In Other News: China Undermines Hong Kong, Brazil’s President Under Fire, Mexico & More – May 29, 2020

May 29, 2020

China’s approval of a new Hong Kong national security law severely undermining the island’s autonomy will test U.S. willingness to take punitive action against one of its largest trading partners, and has the potential to scuttle the trade deal signed by the two countries in January of this year. President Trump will hold a press conference today to address the issue, but has thus far left the public guessing as to how the U.S. will respond. One potential U.S. response is limited sanctions that signal disapproval without imposing any real pain. At the more aggressive end of the spectrum, the U.S. could constrain or even revoke Hong Kong’s special trading status with the U.S., which rests on the premise of Hong Kong’s autonomy from mainland China. The first approach would likely anger domestic proponents of a harder U.S. line on China and signal internationally that the U.S. is loath to take decisive action against China. The second would underscore U.S. resolve, but would also threaten Hong Kong’s status as a global financial center. The impact of the more aggressive response would be felt not only by Beijing, but also by Hong Kong locals who have turned out en masse for months to demonstrate against the mainland, and by other regional trade partners impacted by a major shift in Hong Kong’s status. A major upset to global trade could hardly come at a worse time, with economies reeling from shutdowns imposed to slow the spread of Covid-19. With an election nearing, it is hard to say which political message the administration will consider more pressing – prioritizing a return to economic growth or standing up to our most powerful rival for global preeminence.

If Brazilian President Jair Bolsonaro wasn’t taking the coronavirus seriously before, he should be now, as the pandemic is serving up a toxic mix of social, economic, and political uncertainty in Brazil and the U.S. government has added Brazil to the travel ban list. This week, the Trump administration imposed restrictions on entry into the United States from Brazil due to the increasing numbers of Covid-19 cases there. Brazil now has the second-largest number of confirmed coronavirus cases after the United States, with approximately 400,000 cases and 25,000 deaths. Health experts believe Brazil could see 80,000 deaths by August. President Bolsonaro has been critical of social distancing and shutdown measures implemented by state governors in the absence of federal government mandates. He has called the lockdowns “poison” to the Brazilian economy, making him the latest politician criticizing the cure for being worse than the disease. But Brazilians are fed up with Bolsonaro and his lack of planning or coordinated response to the pandemic. Recent polling by Datafolha indicates that 60% of Brazilians are in favor of more restrictive lockdown policies and a stronger response on the part of the Brazilian government to administer relief. Meanwhile, Bolsonaro has seen a rotating cast of advisors and ministers in the past two months – Health Minister Nelson Teich resigned after less than four weeks in the position – and calls for Bolsonaro’s impeachment over corruption allegations continue to gain voice. The IMF expects the Brazilian economy to contract by 5%, and the Brazilian real has lost 30% of its value since the start of the year. Brazil’s high debt levels and skepticism about its ability to service that debt could negatively impact global financial markets. Brazil is the world’s eighth-largest economy and makes up more than half of the total economic activity in South America. Bolsonaro may be able to hang on with support from the military, but his management of this public health crisis and the economic fallout will leave him vulnerable when Brazilians go to the polls in the 2022 presidential election.

Mexico is sending mixed messages, with President López Obrador back out on the road touring the country even as the death toll from the pandemic continues to rise. The Mexican President has claimed that the virus has been “tamed” and started the process of reopening the country. President López Obrador is eager to bring the Mexican economy back online given that economists predict GDP to contract as much as 7% this year. In his push to restart the economy, López Obrador has touted the new NAFTA deal, known as the United States Mexico Canada Agreement (USMCA), as a catalyst for renewed growth when the deal goes into effect on July 1. He has also said that China’s slowdown will benefit Mexico, as investments and jobs may now go to Mexico instead. López Obrador has criticized past Mexican administrations for outward-looking economic policies he believes have left Mexico poor, unequal, and corrupt, but the reality is that economic integration with North America will be crucial as the country digs out from the coronavirus crash. Furthermore, statistics about Mexico’s outbreak are at odds with his claim that the virus is under control. Coronavirus cases are rising and so is the death toll. Mexico has confirmed approximately 81,400 cases and 9,000 deaths, but health care experts believe the real numbers are much higher. Hospitals are at capacity and doctors and nurses are vulnerable. Press reports indicate that approximately 11,000 Mexican health workers have been infected, making it one of the highest rates in the world. On Tuesday, the World Health Organization (WHO) said the Americas are the new epicenter of the pandemic.

The U.S. is ratcheting up pressure on Iran by ending sanctions waivers that allow Russian, Chinese, and European companies to work on Iranian nuclear sites, provide enriched uranium for use in Iran’s nuclear sector, and move spent reactor fuel out of Iran. The waivers were originally intended to make it more difficult for Iran to use its facilities to manufacture nuclear weapons, both by giving international partners access to operations at the sites, and by reducing Iranian incentives to enrich its own uranium. U.S. Secretary of State Mike Pompeo said that move was in response to continued Iranian nuclear escalation, though there appears to be some debate within the administration about how effective it will prove to be in persuading Iran to dial back its nuclear ambitions. Iran’s Atomic Energy Organization has responded by saying that this will not impact its nuclear program, though there is real potential for a more provocative reaction on Iran’s part, possibly carried out against U.S. interests by regional proxies.