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Daily Memo: The Opening Salvo of a Trade War, the New Normal in Nicaragua

All the news worth knowing today.

|July 6, 2018

By GPF Staff

Today is the first day of what China’s Commerce Ministry called “the largest trade war in economic history.” U.S. tariffs went into effect at midnight, and China has responded in kind. Given the size of the two economies, the value of the exports targeted is unsubstantial – $34 billion on both sides – but the United States has said it may impose more. In a separate but related move, a second phase of Mexican tariffs against U.S. goods went into effect Friday as well. Mexico’s tariffs are a response to U.S. steel and aluminum tariffs, which were applied with no particular target in mind. (Tariffs against China have specific targets.) Trade wars are much more difficult to measure than real wars. Wins and losses aren’t assessed after a single battle. The economic effect is measured in months, even years. There will be casualties on both sides, though, some predictable and some not, and it will all come down to which side is better prepared to weather the storm.

Germany’s largest banks are losing value by the day. At least, global markets think so. Commerzbank, Germany’s second-largest bank, may soon be removed from the benchmark DAX index, a grouping of 30 blue-chip stocks. Meanwhile, Germany’s largest bank, Deutsche Bank, may not be long for the Euro Stoxx 50 benchmark. Deutsche Bank saw its share price spike momentarily in response to rumors that it would be bought by JPMorgan Chase, but the rumors have since been denied. This comes just a week after Deutsche Bank failed the second stage of a U.S. stress test because of “material weaknesses in capital planning.” Decisions on whether to keep the banks on the indexes will come in September. Granted, share price is not everything, and markets are fickle. Most of the time we pay little attention to stock market gossip. But when Germany’s largest banks are rapidly losing value, we pay attention.

China is buying influence in Africa. Its interest and investments there are no secret, of course, as it has been trying to secure access to strategic resources in Africa for years. But this year, China’s Ministry of National Defense hosted the first China-Africa Defense and Security Forum, hosting representatives of 50 African countries and the African Union. The stated goal of the conference, which began June 26 and runs to July 12, is to build Africa’s defense capacity and increase China-Africa defense and security cooperation. There are plenty of reasons to be skeptical about this – after all, “Africa” is a continent, not a grouping of nations with strategic interests in common, and China lacks the kind of force projection capability necessary to be active so far from its shores. The story here is that China imagines a future in which it doesn’t.

Rounding out the week is a disturbing question: Is Nicaragua the next Venezuela? Violence broke out there in April after security forces tried to quell anti-government protests, which were a response to the president’s proposal to overhaul the welfare system. Not only has the violence continued, but the government has called in paramilitary groups for help. Some media reports suggest political organizations on the ground have asked the military to intervene on their behalf. So far, the army has refused to oblige them, but the pressure is mounting. (Then again, pressure has been mounting in Venezuela for years.) Is this the new normal in Nicaragua? What happens there matters because if the crisis comes to a head it will almost certainly affect northbound migration flows, potentially destabilizing Central American stability, such as it is, and challenging U.S. policy, which so far has been limited to sanctions.

Honorable Mentions

  • Germany’s political melodrama continues. There is a new compromise on what to call transit centers and where to locate them, and the interior minister raised the possibility that they won’t be practical, whatever they are called. Merkel looks secure for now, but this issue hasn’t gone away.
  • Syrian rebels are negotiating with Russia in southern Syria for a fifth time as the Syrian army continues its incursion into one of the last rebel strongholds. The latest offensive has displaced hundreds of thousands of people but hasn’t yet become a second Aleppo – not yet, anyway.
  • Chinese President Xi Jinping has been invited to visit Pyongyang on Sept 9. Speaking about North Korea, he said it would take a long time to denuclearize – which is the opposite of what the U.S. had in mind.
  • Macedonia’s parliament has ratified the Macedonia-Greece name agreement. There are still several things on the Greek side to overcome, but progress is progress.