The Weekly Rundown: U.S.-China Trade Talks, Trump's Beef With the WTO and a Possible Currency War

12 MINS READJul 27, 2019 | 20:21 GMT
Pro-democracy protesters fill the arrivals terminal of Hong Kong International Airport on July 26, 2019.

Protesters fill the arrivals terminal of Hong Kong International Airport on July 26. What began in Hong Kong in early June as a string of protests against a controversial extradition bill has since grown into a broader pro-democracy movement, with clashes between police and protesters occurring on several occasions.

(BILLY H.C. KWOK/Getty Images)

On the Record

I say to all the doubters, dude, we are going to energize the country. We're going to get Brexit done.

                                                         British Prime Minister Boris Johnson

On Our Radar

The Shanghai Round. The weight of the global economy will be on the shoulders of U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin when they arrive in Shanghai on July 29 for the first high-level talks since the June G-20 sit-down between U.S. President Donald Trump and Chinese President Xi Jinping. A notable inclusion on the Chinese side of the table is Commerce Minister Zhong Shan, whose more prominent role in the negotiation since the big breakdown in talks in late April has revealed a harder line by Beijing in demanding complete tariff removal as part of a deal and firm guarantees on relaxing Huawei export restrictions before China resumes large agricultural purchases from the United States. The big test in this round of talks is whether both sides can agree to a common framework for reviving their negotiation. Will the U.S. side revise their original 150-page text to consider Chinese demands on Huawei? Will China agree to a phased tariff removal and some legal changes to satisfy U.S. demands on enforcement? We'll also be watching to see if Xi makes an appearance in Shanghai to get a direct feed on where the talks stand ahead of an August annual retreat to Beidahe with party leaders, per a rumor from Politico.

The WTO's Existential Crisis. Ahead of the Shanghai talks, Trump broadcast one of his biggest gripes against the World Trade Organization via Twitter, calling the global trade governing body "BROKEN" due to its provisions that allow countries to classify themselves as "developing countries" to get "special and differential treatment." Indeed, one of the (arguably) biggest flaws to the WTO is its lack of an objective definition of a developed versus developing country, allowing a country like China to classify itself as developing, yet still fight for nonmarket economy status to avoid getting hit more easily with anti-dumping and countervailing duties. (In the case of the latter, China is losing that fight currently at the WTO and has consequently dropped its appeal against the European Union.) In calling out China especially, Trump is setting the tone for the Shanghai talks and making clear that the United States is not going to relax its demands on China making structural and enforceable reforms as part of any trade deal.

Trump's tweet also raises the question of what further moves the White House might make in trying to deny countries special treatment at the WTO. The United States, for example, has already terminated Turkey's and India's designations as beneficiary developing countries under the Generalized System of Preferences. We could see the White House raise more Section 301 cases to justify tariffs against countries it perceives as wrongfully taking advantage of its "developing country" self-classification at the WTO. (In a July 26 memo to U.S. Trade Representative Robert Lighthizer, Trump cited Brunei, Hong Kong, Kuwait, Macau, Qatar, Singapore, the United Arab Emirates, Mexico, South Korea and Turkey as wealthy countries that claim developing status.)

Perhaps most critically, the United States is coming close to its goal of paralyzing the WTO's appellate body, which the White House complains has overreached in its responsibilities and is wholly incapable of holding countries like China accountable for its trade abuses. The appellate body will cease to function on Dec. 10 because of the United States' intentional blockage of appointments to it. Canada has signed onto an EU proposal that would have countries appeal their trade disputes through an ad hoc body comprising former appellate body members following the same WTO guidelines. But consider this: The United States has been the main party in 47 percent of all WTO disputes filed to date, and the United States isn't about to participate in this EU makeshift body. Instead, there is a deliberate strategy underway by the United States to shift trade relations from a rules-based system to a power-based system, raising more uncertainty for global trade ahead.

Hong Kong Is Moving Down a Violent Path. Police and protesters clashed on July 27 in the northern town of Yuen Long where recent mob attacks by pro-Beijing gangsters took place. The deteriorating situation in Hong Kong has raised a big question on what the central government's red line for intervention is. Beijing hinted this week that its military can be deployed to "maintain social order" at the request of the city's government and there have been anecdotal reports of Chinese forces building up on the border as part of its contingency planning. But Beijing is also well aware that a violent crackdown could backfire and invite sanctions at a delicate stage of the U.S.-China trade talks.

Dude, Is Brexit Happening? New British Prime Minister Boris Johnson's Cabinet picks are meant to send a clear message that he is serious about making Brexit happening, but they will do little to calm already deep divisions within his Conservative Party over how to make Brexit happen. We're still anticipating a no-confidence motion against Johnson in October, closer to the Oct. 31 Brexit deadline, once it becomes clear he's hit gridlock with the European Union. In a preview of what's to come, European Commission President Jean-Claude Juncker reiterated to Johnson this week that "the current withdrawal agreement is the best and only agreement possible." Separately, we're still watching to see if Johnson follows his predecessor's plan on Iran now that more countries, including the United States, are signing on (however begrudgingly) to a British-led maritime security force for the Persian Gulf.

