Economic statecraft 2.0 – Hacking and political detention

Business risk: Increased risk of political detention and damage occurring to hacking of infrastructure.

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Economic statecraft on the rise. In a world of geopolitical competition and high levels of economic interdependence economic statecraft will thrive. This is what we’ve seen in the American politicization of trade policymaking and in the Chinese instrumentalization of regulatory measures to punish firms of governments with which it has political disagreements (remember when the Chinese stopped buying Norwegian salmon when the Chinese dissident Wen Xiabo received the Noble Peace Price?). Moreover, the use of economic statecraft has been spreading to other states (Qatar blockade and Saudi Arabia stopping to send patients to Canadian hospitals).

Detention wars. However this was just the beginning. Economic statecraft or the use of economic interdependencies to reach political goals, is reaching new heights these months. The first escalation was the use of detention as a political weapon in the trade conflict. First, there was the arrest of Meng Whanzhou, CFO and daughter of Huawei Founder Ren Zhengfei. She was arrested in Canada at the request of the United States for breaching US regulations banning dealings with Iran. While the extraterritorial application of US law (another form of economic statecraft using the pervasiveness of the US financial system, is nothing new, Trump’s politicisation of the arrest is new. The US President suggested that Meng Wanzou’s release could be part of a trade deal with China. By taking her arrest out of the legal and into the political sphere, all pretence of a purely legal process has been dropped. In reaction to Meng’s arrest, China arrested Michael Kovrig, a former Canadian diplomat, now working for the International Crisis Group. In this way, detention is becoming a political weapon and should concern businesspeople and other people travelling to China in these tense times.

Hacking Wars. Another example of the ramping up of the level of economic statecraft is the cyberconflict that is further developing between the US and Russia. A New York Times (NYT) report shows that US forces have stepped up operations in Russia. The US has placed implants on the Russian electricity grid. The fact that the US didn’t mind the NYT bringing out the news shows that the operations are meant to deter Russia of attacking the American grid.

Erdogan’s big miscalculation

Business risk: Big risk of increased political instability, which will make the already hard economic situation even harder. Smaller risk of temporary disruptions of maritime traffic through the Turkish Straits.

What happened before? On March 31, Erdogan’s AKP party lost municipal elections in Istanbul by 0.2%. President Erdogan refused to accept his loss and forced a rerun of the elections. Erdogan reached himself national prominence when he was elected mayor of Istanbul in 1994.

What happened now? On Sunday, June 23, the rerun led to an even bigger defeat for the AKP candidate. He lost from Ekrem Imamoglu of the centre-left CHP with 9.2% of the votes. In addition to the symbolism, losing Istanbul is also a big blow to the AKP’s patronage networks for which Istanbul is essential.

What will happen? Turkish opposition parties will feel bolstered after their victory in Istanbul (and other important cities). This will strengthen their determination to keep resisting the slide towards repression. At the same time, Erdogan weakened and humiliated will probably not give the opposition more leeway. He will dig in! These two dynamics will collide, and we expect a lot more political instability in Turkey due to increasing conflict between Erdogan and his opponents.

Not repressive enough, not free enough. Turkey is a typical case of a political regime in between democracy and autocracy. On one hand, it’s not oppressive enough to contain all political dissident and on the other hand it’s not free enough to create political openings to voice legitimate concerns without breaking the law. This makes it a very combustible environment without a pressure valve, leading to a potential blow-up.

Why does it matter? Turkey is the EU’s fifth largest trade partner and instability and economic crisis will have an impact on the EU’s economy. Besides, Turkey is already in quite some trouble in its relationship with the US as it plans to buy a Russian anti-missile system. The US has threatened with sanctions if the sale proceeds. Finally, Turkey has a deal on migration with the EU, where it receives millions of refugees in exchange for European money. If instability increases, the refugee deal could be threatened, potentially creating a new migration crisis in Europe.

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Is Mexico back on the menu?

Business risk: High risks for firms trading from Mexico to the US and medium risk form firms sellling from the US to Mexico of retaliation. Highly disruptive effect for automobile supply chains across the US-Mexico border.

