Looming tariffs. Chinese Vice Premier Liu He will be heading back to Washington on Thursday to try to salvage trade talks after the White House threatened a dramatic increase in tariffs over the weekend. On Monday, U.S. trade chief Robert Lighthizer and Treasury Secretary Steven Mnuchin provided some clarity on what prompted U.S. President Donald Trump’s threat, hinting that the hawkish elements in Beijing had prompted Liu’s team to renege on commitments to enshrine new protections for foreign firms in law. Publicly, at least, Beijing is pledging to stand firm. This is probably due, in part, to the stimulus-aided short-term stabilization of the Chinese economy, reducing Beijing’s fear of new tariffs. But that the problem appears to be centered on China’s willingness or ability to implement new laws also suggests Beijing’s hands may indeed be tied. Even with a rubber stamp legislature at its beck and call, steep political and economic constraints mean Beijing doesn’t exactly have a free hand to do whatever it wants at home. Whatever the U.S. is asking for, and whatever Beijing apparently agreed to do before, China just may have concluded that the domestic political and economic risks aren’t worth it. We’ll see if the jump from 10 percent tariffs, which haven’t done major damage to the Chinese economy, to 25 percent, which very well might, changes Beijing’s cost-benefit analysis.
Turkey’s canceled results. Turkey’s national election board has canceled the results of Istanbul’s March 31 local elections, which appeared to reveal flagging support for President Recep Tayyip Erdogan’s Justice and Development Party, or AKP. The AKP lost the election to the Republican People’s Party, the largest opposition party in Turkey. The margin was slim, though, and the AKP challenged the outcome, claiming that the AKP’s go-to bad guys, the Gulenists, were involved in election fraud that swayed the votes away from the AKP. (Fethullah Gulen is a former ally turned political rival of Erdogan who lives in exile in Pennsylvania.) A new election is set to take place on June 23, but Istanbul residents gathered to protest the election board’s decision to cancel the results.
Kiev’s trade losses. Ruptured trade relations with Russia have hurt Ukraine badly. According to the economic policy department director of the Federation of Employers of Ukraine, economic losses stemming from declining trade were 13 times greater in Ukraine than in Russia. He said that the deterioration of relations cost Ukraine 10 percent of gross domestic product, while Russia lost less than 1 percent of GDP. Russia remains Ukraine’s main trading partner, so a complete collapse of trade between the two could lead to Ukraine’s collapse. Ukraine’s former economy minister, Viktor Suslov, told NewsOne that the cessation of military cooperation between the two countries actually helped Russia, which was able to develop a number of new industries.
Pompeo skips Berlin. The U.S. State Department abruptly canceled Secretary of State Mike Pompeo’s visit to Berlin, where on Tuesday he was supposed to meet with German Chancellor Angela Merkel and Foreign Minister Heiko Maas. A State Department spokesman cited “pressing issues” but did not elaborate. The announcement comes just after European diplomats expressed disapproval of the U.S. decision to end waivers for Iranian oil imports and warned that Iran appears likely to withdraw from parts of the current nuclear deal. There have been conflicting statements coming out of Tehran over its commitment to the deal. It is unclear whether Pompeo will still visit London and Greenland this week as planned. A Russian Foreign Ministry spokeswoman said Tuesday that Pompeo will be in Sochi on May 14 to meet with Russian Foreign Minister Sergey Lavrov.
Moderating growth in Europe. The European Commission revised its 2019 growth forecasts on Tuesday. In February, the commission had projected 1.5 percent growth for the European Union, but it now expects just 1.4 percent growth. The forecast for the eurozone also fell by 0.1 percentage point, to 1.2 percent. Estimates for 2020 were lowered by the same margin, to 1.6 percent for the EU and 1.5 percent for the eurozone. Much of the slowdown is due to Germany, where industrial orders in March grew by just 0.6 percent after falling by 4 percent in February and 2.1 percent in January. For the quarter as a whole, manufacturing orders were down 4.1 percent, and the German Economy Ministry said it expects the sector to remain subdued for months. One other item related to Germany that caught our eye concerns the banking sector. During a call with journalists on Tuesday, an executive from Germany’s Federal Financial Supervisory Authority, or BaFin, said the watchdog and the German central bank in April began surveying almost 100 financial institutions for “a possible erosion of lending standards.”
Financial risk in the U.S. The U.S. Federal Reserve identified high stock prices and heavy corporate debt loads as potential risks to the U.S. financial system. The Fed’s latest financial stability report shows leveraged lending (loans that result in high indebtedness for a company) totaled $1.1 trillion at the end of 2018, a 20 percent year-on-year increase. It noted that risks related to these loans have intensified, and though current default rates remain low, they are not immune to weaker economic activity. It’s something to keep in mind ahead of the next recession, whenever it may come.
- Russia’s Hmeimim air base in Syria came under fire on Monday. Russian news service TASS claimed that 36 rockets were fired on the airbase from Idlib, implying that Hayat Tahrir al-Sham was responsible for the barrage.
- Libyan Prime Minister Fayez al-Sarraj warned Italy’s government that the fighting over Tripoli could send hundreds of thousands of refugees fleeing for Europe.
- The Libyan National Army, which is trying to take Tripoli from the U.N.-recognized Government of National Accord, said it shot down one of the GNA’s Mirage F1ED jets and detained its Portuguese pilot.
- South Korean intelligence reported that Moscow understands and supports Pyongyang’s interpretation of what the denuclearization process entails. North Korean leader Kim Jong Un also requested that his Russian counterpart Vladimir Putin communicate this to the U.S. and China.
- The U.S. today resumed an anti-dumping investigation against imported tomatoes from Mexico, ending 23 years of suspension agreements on the matter.
- European Commission forecasts show Italy blowing past European Union budget deficit rules in 2020, with the deficit hitting 3.5 percent of GDP – half a percentage point more than the rules allow.
- The Greek government called a confidence vote for Friday.
- Talks are getting underway on Tuesday in Northern Ireland on resolving the dispute that brought down the devolved government more than two years ago.
- The Central Bank of Venezuela authorized both public and private banks to exchange foreign currencies, including U.S. dollars, for the first time in 16 years. There are no specified limits on the amount that can be exchanged, but banking authorities will regulate exchange rates and track operations.
- Saudi Arabia’s Ministry of Hajj and Umrah announced that Qatari pilgrims would be allowed to enter the country via Jeddah and Medina and allowed to travel to Mecca.