Friday News Roundup — January 4, 2019: Shutdown Standoff on Border Security; Apple & China Market Jitters; and News You May Have Missed
Happy New Year from all of us at the Center for the Study of the Presidency & Congress. If the holiday season was supposed to be quiet, with “on earth peace and goodwill toward men,” Washington surely didn’t get the message. Just as many Americans were focusing on time with family, the political firmament was riven by shakeups on the global stage and a shutdown of domestic agencies.
Aside from turning the calendar over to a new page, we’ve seen two resignations from President Trump’s cabinet, the first announcements of (top-tier) Democratic candidates exploring presidential bids, and the installation of the 116th Congress. At the same time, the partial shutdown of the government over President Trump’s demand for $5 billion of additional funds to construct a wall across the southern border continues, with both the president and Democrats in Congress digging in and rejecting any talk of compromise. In short, we may have been on vacation last week, but it was not that relaxing in Washington.
This week, Dan takes a look at the how the new 116th Congress faces the border funding showdown and Michael goes behind the headlines on Apple’s big statement about slower growth. In addition, keep an eye on this space over the next couple weeks. We are welcoming some new faces to the CSPC Policy Team and we are excited to introduce them to you.
As 116th Congress is Seated, Border & Shutdown Deal Looks Elusive
Dan Mahaffee
Yesterday, while the 116th Congress was seated and Nancy Pelosi returned to the Speakership, the partial government shutdown entered its thirteenth day. While the GOP-led Senate of the 115th Congress had put together an 11th-hour spending package to keep the government open, the Trump administration — increasingly egged-on by right-wing media — decided to embrace the end-of-year shutdown for the sake of a border wall. Measures to fund the government without funding for border security were passed by the newly-seated House on Thursday evening, but such measures appear dead-on-arrival in the Senate with President Trump already threatening a veto.
Be it “wall” as the Department of Homeland Security strangely calls it, or steel slats, or a range of border measures, it is clear that President Trump and key advisors like Stephen Miller see immigration—and the wall in particular—as a wedge issue that they can use to fortify their base and sow doubts about Democratic policies in advance of 2020. Nevermind the fact that the Trump administration was offered $25 billion in border security funding as part of a deal that would have provided a long-term path to citizenship for the “Dreamers” under DACA protection. However, the White House was unwilling, or unable, to whip enough Republican Senators to make this deal happen.
The White House now considers such an offer moot due to court rulings that limit presidential flexibility on DACA, but it has also boxed itself in by chorus of Fox News and talk radio commentators who framed any immigration deal as part of some greater demographic battle for America’s future. Democrats, on the other hand, feel equally principled in their approach to border security, following the controversy of the Trump administration’s family separation policy and a sense that the 2018 midterms were a referendum on such hot-button issues. Getting outside of the “Beltway bubble” during the holidays, I found that neither party’s leaders seem to represent how Americans really feel about immigration.
At the risk of sounding like Tom Friedman at a dinner party, my entirely anecdotal and conversational findings suggest a more nuanced Main Street view on immigration. On one hand, they don’t want to see the cruel division of families or the sudden deportation of undocumented immigrants who have long been law-abiding members of their community. At the same time, they want to see a secure border and the enforcement of the laws — especially if there is a compromise for reformed laws that protect those who have been law-abiding, despite their illegal entry, and punitive measures for employers that have repeatedly hired undocumented workers. The brutality, here and in Central America, of gangs like MS-13 shocks many. They understand the need to bar such criminals from entry and deport them, yet wonder why the government thinks that ICE sweeps of immigrant high schoolers is the answer. The opioid epidemic has many concerned about drugs, and even if the highly potent Fentanyl is coming from China, the southern border is still seen as a dangerous source of cartel trafficking.
Polling tends to support my anecdotal findings, as there is still-growing support for legal immigration, legal status for those brought here as children, and stronger border security and merit-based immigration.
President Trump could work with Congressional leaders to achieve a “Nixon to China” measure on immigration that solves the shutdown, border security, and these issues — but the past few weeks suggest otherwise. It appears that the White House is far more concerned that right-wing media could dislodge the Trump base and doom his 2020 strategy of energizing his base while portraying Democrats as out-of-touch to secure Republicans and independents who disapprove of other parts of the Trump record.