Guatemala, a Cautionary Tale for Mexico? After the White House threatened tariffs and a travel ban, the Guatemalan government signed a so-called safe third country agreement with the United States on July 26. But there's a big problem: Guatemala's Constitutional Court had already blocked the agreement, and even as Guatemalan President Jimmy Morales, whose single four-year term ends in January, said this week he was appealing that decision, the case remains in legal limbo (and considering that Guatemala is one of the most dangerous countries in the world, this deal is not likely to pass legal muster). In the White House's eyes, Guatemala has proven easy to push around as it aims to bottle up more migrants south of the U.S. border. But Mexico has tried to avoid even getting into the mess of signing a safe third country agreement, hoping that its security buildup on the border will be enough to neutralize the United States' tariff threats. But Trump is unlikely to let go of the asylum demand, which means Mexico will be bracing for revived tariff threats around Sept. 5, when the 90-day review period for its migration deal with the United States expires.

The Missile Test Telegraph. This was a big week for ballistic missile tests. Iran carried out a medium-range ballistic missile test after a nearly eight-month hiatus. While Iran has technical motivations to continue testing, the move also sent an important signal that the wider region — to include U.S. forces that are being deployed to Saudi Arabia — is within range of Iranian retaliation. We'll be watching to see if this nudges the Europeans any closer to the U.S. position on sanctions, even as the Europeans are trying desperately to create a deconfliction path. North Korea also popped missile tests this week. The U.S. response to North Korea's July 25 short-range ballistic missile test was predictably muted, with Washington saying they are meant to enhance leverage in the working-level talks that the White House says are still on track. For Pyongyang, such tests shore up its domestic defense, but North Korea's clear linkage of the test to U.S.-South Korea military exercises and arms sales leaves open the question of whether the August start of drills will create more hurdles to talks.

On Our Minds

Will the Fed Trigger a Global Currency War? The U.S. Federal Reserve is locked and loaded for its first interest rate cut since 2009 when the Federal Open Market Committee meets July 30-31. The more immediate question is whether the Fed reduces interest rates by 50 basis points instead of the more widely anticipated 25 basis point cut. The Fed's moves will nonetheless ripple across the world and compel many other central banks, particularly in weaker economies, to lower interest rates to match the Fed's moves (the European Central Bank this week notably held off on an early rate cut, but is preparing for further easing in September). The broader question on our minds is to what end will the rational and expected global response to the Fed's moves intensify Trump's steady tirade against so-called currency manipulators. Trump has already accused the European Central Bank, Bank of Japan, Bank of England and others of manipulating the value of their respective currencies to undercut the dollar. The International Monetary Fund this week even provided more fodder to Trump by saying in its global growth report that the dollar was overvalued by 6 to 12 percent compared with other major currencies. Is a global currency war on the horizon?

A Mysterious Sino-Russia Maneuver in Asia. Sino-Russian joint patrols through the Sea of Japan and the East China Sea sparked a lot of acrimony with South Korea and Japan this week. On July 23, Chinese and Russian bombers transited through South Korea's self-declared Air Defense Identification Zone, but then a Russian A-50 early warning aircraft passed into South Korean-claimed airspace around Dokdo Island, which is also claimed by Japan. Japan and South Korea scrambled jets and South Korea fired warning shots. It is unclear whether the Russian transgression was accidental or intentional, but Seoul and Tokyo cannot shake the fact that Russia and China are coordinating much more broadly in the maritime space of the Asia-Pacific. This great power dynamic could drive Japan and South Korea into a tighter security alignment with the United States, but divisions between the two have hampered U.S. efforts to strengthen its alliance network in the area. Notably, Seoul and Tokyo are in the middle of an escalating trade war that China — and not the United States — will try to mediate in a trilateral summit in August.

Meanwhile, in the South China Sea, Vietnam is doubling down in its pushback against China by extending the operation of a Japanese oil rig until mid-September. The enduring standoff raises real risks for clashes and skirmishes, which could also drive Vietnam to tighten security relations with the United States. The conditions are ripe for the United States to strengthen its maritime alliances in the region, but China has deep economic inroads with all these powers and U.S. trade attacks and White House complaints about burden-sharing have injected a lot of questions into many of its most critical security alliances.

Abbas' Risky Ultimatum to Israel. Palestinian President Mahmoud Abbas has threatened to end all agreements with Israel, including security ones, and though he's said this before, there's a different background that makes this threat worth watching. Abbas is facing an economic crisis as aid dries up and Israel withholds tax receipts — punishment in part because Abbas hasn't gotten on board with the U.S.-led peace plan he sees as far too pro-Israel (and which incentivizes a one-state solution). That's leaving him with fewer options against Israel — and now Abbas may be flirting with imitating Hamas' strategy in Gaza in the Palestinian Authority's relationship with Israel by threatening security escalations in exchange for aid. Abbas doesn't have a free hand like Hamas in Gaza to go too far without Israeli forces making strident moves against him, but with an Israeli election coming in September and the results bound to be narrow, Abbas surely knows that now is the time to press against an Israel that has otherwise felt emboldened by the United States to do as it likes in regard to annexations in the region. Should the ploy flop, there is a question of whether Abbas' Fatah party would resist in a more violent fashion, creating a bigger disturbance for Israel in the West Bank. This dynamic also leaves open the question of which regional power could effectively step in to mediate, with Qatar playing a much more prominent role in Gaza as of late.

In Case You Missed It

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On Our Calendar

In the coming week, U.S. and Chinese negotiators meet in Shanghai for trade talks and the U.S. Federal Reserve is expected to lower its benchmark interest rate for the first time in 10 years. For more, see our Geopolitical Calendar.

Stratfor Talks

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