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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.

US-Turkey tensions rising

Business risk: Risk of cutting of market access or tariffs on Turkish products heading to the US + Risk of increased economic and exchange crisis in Turkey.

Russsian S-400 missiles during a rehearsal for a 2014 Victory-Day-Parade.

Tensions between the US and its NATO ally Turkey have been tense for quite some time now. But recently three issues have further heightened them:

Russian arms sales: Turkey plans to buy a Russian S-400 missile defence system. This would be a risk for the Western alliance as they are, according to the US, not compatible with NATO systems. The US has offered to sell Turkey Patriot systems instead and at the same time threatened with sanctions and a halt in the sale of F-35 fighter jets.

Syria: Turkey has threated to strike at the (Kurdish) Syrian Democratic Forces, who assisted Western Forces in battling Islamic State. Ankara sees them as terrorists linked to the separatist PKK in Turkey. US Secretary of State warned of “Potentially devastating consequences of unilateral Turkish military action in the region.”:

Detainees: Turkey detains several US citizens and local US consulate staff. Senators Roger Wicker (Rep.) and Ben Cardin (Dem.) introduced a bill to sanction those Turkish officials who are responsible for these detentions.

But Turkey has not given any ground on these issues, and Erdogan has stated that the missile defence deal is sealed. The prospect of US sanctions on Turkey, therefore, does not seem far away. Last year the US already sanctioned Turkey over the detention of Pastor Andrew Brunson. These sanctions led the Turkish lira into freefall.

But that was before the local elections. At this moment Turkey is in a severe economic downturn. The lira lost 28% in 2018 and Turkey is facing its first recession in a decade with unemployment at a nine-year high. Now that the local elections are over and Erdogan’s AKP Party suffered some severe setbacks in the big cities, it might get more concerned about bread and butter issues, and become more willing to compromise with the US.

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More US sanctions on Iran

Business risk: Increased oil prices due to lower Iranian production + risk of disruption of Strait of Hormuz that would push oil prices further upwards.

Iranian Revolutionary Guard commandos and missile boats in Great Prophet IX Maneuver in Strait of Hormuz, Persian Gulf. (Source: sayyed shahab-o- din vajedi)

No more waivers. The Trump administration announced that it would not renew any of the waivers for buying Iranian oil. China, Turkey, India, Japan, South Korea, Taiwan, Italy and Greece all had exemptions to purchase Iranian crude. Italy, Greece and Taiwan already stopped buying oil from Iran.

Big oil importers like India will face severe economic costs due to the probable price increases. For India, the problem is exacerbated as the US also put more sanctions on its other top oil supplier, Venezuela. Turkey and China (who buys almost half of all Iranian oil) condemned this move.

Oil prices jumped up. In the already tight market (with sanctions on Venezuela) “international Brent crude oil benchmark rose to more than $74 a barrel on Monday, the highest since November” reported Reuters.

The White House declared that the US, Saudi Arabia and the United Arab Emirates 

have agreed to take timely action to assure that global demand is met as all Iranian oil is removed from the market.

This statement is in contrast to recent actions by the Saudi’s who have cut their production.

A Small opening? The renewed US sanctions have caused already much pressure on Iran. Its oil exports plummeted from 2.8 million barrels a day to 1.3m. The IMF predicts 40% inflation this year. Economic hardship can push the regime to become more accommodating, but at this moment it seems not to budge.

However, there are some signs that it would be open to talking to Washington. Last month, it proposed to exchange prisoners between Washington and Tehran. Tehran seems intent to play on Trump’s vanity. The President has claimed that:

Donald J. Trump is the greatest hostage negotiator that I know of in the history of the United States. 20 hostages, many in impossible circumstances, have been released in last two years. No money was paid.’ Cheif (sic) Hostage Negotiator, USA!

Given how much Trump likes to conclude deals that have no game-changing impact (NAFTA renegotiation, upcoming US-China trade deal) and have zero-impact summits (North Korea), the Iranians might be on the right track here.

Or going hardline in Hormuz? The alternative for the regime could be to completely dig in, provoking ever stricter US sanctions, finally triggering Tehran to take some brash action. This month Iran’s President Hassan Rohani threatened to disrupt traffic through the Strait of Hormuz. Newly appointed Iranian Revolutionary Guards Commander Hossein Salami, whose forces control the Strait of Hormuz, also threatened to close the Strait.

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EU-US trade conflict, aeroplane edition

Business risk: Tariff risk for EU-to-US exporters and US-to-EU exporters.

