early as July 7. Iran will soon be stockpiling low-enriched uranium and heavy water at levels beyond the limits it agreed to in the JCPOA but is also threatening to increase its weapons-grade enrichment levels and to rework the Arak heavy water nuclear reactor to produce weapons-grade plutonium. The United Kingdom, France and Germany have been scrambling to persuade Iran to steer clear of that line by announcing that its special payment system, known as INSTEX, is operational and starting to process its first transactions. The financial link is supposed to facilitate humanitarian trade that Iran desperately needs, but will it be enough to slow Iran's nuclear restart? Probably not. Iran has been clear: To fully implement the JCPOA it needs to be able to export oil and not just import food and medicine. Even as the White House is telegraphing cyberattacks as its preferred response to Iran, aggressive Iranian moves on the nuclear front will increase the potential for a U.S. military strike.
The Flip Side to Trump's Trade Wars. The European Union is on a free trade agreement roll. After finalizing trade pacts with Canada and Japan, the European Union clinched its largest-ever free trade agreement with the highly protectionist Common Market of the South (Mercosur), the South American trade bloc comprising Brazil, Argentina, Paraguay and Uruguay. After 20 years of drawn-out negotiations, the two sides were able to compromise on longstanding sticking points over Mercosur's highly competitive agricultural exports to Europe and Europe's highly competitive auto industrial exports to Mercosur. Free trade agreements always take a long time to negotiate, but a rise in U.S.-led protectionism and slowing economic growth overall have been strong catalysts for countries to work out their trade differences with an eye toward expanding market access. Now starts the long road to ratification. The bigger challenges will likely be on the EU side, where a unanimous vote is required and where countries like France, Poland and Ireland could push for stronger agricultural protections. This agreement will also be a test of just how thick a red line French President Emmanuel Macron wants to draw around a demand for any EU trading partners to remain in the Paris climate accord in light of Brazilian President Jair Bolsonaro's threat to follow in President Trump's footsteps and pull out of the climate pact (Macron tried to make a similar demand over EU-U.S. trade negotiations, but had to back down in the end). A populist government emerging from October elections in Argentina could also complicate ratification on the Mercosur end.
A Swiss-EU Battle Previews a Bigger Brexit Fight. The European Union will withdraw the Swiss stock exchange's "equivalence rights" on July 1, which means that Swiss traders will not be allowed to operate in the European bloc. Switzerland will probably introduce similar measures for EU traders in retaliation. These tit-for-tat moves are the result of the Swiss government's reluctance to ratify an agreement that would align Switzerland more closely with the European Union's single market. Under normal circumstances, Brussels and Bern probably would have worked out an agreement, but the European Union is wary of making concessions related to the single market at a time when Brexit negotiations with the United Kingdom remain open. Moreover, this is a preview of just how nasty future talks with the United Kingdom could get, as London will probably request permanent equivalence rights for its huge financial sector — something that Brussels will use as leverage in the negotiations.
On Our Minds
Trump Has a Bullseye Painted on Vietnam. As the final point of assembly for most tech supply chains in the region, Vietnam has seen its trade surplus with the United States grow to nearly $40 billion as U.S.-China trade tensions have worsened. The news has gotten back to President Trump, who this week called Vietnam "almost the single-worst abuser of everybody." The U.S. Treasury Department already has come close to labeling Vietnam a currency manipulator and there's a real possibility the White House will spin up a Section 301 case against Vietnam to justify imposing tariffs. Hanoi has been trying to broadcast its moves to crack down on Chinese relabeling of products for re-export and will do its best to remind Trump of the $20 billion contract it signed with Boeing and GE for planes and engines in February. We can also expect Hanoi to emphasize the importance of its defense relationship with the United States in balancing against China. But judging by Japan's experience, this may not be enough for Vietnam to escape Trump's tariff wrath. Perhaps the most Vietnam can hope for is that Trump has his hands too full with his trade war with China and threats against Mexico to risk launching additional trade salvos. As Trump put it this week, "I don't want to do too many at one time. China's fine. We did Mexico and China." For Japan and the European Union, that may also imply some restraint on U.S. auto tariffs — at least for now.
Another Coup Attempt in Venezuela? The Venezuelan government claimed this week that it had disrupted a coup plot that allegedly involved soldiers and police freeing former Defense Minister Raul Baduel from government custody and installing him as interim president. This is an awkward revelation for opposition challenger Juan Guaido. Virtually all of the key officials representing Venezuela's commercial and diplomatic interests abroad — and those negotiating with holders of defaulted Venezuelan debt — are loyal to Guaido. But the government's claim raises the possibility that dissidents are tiring of Guaido's inability to remove President Nicolas Maduro from power. Doubts will grow concerning Guaido's ability to negotiate with bondholders, arbitration claimants and governments if support for him is flagging among key military and political dissidents.
... And a Failed Coup Attempt in Ethiopia. As the dust settles in Ethiopia after a failed coup attempt in the Amhara region and the assassination of five senior officials over last weekend, Prime Minister Abiy Ahmed faces daunting challenges. For one, he must crack down on growing internal ethnic strife and factionalism — key drivers of the recent coup effort — without alienating his support and exacerbating the problem. He must also reassure foreign investors that Ethiopia's bold liberalization agenda will not be halted, despite evidence of rising political risk. As such, the Ethiopian government's next steps will be crucial. Already signs show that the government is arresting scores of individuals linked to hard-line Amhara parties, likely in a bid to show them that they are not untouchable. Yet it remains to be seen whether Abiy can negotiate with more moderate members of the opposition in a bid to reduce growing tensions. As Ethiopia heads toward a likely contentious election in 2020, the moves Abiy make now will reveal whether he can push forward with his ambitious transformation plans or whether Ethiopia will sink into further unrest.
A Balancing Test for the Philippines. With the Philippine political scene roiling with controversy over President Rodrigo Duterte's China outreach, the U.S. Navy confirmed this week that it may make a bid to return to Subic Bay, the site of a U.S. naval base until 1992, in the form of a repair and maintenance facility at a bankrupt commercial shipyard. While tentative, such a move would check potential Chinese encroachment in the strategic location adjacent to the South China Sea. With the shipyard's owner almost a billion dollars in debt to its South Korean creditors, two unnamed Chinese firms have expressed interest in buying the facility. Manila prefers a Philippine operator but, with few domestic options, has said it would not rule out Chinese proposals. Duterte has engaged in a conciliatory outreach toward China, quieting maritime disputes and garnering investment. But domestic controversy has swirled over a South China Sea incident in which a Chinese vessel sank a Philippine fishing boat. With potential competing U.S. and Chinese offers, Manila will need to navigate carefully: While a Chinese port presence on Philippine shores could upset critical defense links with the United States and trigger domestic rifts, a U.S. Navy presence so close to hotly disputed waters could upset Chinese relations as well.
In Case You Missed It
On Our Calendar
In the coming week, European Union leaders meet to decide who will lead the European Commission and other top EU posts, more mass protests are planned in Hong Kong, Turkish President Recep Tayyip Erdogan visits China and the United Nations is expected to release a report on the human rights situation in Venezuela. For more, see our Geopolitical Calendar.
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