On the Record
This tax is not the mad idea of a few European states. It is based on the diagnosis that there are new business models based on data. ... As soon as the Organization for Economic Cooperation and Development adopts a credible solution, France will withdraw its national tax.
French Finance Minister Bruno Le Maire,
on his country's new digital services tax
On Our Radar
From Foreign Policy Fracas to Freeze? As U.S. President Donald Trump tries to avoid major foreign policy debacles from upsetting his reelection bid, we’re looking at the potential for the White House to put both conflicts with Iran and North Korea on ice. On Iran, the French government is expected to have by July 15 a "freeze for freeze" proposal for the White House stemming from its ongoing mediation efforts with Tehran. The proposal could entail Iran freezing its uranium enrichment activities in return for the United States relaxing sanctions pressure on Iran, perhaps by extending waivers for Iranian oil sales or by easing up on sanctions enforcement. Whether the White House will go for such a proposal in the face of Iran’s bold actions on the nuclear and maritime front is a whole other question. Iran’s failed attempt to seize a British oil tanker this week in retaliation for the United Kingdom seizing an Iranian oil tanker a week earlier shows that Tehran is not shying away from a potential military skirmish.
On North Korea, rumors have been flying that the White House is mulling a possible 15- to 18-month suspension of textile and coal sanctions on North Korea in exchange for a freeze in nuclear production and dismantlement of the Yongbyon site. Even as the White House has vehemently denied the rumors, a phased, trust-building agreement of this stripe is likely the only deal North Korea would accept at this stage. Following last month's surprise DMZ meeting between Trump and North Korean leader Kim Jong Un, working-level talks should be kicking off again between Washington and Pyongyang and should thus yield more clues on what the White House is actually considering to break the impasse.
Status Check on U.S.-Mexico Border Arrests. An update from U.S. Customs and Border Protection showed a 28.5 decrease in U.S. apprehensions on the border with Mexico, from 132,880 in May to 94,897 in June. That’s a positive signal for Mexico as it tries to keep Trump’s tariff threat on ice. The question is, how long will the lull last?
Hong Kong Protest Experimentation. This weekend will see more demonstrations in Hong Kong as protesters try to sustain their momentum against the Beijing-backed administration. But the protesters face a Catch-22 in their tactics: They want to hit Beijing where it hurts by encouraging runs on Chinese mainland banks, but they’re also undermining Hong Kong’s reliability as a financial hub and alienating their more business-minded supporters. The protesters are also trying to draw support from mainland tourists as a way to “export” their revolution to the Chinese core, but some protest calls “to reclaim” areas encroached on by mainlanders are souring an already negative perception that most mainlanders have of Hong Kong's protesters. We’re watching for the potential for protests to spread into the mainland, which would force Beijing to take a more direct role in managing unrest, and thus risk intensifying the crisis in Hong Kong.
Turkey’s Perfect Storm. After taking hits to his economic legitimacy and now facing a rebellion from within the ruling Development and Justice Party, Turkish President Recep Tayyip Erdogan is relying on the nationalist card to shore up support. First, there’s the spat with the United States over Russian S-400 air defense systems, now delivered at long last to Ankara, which the United States seems likely to punish Turkey for by enacting sanctions and ending Turkey’s involvement with the lucrative F-35 fighter jet development program. Then, there are impending European Union sanctions over Turkey’s energy drilling in Cypriot waters: The European Union is considering targeted sanctions, cutting high-level contacts, reducing aid, reviewing the European Investment Bank’s lending program and suspending an aviation agreement negotiation. The European Union is set to vote on these sanctions on July 15 and we’re watching to see if Turkey returns to the tactic of weaponizing migration flows (currently at a low level) to pressure European states like Hungary, Slovakia and Slovenia to veto sanctions. Then there’s the central bank problem: Erdogan’s sudden replacement of the central bank's governor with a more pliable official who will align with Erdogan’s unorthodox economic philosophy has rattled markets and investors. Lurking behind these concrete threats are potential American sanctions for Turkey's trade with Iran and Venezuela as well.
India Feeling the Squeeze. India, like Turkey, is another middle power that faces the threat of U.S. sanctions as it advances a $5.2 billion S-400 deal with Russia. We’re also watching U.S.-India trade talks over Indian trade barriers and data localization policies to see if the United States is inching closer to opening up another front in its trade wars by launching a Section 301 trade investigation against New Delhi.
Soybeans and Semiconductors. China has made it clear that it wants to see what the United States will actually do to ease export restrictions on Huawei before it puts in orders for more agricultural purchases. We’re watching for guidance from the U.S. Commerce Department on how it will define the “national security threat” that U.S. companies must navigate in trading with a Chinese tech giant like Huawei. For example, is it a national security threat for Huawei to use Google’s Android operating system or for U.S. companies to sell semiconductors for consumer products like Huawei smartphones? The White House might start by extending a 90-day reprieve on the Huawei export ban or by granting some U.S. companies licenses to continue doing business with the Chinese company. Whatever the White House decides, it will be up against a more hard-line Chinese negotiating team as Chinese Commerce Minister Zhong Shan plays a more prominent role in the trade talks.