The President wants our borders and nation to be secure, but is perfectly comfortable with those protecting our nation going unpaid. The Democratic leadership has been happy to let the president own this shutdown. Still, they need to spend more time highlighting that the White House could have taken a robust border security deal earlier in 2018.
They risk falling into the White House’s immigration-as-a-wedge strategy of labeling Democratic leaders in favor of “open borders” when Nancy Pelosi calls the proposed wall “an immorality” and an “abolish ICE” movement grows amongst the progressive base and caucus. The Democratic messaging needs to be clear, simple, and demonstrate tough border security combined with humane immigration reform. Otherwise, their statements, especially when made devoid of context in campaign ads, will be an albatross when they try to convince 2020 voters that they can be better than Trump on immigration and security.
For anything to be resolved, it has to thread the needle of a Democratic House, a GOP Senate, and the whipsawing of the Trump administration. If compromise and common sense are going to somehow return to Washington over the coming months of divided government, the early portents aren’t promising.
Apple Profit Warning Spooks Investors
Michael Stecher
The fourth quarter was a bad one in the US equities markets. After hitting an all-time high in late September, investors got skittish about the effects that tariffs were having on consumer spending and global growth appeared to slow. The last week of 2018 was a particularly wild ride: the S&P 500 fell by 2.71% on Christmas Eve, only to rally almost 5% on Boxing Day. Like me, you probably received a news alert push each day that week at around 4:01pm EST when you really wanted to be spending quality time with your loved ones. The reasons for that last roller-coaster ride are probably technical in nature — check out this piece for an overview (but whatever you do, do not follow the author’s lead and use the Dow Jones Industrial Average as a proxy for the equity market as a whole. The DJIA is too small a slice of the market and the calculation of its price is fundamentally illogical. Use the S&P 500 instead; it is much better. As a recovering equity derivatives structurer, I assure you, dear reader, this is the hill I want to die on) — but stock market participants were clearly getting anxious about what 2019 holds.
Into that mix came an announcement from Apple that they were expecting lower revenues in the fiscal quarter that ended on December 29, 2018 than they had initially hoped. In his note to investors, Apple CEO Tim Cook focused on two areas that can be summed up in a single word: China. Apple joins a long list of companies who sell products in China who have warned that sales growth is slowing and professional China watchers have started to sound alarm bells about a slowing economy. Tim Cook specifically highlighted the tariffs placed on Chinese goods imported into the United States, but it is unlikely that is the whole story.
In its last earnings call, Apple highlighted how slow growth in emerging markets was hitting their bottom line. They mentioned Russia, India, Turkey, and Brazil as the markets of concern, and China clearly belongs on that list too. Some of this is to be expected. When interest rates are low in developed economies like the United States and Europe, investors look to countries with riskier investment profiles to goose returns. When rates rise, that money gets parked closer to home. That is especially true when people start to worry about economic growth: they favor safer assets. As foreign investment flows out, financial conditions tighten, individuals and businesses have a harder time borrowing, and consumers have less to spend. This has been clear in Turkey for months, China, with a far larger domestic market and less transparent financial reporting, appears to be following this trend as well.
But there are also less macroeconomic reasons why Apple’s revenue growth is slowing. Apple’s performance is dominated by iPhone sales — in fiscal year 2018, iPhone sales represented nearly 63% of the company’s total net sales — and iPhones are pretty expensive. They have actually been getting more expensive over time: the average iPhone sold has increased in price by 40% since 2014. The incentives offered for upgrades by cell phone carriers have become less generous and the performance improvements between one year’s model and the next have become less obvious to the average consumer. This is driving consumers to go slower with upgrades. In 2014, Americans waited 2 years to upgrade their smartphones, now it is nearly 3 years, choosing to hold on to their existing tech and replace failing batteries if necessary rather than shelling out for an upgrade.