U.S. Air Force airmen install a fence along the U.S.-Mexico border east of San Luis, Ariz., on Oct. 3, 2006. The Guardsmen are working in partnership with the U.S. Border Patrol as part of Operation Jump Start. The airmen are assigned to the 188th Fighter Wing Arkansas Air National Guard. DoD photo by Staff Sgt. Dan Heaton, U.S. Air Force. (Released)
U.S. Air Force airmen install a fence along the U.S.-Mexico border (Credits: DoD photo by Staff Sgt. Dan Heaton, U.S. Air Force.)

A few months after the US and Mexico (with Canada) concluded a trade deal, an update of the North American Free Trade Agreement, Mexico seems back in the crosshairs. The US President announced that he would impose 5 per cent tariffs on Mexican goods entering the US market until the Mexicans halt illegal immigration.

It’s not clear how hurting the Mexican economy will solve the immigration issue. However, it makes it very clear how tariffs are becoming a hammer for the US President with which he can hit any issue. By using tariffs out of the trade context, deescalation of trade wars becomes more difficult as there will always remain issues on which one disagrees, and that could (in this logic) lead to new tariffs.

It also makes it very clear to all states that would consider making concessions in trade negotiations that giving in to US pressure does not make them safe for another round of tariffs in the (near) future. If the bully continues bullying you once you have given your lunch money, what’s the point of doing it next time? The EU and China will think twice before giving in to US demands in the future.

Are the tariffs on or off? A few days after President Trump announced a deal with Mexico and a few days of squabbling with Mexico over what’s exactly in it, the US President has renewed his threats. Wether the deal sticks for the moment or not, this clearly will not be te end of it. To be continued…

Iran, is it getting better?

Business risk: Lowered risk of military escalation and therefore decreased risk of disruption in the Persian Gulf. Sanctions risk remains the same.

Assistant to the US President for National Security Affairs John Bolton. (Credits: Kremlin, Russia)

Hawkish rhetoric. The United Arab Emirates told the UN Security Council that the attack on four oil tankers off its coast last month was most likely carried out by a state actor. While no specific country was mentioned, according to the Saudi ambassador responsibility “lies on the shoulders of Iran.” US National Security Advisor, John Bolton, continued his hawkish rethoric, stating that Iran “almost certainly” is behind the tanker attacks and that it’s seeking nuclear arms.

The calming voice of the President. At the same time, President Trump has dialled down his rhetoric, stating that he hoped Iran would negotiate a new nuclear deal and declaring that he is not seeking regime change in Tehran. Acting Secretary of Defense Patrick Shanahan send the same message, stating that:

I just hope Iran is listening. We’re in the region to address many things but it is not to go to a war with Iran.

This all happens amid rumours that the President is increasingly unhappy with Bolton and that the National Security Advisor may be on his way out.

Would the Iranians talk if Trump called them? President Trump invited the Iranians to “call him” to sort out their issues. While Iran’s Supreme Leader Ali Khamenei stated that Iran would not negotiate with the US, President Hassan Rouhani has suggested that their countries should talk to lift sanctions.

However, the risk of misunderstanding remains. It seems that the recent increase (before the decrease) in tensions might have been caused by mutual misunderstandingswhere Iranian leaders believed the US was ready to attack and made preparations for a counterattack. These preparations were then observed by the US, which concluded that Iran was preparing to attack US forces. Similar misunderstandings and accidental escalation will persist as long as there is no more direct communication between the US and Iran and their respective militaries.

US-China, is a military escalation possible?

Business risk: Limited risk for those firms using transport routes through East Asian seaways.

US made M60A3 TTS Tank in Taiwan (Credits: 玄史生)

Mutual irritation continues. Tensions between the US and China are increasing on non-economic issues too. US Secretary of State, Mike Pompeo, stated on the commemoration of the Tiananmen square crackdown that:

China’s one-party state tolerates no dissent and abuses human rights whenever it serves its interests […] Today, Chinese citizens have been subjected to a new wave of abuses, especially in Xinjiang, where the Communist Party leadership is methodically attempting to strangle Uighur culture and stamp out the Islamic faith.

Both the thirty years Tianman crackdown and the treatment of Muslims in Xinjiang are very sensitive to the Chinese leadership.