EU-Mercosur Is Still Far From the Finish Line. The European Union and Mercosur, the South American trading bloc, were able to clinch a free trade agreement after 20 years of negotiations, but the road to ratification will be rocky. This week, the Irish Parliament symbolically voted against the deal and vowed to build a coalition across the European Union to ensure its defeat. Spain, Italy, France and Poland are the other places to watch for serious resistance. And on the other side of the Atlantic, a presidential victory for the populist Alberto Fernandez-Cristina Fernandez de Kirchner ticket in Argentina in October could also lead to Buenos Aires walking away from the deal.
A Nationalization Threat in Venezuela Puts the U.S. in a Quandary. The government of Venezuelan President Nicolas Maduro is threatening to nationalize Chevron’s assets if the United States does not extend a key sanctions waiver for Chevron and a few other U.S. companies before it expires on July 27. If Venezuela nationalizes the assets, then they will likely end up in Russian and Chinese hands, depriving the United States of its remaining big foothold in the Venezuelan oil sector and giving the United States’ two biggest geopolitical rivals a near-monopoly on the OPEC members’ upstream oil industry. Venezuela has fallen low on the White House’s radar, but the stakes around this nationalization threat are high enough to draw it back in.
On Our Minds
A High-Stakes Battle over Tech, Taxes and Trade. France passed a landmark piece of legislation this week that will place taxes on digital services offered by large tech firms, regardless of whether they are registered and operate in the country. The way French lawmakers shaped the law, it almost exclusively singles out big U.S. tech firms, drawing a rapid and furious response from the White House. Using the same tool it has used to whack China on trade, the Office of the U.S. Trade Representative has launched a Section 301 case against France that is likely to result in U.S. tariffs on French agriculture and retaliation in kind. The last thing Germany needs right now is another massive friction point in its already difficult trade negotiation with the United States as it tries to ward off auto tariffs. The United Kingdom, and perhaps Spain and Italy, may be next in passing similar laws to tax big tech firms, but will they be willing to face similar trade wrath from the White House or will France serve as a cautionary tale?
This is only the beginning of a broader battle over taxing digital services. In a bid to establish global norms in this area, the debate at the level of the Organization for Economic Cooperation and Development has been largely stuck, with the United States favoring rules that tax corporations where they are registered and located (as it tries to secure tax revenue from American tech giants for itself and drive those companies away from European tax havens) and European states like France, the United Kingdom, Italy and Spain favoring a system that taxes digital services regardless of where they operate. The Europeans are deeply divided over the issue, with tax friendly states like Ireland, Denmark, Sweden and Finland refusing to follow the French push for a European Union-wide tax that would undermine their own competitiveness.
An Asian Trade Battle That Doesn’t Involve Trump. Japan's new Trump-style approach of using export restrictions as retaliation for South Korean court rulings on wartime compensations is deepening a rift between the two critical U.S. allies. With Japanese export restrictions now in place on three key chemical inputs for South Korea's semiconductor and smartphone industries, Tokyo has implied that South Korea is turning a blind eye to smuggling precursor materials for chemical weapons to North Korea, Iran and elsewhere. We still need to see if Tokyo decides later this month to impose national security scrutiny on all South Korean exports. Before then, Japan's self-imposed July 18 deadline for South Korea to enter arbitration on wartime claims will pass and Japan will hold key upper house elections on July 21. Backing down is domestically unpopular in either country, but for South Korea, the incentive to de-escalate is higher. We’ll be watching to see if a South Korean appeal to the White House to help de-escalate the spat goes anywhere.
A Command Economy Drive Toward “Technological Sovereignty.” The Russian government has distributed responsibilities for the development of major technologies across a number of state-owned companies. For example, Russia’s Sberbank gets artificial intelligence technologies, Russia Railways gets quantum communications, Rosatom gets quantum computing and material sciences, Rostec gets quantum sensors, and Rostelecom and Rostec will team up on 5G infrastructure. The Soviet-like approach is designed to strengthen Russia’s “technological sovereignty," but it raises serious questions on just how effective or efficient it will be, especially relative to American and Chinese technological powerhouses.
In Case You Missed It
On Our Calendar
In the coming week, Guatemalan President Jimmy Morales meets with U.S. President Donald Trump at the White House, Honduran President Juan Orlando Hernandez meets with Mexican President Andres Manuel Lopez Obrador in Mexico City and the European Union is scheduled to vote on sanctions against Turkey over its energy drilling in Cypriot waters. For more, see our Geopolitical Calendar.
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