On the Record
In 3-5 years time, Huawei will be flowing with new blood. After we survive the most critical moment in history, a new army would be born. To do what? Dominate the world.
Huawei founder and CEO Ren Zhengfei
On Our Radar
"Who is our bigger enemy, Jay Powell or Chairman Xi?" U.S. President Donald Trump's Aug. 23 Twitter rage against China and U.S. Federal Reserve Chairman Jay Powell goes to show how the president's trade policy is stuck in a loop: His trade war with China, at 18 months and counting, is taking its toll on the global economy, and U.S. bond markets are sending out distress signals. Those recession fears then have the dual effect of compelling the Federal Reserve to cut interest rates and driving the White House to ease up ever so slightly on its tariff threats and search for other stimulus measures (payroll tax cuts?). But China, encouraged by the sight of a more panicky White House, ends up maintaining a hard line in the negotiations while a cautious Federal Reserve, waiting to see if the White House tempers its trade threats, avoids committing to drastic stimulus measures. Not getting his wish of a pliant Beijing nor a weaker dollar, Trump lashes out in search of more leverage, markets plunge on another spike in trade uncertainty and the cycle repeats itself. The $80 trillion question for the global economy is, how many more times can this pattern continue before it produces a recession?
Here's what we're watching:
Trump's Next Moves Against China. Trump announced that he would be raising existing tariffs on $250 billion worth of Chinese goods from 25 to 30 percent on Oct. 1 and increasing duties on a remaining $300 billion in imports from 10 to 15 percent starting Sept. 1 — some of those tariffs have been delayed to Dec. 15 to avoid hitting U.S. consumer prices during the holiday shopping season. On the spectrum of retaliatory options, this is relatively measured for Trump.
China has already matched Trump's earlier tariff threats but could now also publish its long-awaited "unreliable entity list" that could blacklist firms like U.S.-based FedEx, electronics manufacturer Flex, British-based HSBC and other firms caught in the U.S.-China crossfire, while Beijing is still waving the threat to restrict rare earth exports to the United States. U.S. companies like General Electric and Gulfstream, a subsidiary of General Dynamics, are also on Beijing's sanctions target list for their connection to U.S. defense deals with Taiwan. All eyes will be on how much the People's Bank of China allows the yuan to fall when markets open.
Given China's growing compulsion to respond, we will need to keep watching for more Trump moves down the line. These could entail instating fentanyl-related sanctions against bigger Chinese targets and rescinding or ending early a temporary general license for U.S. companies to work with Huawei. He could also order additional Section 301 investigations over issues like currency intervention, access to China's cloud computing market and the country's self-designated developing status at the World Trade Organization (WTO). A far more extreme option would be for Trump to declare a national emergency through the International Emergency Economic Powers Act of 1977 to try and impose restrictions on U.S. businesses that trade with and directly invest in China.
When it comes to Trump's (likely ill-fated) mission to weaken the U.S. dollar, we're watching for any moves by the White House to impose a currency transaction tax or for the U.S. Treasury Department to use the External Stabilization Fund to sell dollars.
The G-7 Watch List. While central bankers at Jackson Hole, Wyoming, have been telegraphing to the world that they alone cannot save their economies from trade uncertainty, don't expect much reassurance from political leaders gathering in France for the G-7 summit. U.S. tensions with France and Germany will be on display over an array of issues: U.S. retaliatory threats against France's digital tax on U.S. technology giants (Trump has threatened a tariff of up to 100 percent on French wine), U.S. tariffs against the European Union over Airbus subsidies and a still-lingering threat by Washington to impose auto tariffs on the bloc. Trump will also take aim at German Chancellor Angela Merkel's resistance to fiscal stimulus and the European Central Bank's plans for monetary easing. Relatedly, we'll also be trying to parse through the European debate over an internal document on unilaterally imposing tariffs on the United States and on setting up an investment fund to help European industrial champions compete with U.S. and Chinese technology giants.
With China increasing retaliatory tariffs against U.S. agricultural products, Trump is going to be very eager to announce some real progress in his trade talks with Japan when he meets with Japanese Prime Minister Shinzo Abe on Aug. 25. Even so, a U.S.-Japan trade deal is not going to provide that much relief to U.S. soy, corn and wheat farmers getting hammered by the U.S.-China trade war.
Trump's meeting with Indian Prime Minister Narendra Modi on Aug. 25 may shed some light on how far the White House intends to take its trade threats against New Delhi. Like China, India is also a big target for a Section 301 investigation and tariffs on the country's self-designated developing country status at the WTO, as well as other trade complaints. We can also expect Modi to politely decline any attempts by Trump to mediate in India's simmering Kashmir dispute with Pakistan.
