Trade truce is over. U.S. President Donald Trump said 10 percent tariffs on some $300 billion in Chinese goods – which includes almost all Chinese exports to the U.S. that have been spared from import taxes thus far – will kick in on Sept. 1. Beijing pledged to retaliate. Senior trade negotiators from the two sides aren’t scheduled to meet again until September. If (and that’s a big if) this move really spooks China, expect Beijing to push for talks sooner and to start hearing about major spikes in Chinese purchases of U.S. farm goods. More likely, expect China to make a show of digging in to manage nationalist pressures at home, while gauging whether the move sparks a meaningful political backlash in the U.S. While 10 percent tariffs aren’t huge, the scope of the tariffs is; they will cover most consumer goods imported from China, and they’ll be kicking in just as the holiday shopping season gets into full swing, meaning any sticker shock will be much more difficult to hide compared to previous tariffs. U.S. retailers will presumably seek to avoid the tariffs by front-loading orders in August, so any significant economic pain in either China or the U.S. – or the myriad other countries whose firms rely on supply chain links in China – may not show up until the fourth quarter at the earliest.
INF treaty is dead. The U.S. officially withdrew from the 1987 Intermediate-Range Nuclear Forces Treaty on Friday. The treaty, which had been suspended in early February, prevented the U.S. and Russia from developing land-based missiles with ranges between 500 and 5,500 kilometers (310 and 3,420 miles). U.S. President Donald Trump had pointed to Russian noncompliance as the reason for the U.S. withdrawal, citing the Novator 9M729 missile (SSC-8 in NATO parlance). (Moscow claims that the U.S. deployment of Aegis missile defense installations in Romania – and soon Poland – runs afoul of the treaty.) Another reason for the U.S. decision is that the INF limited Washington’s freedom to maneuver against threats in the Asia-Pacific, particularly China and North Korea. But as our Phillip Orchard wrote last year, leaving the INF treaty probably won’t help the U.S. solve the Asia-Pacific problem.
Rumblings in Kashmir. Tensions between India and Pakistan are heating up again along the Line of Control in Kashmir. Just days after deploying 10,000 more troops to the restive region, India has deployed another 25,000 to the area. Indian officials have attempted to downplay the news – the governor of Kashmir said the soldiers were just filling in gaps and that “all is normal” – but rumors abound. One rumor has it that India’s government is preparing to scrap two articles from the country’s constitution that grant the state of Jammu and Kashmir semi-autonomous status and provide special rights and privileges to its citizens. Separately, India’s national security adviser was reportedly warned last week about a possible terrorist attack in the region. Fears of war surged earlier this year after Kashmiri separatist militants killed 40 Indian troops in a suicide bomb attack on Feb. 14, prompting India to respond with airstrikes on a militant training camp in Pakistan.
More tariffs to come. U.S. President Donald Trump will make an announcement about trade with the European Union today, and there’s a good chance he will announce new tariffs of up to 25 percent on European automobiles by mid-November if the EU doesn’t surrender in trade talks. The EU offered a year ago to work with the U.S. to cut industrial tariffs to zero, but Washington wants agricultural goods to be on the table as well. Given the political sensitivity in Europe of issues like genetically modified organisms and farm subsidies, as well as the EU’s convoluted negotiating process, it is highly unlikely that Brussels could engage on these issues by November even if it wanted to. Estimates of the impact of the tariffs on both economies vary depending on how widespread they are as well as the scale of the retaliation, but the U.S. would probably see hundreds of thousands of job losses and a jump in new car prices of several thousand dollars. In Europe, Germany and Central European states like Slovakia, the Czech Republic and Hungary would be especially hard hit. UniCredit estimated in April 2018 that 25 percent auto tariffs would crop 0.56 percent off German gross domestic product and 0.18 percent off the EU as a whole. Germany’s Ifo Institute found less drastic impacts in February 2019, predicting tariffs would reduce German GDP by less than 0.2 percent if the EU did not retaliate. EU Trade Commissioner Cecilia Malmstrom said in late July that Brussels would target 35 billion euros ($39 billion) worth of U.S. goods should the U.S. levy car tariffs.
A plan for Venezuela. U.S. Commerce Secretary Wilbur Ross delivered a several hundred-page blueprint for rehabilitating Venezuela’s economy on Thursday – on the condition that Venezuelan President Nicolas Maduro gives way to opposition leader Juan Guaido. The plan calls for the lifting of commercial restrictions on U.S. companies’ activities in Venezuela, the creation of a clearinghouse to aid business investment and trade, the restoration of the central bank and the private banking sector, and efforts to restore oil production and farming. Meanwhile, U.S. President Donald Trump said, without elaborating, that he was considering imposing a blockade or quarantine on Venezuela.
- North Korea fired two more short-range missiles early Friday morning local time. South Korea’s National Intelligence Service said the launches were likely in response to the South’s deployment of new F-35 fighter jets and U.S.-South Korean joint military drills.
- Trump classified protests in Hong Kong as “riots” and said they were an internal matter for China to deal with.
- Eurozone retail sales climbed by 1.1 percent month over month in June, the biggest monthly jump since late 2017.
- U.S. President Donald Trump signed an executive order adding a second round of sanctions on Russia over the 2018 poisoning of a Russian double agent and his daughter in the U.K. The sanctions had been prepared months ago, in accordance with a 1991 law on the use of chemical weapons, but Trump had delayed implementation.
- Following a meeting in Washington on Thursday between U.S. Trade Representative Robert Lighthizer and Japanese Economic Revitalization Minister Toshimitsu Motegi, the two sides indicated that a limited trade deal could be close.
- Japan said it would cut South Korea from a list of preferred trading partners, effective Aug. 28. Seoul said it would do the same to Tokyo in response.
- The Bank of England said there is a one-in-three chance of a U.K. recession by the end of the first quarter of 2020, whether a Brexit deal is reached or not.
- The U.S. trade deficit in goods with China reached a five-month high in July.