The US House of Representatives voted the “Taiwan Assurance Act of 2019”supporting Taiwan and urging the US to sell arms to the island nation. The legislation has to pass the Senate before it becomes law. China warned the US over its arms sales to Taiwan and demanded that the US would scrap a plan to sell $2 billion of arms to Taiwan (tanks, anti-tank missiles and air defence systems) to “avoid serious damage”.

The US continued its freedom of operation actions and sailed two Navy ships through the Taiwan Strait on May 22. Around the same time, Taiwan conducted its largest military exercises in five years to “test its ability to repel an invasion of the island.“

China is also framing the US-China conflict as bigger than only trade. In a meeting with scholars from a US thinktank, Chinese officials ranted about how this was a clash of civilizations.

Beware of accidents. Neither side seems to have the intention to launch a military conflict but with increasing military activity, the risk of an accidental collision that could lead to an escalation in an environment of jingoistic rhetoric on both sides increases.

US-China trade, can it get even worse?

Business risk: High risk for US firms (tech and non-tech) operating in china or selling in the Chinese markets and all firms supplying these firms. High risks for firms worldwide that use Chinese technology and have strong links to the US.

Huawei Mate smartphone. Credits: Kārlis Dambrāns

Yes it can get worse! President Donald Trump escalated his trade war with China earlier this month, ramping up tariffs on about $200 billion of Chinese goods, prompting Beijing to retaliate with further duties of its own. Trump and his counterpart Xi Jinping are expected to meet again at the end of June for the G-20 summit. Some analysts predict a resolution during the summit, but we expect no significant progress.

To make things worse. Washington blacklisted Huawei, barring US companies from selling to the group. This will probably affect about 1,200 US suppliers to the telecom group. Google has already stopped providing some hardware and services to Huawei. Huawei fights back by initiating a lawsuit in the US, arguing the blacklisting is unconstitutional.

The Chinese fight back. by raising the issue at a meeting of the WTO market access committee, arguing the ban is against WTO rules. They also threatened to use rare earth export controls to hurt the US. Rare earth are (not so rare) materials that are essential for modern electronics and which are mainly produced in China (more than 80% of global production). In 2010 China used an (informal) rare earth export ban in a conflict with Japan over a Chinese fishing boat that was caught by the Japanese coastguard in disputed waters.

China also put its purchases of US soybeans on hold. Purchases were resumed earlier as a goodwill measure after the US and China seemingly agreed on a truce in their trade conflict in December last year. In this way, they directly strike the American mid-west, core Trump country, that has been suffering hard from the retaliation in the trade wars by numerous countries. Profiting the most are Brazilian soybean farmers.

China is also retaliating by warning students and tourists of the risks of studying in and travelling to the US. This could be a huge financial drain for US universities and the tourism sector with more than 300 000 Chinese studying in the US and tourists spending almost $40 billion in 2018.

US companies fight back. More than 170 US footwear companies wrote a letter to the President to argue that the additional 25% tariffs on Chinese imports would be:

catastrophic for our consumers, our companies, and the American economy as a whole.

An IMF report made clear what most experts believe but what President Trump vehemently denies that it are US importers and not Chinese firms that are bearing the brunt of the tariff costs. In addition to US farmers that suffer most of the retaliation to the US new trade policies, the trade conflict seems to be creating more losers than winners in the US. Whether this will have an impact on US policies seems doubtful as the US President is extremely convinced of the contrary. His beliefs on trade policies date back to the 80s and are a small part of his ideas that don’t have changed over time.

Welcome to a fractured world. The technology sector is increasingly getting fractured between a US and a Chinese side. The software and internet sectors have known this bifurcation for a long time. The Great Firewall has for decades separated the Chinese internet from the rest of the world. Chinese internet service firms like Weibo have been able to grow overwhelming market shares because China blocks Western tech giants services like Google or Facebook. Now the physical side of the tech world that is strongly intertwined between the US and China has been drawn in the US-Chinese tech cold war. The blacklisting of Huawei, the pressure the US is exercising on its allies to join in the ban and the retaliatory measures China will take on US firms, all point to an icy summer in the tech world. Firms like Apple with a sizeable Chinese part in their supply chain seem especially vulnerable for retaliation. The same counts for other American firms with a large China operation like General Motors.