Lufthansa Airbus A380 and Boeing 747 (Kiefer)

A long-lasting conflict. For 14 years there’s been a conflict between the EU and the US over their respective subsidies for Airbus and Boeing. Both the EU and the US have filed multiple cases with the World Trade Organization (WTO), and both have been found guilty of breaking WTO rules on subsidies. While most of the conflicting issues have been solved, a few remain.

On March 28, the (WTO) issues a final ruling stating that Boeing and the US have complied with all but one subsidy complaint. The remaining issue is tax reductiongranted by Washington State.

The US reacted (through US Trade Representative Robert Lighthizer):

“This report confirms what every other WTO report on these issues has found: the United States does not provide support even remotely comparable to the exceptionally large and harmful EU subsidies to Airbus, […] It is long past time for the EU to stop their subsidies and let our world-class aircraft manufacturers compete on a truly level playing field,”

Why do I care? I don’t make aeroplanes? The US plans to impose retaliatory tariffs on $11bn worth of goods from the European Union to punish the EU for not fully complying with the WTO rulings. The exact amount depends on arbitration by the WTO (expected in a few months). Aircraft, food products, carpets and table knives are among the products in the preliminary list. (full list)

In good Tit-for-Tat-style, the EU responded that it would impose tariffs on $20bn of US goods. Fish, vegetables, fruit and other foodstuffs, but also wallets and handbags and lots of other stuff on the EU-list. (full list)

A little bit comforting. In contrast to quite some other trade conflicts these days, all this is occurring within WTO rules.

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Increased tensions around Taiwan

Business risk: Military conflict that would disrupt global supply chains and market access to China and Taiwan.

Chinese President Xi Jinping and Taiwanese President Tsai Ing-Wen (Source: 美國之音合成圖片)

What happened? On March 31, two Chinese J-11 fighter jets crossed the Taiwan Strait’s “median line” this resulted in a standoff with Taiwanese jets in the Taiwanese airspace. Taiwan said it would “forcefully expel” Chinese warplanes next time. US National Security Advisor John Bolton reacted with a tweet pledging US “commitment’“ to Taiwan’s security.

Increasing tensions. This incident is happening in an environment of heightened tensions in the US-Taiwan-China relationship and growing assertiveness on all sides:

  • The state department approved a big arms deal including pilot training, maintenance and logistics for F-16 fighter jets. The last time the US sold jets to Taiwan was 1992. At the same time, Taiwan announced a 5,6% increase in its defence budget. This is a signal to China from both the US and Taiwan that the island is increasing its defences.
  • While the US has no formal obligation under the Taiwan Relations Act to defend the island, the US is becoming much more assertive in resisting China’s claim for dominance in its neighbourhood. The US has increased its trips through the Taiwan Strait. In the past nine months, ships sailed six times through the Strait, under Obama this was only 1-3 a year.
  • In January Chinese President, Xi said that Taiwan must be unified with the mainland. Taiwanese President Tsai reacted by saying that: “Taiwan absolutely will not accept ‘one country, two systems.’”
  • Also, there’s the growing confidence in the Chinese People’s Liberation Army’s (PLA) capabilities. Even in the US the absolute belief in the certainty of victory in a conflict with China is withering away.

“The U.S. could lose,” said Gary Roughead, co-chair of a bipartisan review of the Trump administration’s defense strategy published in November. “We really are at a significant inflection point in history.”

What’s holding everybody back? While avoiding Taiwanese independence is one of the core interests of China, it has shown restraint in its relations with the island and has so far used a softer approach, integrating the Taiwanese with its economy, increasing its dependence on the mainland. While China ultimately wants Taiwan to ‘return’ to the mainland, a major war with Taiwan (and potentially the US) would damage Taiwan’s economy so much that it might end up winning a war and having nothing more to rule.

Besides, China needs economic growth to honour the social bargain it has with its population (increasing prosperity in exchange for standstill (or decline) in political rights. A major war would cause severe economic harm to China and could endanger this bargain.

What could trigger a conflict? Accidental escalation is the main path to war between the US and China. New incursions of the Chinese in Taiwanese airspace and the Taiwanese reaction could escalate the conflict if for example a plane is shot down. Alternatively, incidents at sea (provoked or not) in the Taiwan Strait could escalate. While in the past doubts about its military capabilities hold China back to avoid escalation, its new sense of military confidence could lead to hubris that could lead to further escalation.

What to watch out for? The coming elections in Taiwan (2020) are another potential trigger. China is very sensitive to any candidates supporting (formal) Taiwanese independence. And it’s entirely possible that mainland China could stage a demonstration of its power in the run-off to the elections to let voters think twice who they support through the ballot box.

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