The Hong Kong Airport "Stress Test." Many observers breathed a sigh of relief early this week following large, but mostly calm protests in Hong Kong last weekend. But pay attention to who is leading the demonstrations: While the umbrella Civil Human Rights Front marches tend to be more peaceful, the student-led actions have much higher potential to trigger violence and also create more backlash to their movement. This weekend, student protesters are going to try to target Hong Kong International Airport again by overwhelming all transport options there. Beijing has been issuing warnings to the Hong Kong government to contain the unrest by the Oct. 1 anniversary of the founding of the communist state, but we still think Beijing will try to avoid rushing what would likely end up being a very messy crackdown ahead of the anniversary.
Italy and Brexit Watch. Aug. 27 will be a big day for both Italy and the United Kingdom. We should know by then whether Italy's anti-establishment Five Star Movement and the center-left Democratic Party will be able to form a coalition government to stave off a general election and leave the Euroskeptic League party in the cold. While there are several sticking points in their negotiation, the prospects for a coalition deal are looking pretty good going into next week. Markets will also be encouraged by the fact that the Democratic Party will act as a moderating influence on Five Star policies. Meanwhile, British Labour Party leader Jeremy Corbyn will be convening a cross-party meeting with Conservative Party backbenchers and leaders from the Liberal Democrats, Scottish National Party and Green Party to see who will sign onto his plan for a no-confidence motion and caretaker government to chart the path to an early general election. The biggest question is whether rebel Tories will be able to convince Corbyn to give up the idea of assuming the prime minister's role and agree on a consensus candidate instead.
On Our Minds
To Engage or Not to Engage With Russia? There was a lot of hubbub during the week over Trump's remarks that the G-7 should return to the G-8, and that Russia should be allowed back into the club. France and Germany predictably reiterated their condition for a resolution over the (still frozen) Ukraine conflict before readmitting Moscow. But the United States will be hosting the G-7 summit next year and Trump, as the host, could extend an invitation to Russian President Vladimir Putin. The idea is not all that radical when considering a serious debate among U.S. national security circles on the need to engage Moscow as a means to weaken a stronger Russia-China alignment against the United States. And with European concerns rising over an escalating U.S.-Russia arms race, France and Germany could even be more open to the idea when the summit comes around next year as both countries try to find ways to keep all sides engaged.
Controlling the Arms Race Narrative. Russia, meanwhile, played it cool all week, taking care of controlling the narrative of the arms race and casting the United States as the aggressor following Washington's recent test of a ground-launched cruise missile (a type of missile that was previously prohibited under the now-suspended Intermediate-Range Nuclear Forces Treaty.) Remember, a big reason why the United States withdrew from the treaty was to more effectively compete with China, who has been building up its arsenal of ground-based cruise missiles. The United States will now focus on wary Pacific allies like Japan and South Korea (whose security and economic relationship deteriorated further this week as Japan vowed to increase export restrictions on South Korea and as Seoul ended an intelligence-sharing pact with Tokyo) to host U.S. missiles as it tries to balance against China. The United States has said that it has no intention of deploying these missiles in Europe, while Russia is saying it won't make a move unless the United States does so first. Still, we're watching for any quieter moves by Moscow in its western military district and any signs from Poland and the Baltic states that they are entertaining hosting U.S. missile deployments.
Israel Leverages Its Technological Prowess. As a tiny country in a hostile neighborhood, Israel has to put a lot of energy and innovation into managing its relationships with foreign powers. One way Israel can make itself especially useful to other governments is through its cybersecurity advantage. According to a Reuters report citing an unnamed Israel defense official, Israel's Defense Ministry loosened some of its export control rules for certain (unnamed) countries to facilitate sales of offensive cyber tools. We've already seen signs of Israeli-developed cyber tools falling into the hands of strategic Arab powers. The United Arab Emirates, for example, used Israeli-made cyber tools for monitoring Qatar's al-Thani royal family, and Saudi Arabia allegedly used these tools to spy on murdered journalist and political dissident Jamal Khashoggi. There is a large and growing market for offensive cyberweapons, and close ties between Israel's technology industry and national security establishment have enabled the country to compete at the level of global powers in the sector. As Israel targets potential buyers, it will do so with a geopolitical aim in mind: Israel will care far more about keeping stability among known actors in its neighborhood than any Western campaign to promote democracy in the Middle East. Over time, however, we could see growing political backlash and potential sanctions by some Western countries against major exporters of offensive cyber tools, such as Israel and China, as a result of enabling digital authoritarianism becoming increasingly visible.
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On Our Calendar
In the coming week, Iranian Foreign Minister Mohammad Javad Zarif will visit China and Japan, Turkish President Recep Tayyip Erdogan will travel to Moscow to meet with Russian President Vladimir Putin, and U.S. Donald Trump will visit Poland. For more, see our Geopolitical Calendar.
Stratfor Talks
Stratfor's South Asia Analyst, Faisel Pervaiz, speaks with contributor Ambika Vishwanath for the Stratfor podcast about India's escalating water crisis and the ways in which it will seep into each crevice of the country's domestic and foreign policy aims.
Visit our podcasts page for more conversations on geopolitics and world affairs with Stratfor's analysts, editors and contributors.