The Chinese market also has some unique features that hurt Apple. For example, American users might prefer the iOS-only iMessage for its seamless integration with the rest of the Apple ecosystem or superior encryption to text messages (which have none, and really we should all prefer encrypted services, like iMessage, WhatsApp — if you feel comfortable with its corporate parent Facebook — or Signal). In China, users tend to use WeChat, which has its own integrative ecosystem, built-in government censorship, and which can be used on any device. As a result, iOS is less “sticky” there and the market has concentrated in lower-priced Chinese brands like Huawei or Oppo, especially as they have rolled out similar hardware and features.
With four possible explanations for Apple’s disappointing iPhone sales in China — tariffs, macroeconomics, expensive products, and a less customer loyalty — reality is almost certainly more complicated than the note Tim Cook sent to investors. Apple’s current woes, however, also point to deeper issues with the global economy. At CSPC, we spend a lot of time looking at how US companies have changed their China focus in recent years. China used to be a low-cost manufacturing hub, but it is now a major market for sales. This makes the transmission vehicle from a potential slowdown in Chinese growth to a recession in the United States clearer: sagging sales in China will damage US corporate profits, slow job and wage gains, and reduce consumer spending. As Chairman of the White House Council of Economic Advisors Kevin Hassett put it on CNN on Thursday morning, “a heck of a lot of US companies” will feel the pain from a slowing China. It is less than clear, however, why he framed it as a good thing.
News You May Have Missed
North Korean Diplomat Says “Ciao” to the Hermit Kingdom
According to South Korean media, North Korea’s acting ambassador to Italy has gone into hiding and seeks political asylum in a western country. Aside from a diplomatic black eye for North Korean leader Kim Jong-un, the defection would likely be a major intelligence boon for the United States and its allies, who have a difficult time getting accurate assessments of the political situation in North Korea, at a very serendipitous time.
American Businessman Arrested in Russia on Espionage Allegations
Paul Whelan, an ex-Marine and corporate security professional, was arrested in Russia on December 28 on charges of spying. It is pretty unlikely that Mr. Whelan has any connections to US intelligence agencies as they tend to be very careful about operating in “denied environments” like Russia. Intelligence officers posing as diplomats have immunity from prosecution and it is difficult to understand why a US intelligence service would risk an officer by putting him in Russia without that safety net. It seems much more plausible that Russia has taken Mr. Whelan hostage (like Turkey did with Andrew Brunson and China is doing with Canadian citizens), perhaps in an attempt to leverage the release of Maria Butina, the Russian agent who was trying to develop links to the National Rifle Association and other right-wing political organizations.
State Department Updates Travel Warning for China
In the first of three China stories that you may have missed, the U.S. State Department updated its “Level Two” travel warning related to China, urging “increased caution” for Americans traveling to China “due to arbitrary enforcement of local laws as well as special restrictions on dual U.S.-Chinese nationals.” This reflects concerns over the arbitrary detention policies of the Chinese government, China’s policies refusing to recognize dual-citizenship for those with Chinese citizenship (and the resulting denial of consular assistance from the country of second citizenship), and blanket “exit bans” which can prevent a traveler from leaving China for an indeterminate period of time.
China Lands Rover on Far Side of Moon
China was already one of only 3 countries to land an object on the moon, but this week their space program made history by landing a probe on the side of the moon that faces away from Earth. While this is not something that the United States would be unable to do (and probably could have done decades ago), it represents an impressive technical achievement that required many of the steps necessary to conduct exploration missions on other solar bodies.
Chinese Prototype Electromagnetic Railgun Spotted at Sea
Considering more terrestrial concerns about China’s capabilities, defense analysts noted that China’s seaborne testbed electromagnetic railgun has been observed during sea trials. Instead of using traditional chemical propulsion and warheads — i.e. gunpowder and explosives — such a gun uses highly energized electromagnets to propel projectiles at greater ranges and speeds than traditional naval artillery. The United States had long been testing such a weapon in classified naval research, but efforts to field the technology had run into technological and budgetary obstacles. If China is able to successfully field the technology, it would continue to raise concerns that its military capabilities are rapidly improving, as many U.S. naval analysts believed China could not field such a technology until 2025.
The views expressed by contributors are their own and not the view of CSPC.
