Dispatch from Washington: July 2023


Inflation in the American economy continues to cool—the Federal Reserve has paused interest rate increases but a robust labor market indicates that more hikes are likely. President Joe Biden traveled to Europe for the NATO summit and made visits to the United Kingdom and Finland on the margins. The US and EU finalized a data transfer arrangement, ending years of legal uncertainty. United States Trade Representative Katherine Tai delivered a major speech at the National Press Club. Mexico has surpassed China as the United States’ largest trading partner. The White House is likely to impose new restrictions on exporting chips to China. There were a series of high-profile visits to China from senior Biden administration officials, with more expected over the coming weeks and months.  The United States Surpreme Court ended their term and released several controveral rulings.

Inflation Continues to Cool – Approaches Fed Target Rate

 The most recent U.S. Department of Labor Consumer Price Index (CPI) showed inflation falling to 3% in the 12 months through June, the lowest rate since March of 2021. Overall inflation has dropped sharply and this summer there is a vastly different economic picture then last summer when inflation peaked at 9%, a 40-year high—the latest data reflects that inflation has declined for 11 months straight. Lower energy prices are a major factor pulling down overall inflation, yet the data shows there are still areas of the economy where consumer prices remain stubbornly high, and food prices continue to accelerate faster than other categories. Policymakers at the Federal Reserve are still hoping to cool the overall inflation rate to 2%, the historic target. 

Fed Pauses Rate Hikes…For Now

Since early 2022, the Federal Open Market Committee (FOMC) has made aggressive changes to U.S. monetary policy in an attempt to lower inflation to its long-term target of 2%. On June 13 and 14, the Fed held its regularly scheduled policy meeting and announced a pause in interest-rate hikes, leaving rates at 5% to 5.25%. This is the first pause after 15 months of consecutive increases. In a press conference following the meetings, Federal Reserve Chairman Jerome Powell said that the central bank is taking a “wait and see” approach and that “nearly all committee participants view it as likely that some further rate increases will be appropriate this year…It may make sense for rates to move higher but at a more moderate pace.” The Federal Open Market Committee is scheduled to meet on July 25 and 26 and Powell said that “we have made no decision about a hike or pause at the July meeting.”

Latest Jobs Report is Less Positive than Expected, but Labor Market Remains Strong

The June jobs report showed that hiring slowed slightly in the previous month with the Department of Labor finding that employers added 209,000 jobs in June. This is the 30th consecutive month of gains in American payrolls and the unemployment rate is currently 3.6 percent. This is below expectations; economists expected the U.S. to add roughly 240,000 jobs. According to the Labor Department, wage growth has also remained strong, with earnings rising 4.4 percent over the past 12 months and outpacing the rate of inflation. President Biden celebrated the report, with a White House statement saying that “This is Bidenomics in action,” and stressing that unemployment has now stayed below 4 percent for the longest stretch of consecutive months since the 1960s. The jobs numbers are considered a key in determining where Federal Reserve monetary policy is headed, and policymakers see the strong employment market as helping drive inflation. The Fed is using interest rate increases to try to cool the economy and many expect another rate increase when policymakers meet again in late July.

Biden Travels to Europe, Attends NATO Summit

Ahead of the NATO Summit in Vilnius, Lithuania, President Biden stopped over in the United Kingdom for consultations with British Prime Minister Rishi Sunak declaring that he “couldn’t be meeting a closer friend and a greater ally” and that the U.S. and the United Kingdom are the “two of the firmest allies” in NATO. The President also met King Charles at Windsor Castle, their first meeting since the King was formally crowned in May.

In Vilnius, the leaders of all 31 NATO members attended the summit, as well as the leaders of Sweden, South Korea, Australia, Japan, New Zealand, and the European Union. A major development immediately before the summit was Turkey acquiescence to Sweden’s bid to join the alliance—after receiving concessions on issues ranging from counterterrorism to the transfer of F-16 fighter jets, Ankara provided a green light for Sweden to become the 32nd member of NATO. Measures regarding Sweden’s joining the alliance must still pass the legislatures of the 31 current NATO members. The war in Ukraine loomed large over the gathering and NATO and the leaders pledged their continued support for the war effort. Importantly, while NATO leaders expressed support for Ukraine joining the alliance, with the summit declaration clearly stating that “Ukraine’s place is in NATO,” they declined to provide a timeline, prompting Ukrainian President Volodymyr Zelenskyy to lash out at NATO for not inviting Ukraine to immediately join. Nevertheless, Ukraine did receive considerable long-term security guarantees and a commitment to bolster the country’s economic stability. After the conclusion of the NATO summit leaders from the Group of Seven (G-7) stood alongside President Zelenskyy and announced a major security assurance program as well as technical and financial support.

President Biden closed out his European trip with a visit to Helsinki, Finland. Joining Nordic allies for a summit, Biden’s visit was a symbolic way of marking Finland’s recent accession to the alliance as well as welcoming the expected accession of Sweden into NATO. 

U.S. and EU Finalize Data Transfer Agreement

The United States and the European Union finalized a new data transfer deal after years of legal uncertainty. On July 3, 2023, Secretary of Commerce Gina Raimondo announced that the U.S. fulfilled its commitments that were prerequisites to the implementation of the deal, called the EU-U.S. Data Privacy Framework. Preceding the announcement from the Department of Commerce, Attorney General Merrick Garland designated the European Union (EU) and three additional countries that make up the European Economic Area (EEA) as ‘qualifying states’ for purposes of implementing the redress mechanism established under President Biden’s October Executive Order on Enhancing Safeguards for U.S. Signals Intelligence Activities. On July 3, 2023, the Office of the Director of National Intelligence (ODNI) confirmed that the U.S. Intelligence Community had adopted policies and procedures pursuant to the Executive Order. The agreement was sealed on July 10 when the European Commission adopted of a so-called adequacy decision, which recognized the U.S. as a country with sufficient protection for Europeans’ personal data that’s sent to the U.S. The Department of Justice’s designation took effect upon the adoption of the adequacy decision. This agreement ensures that data from American technology companies such as Meta and Google can continue flowing between the United States and the European Union.

USTR Marks Fundamental Shift in U.S. Trade Policy

In a major speech before the National Press Club on June 21, United States Trade Representative (USTR) Katherine Tai declared a new approach to trade policy. Ambassador Tai’s remarks built on National Security Advisor Jake Sullivan’s recent speech on renewing American economic leadership, and highlighted how the U.S. trade agenda is prioritizing resilience in the global economy. In what some commentators described as an “impassioned plea for protectionism,” Tai flipped the old paradigm of negotiating traditional tariff-cutting agreements to promote the interest of big corporations, to a policy orientation of “making it easier for our smaller companies to thrive, to grow into medium businesses.” Rather then getting access to cheap imported consumer goods, the Biden administration wants to raise standards for workers by using trade policy “to create a race to the top,” conceding that consumers will not benefit from “artificially low costs and low prices” yet will experience more “US-based production,” and a “vibrant middle class.” On the international front, Ambassador Tai addressed “the dangers that offshoring and the concentration of production outside our borders — and in the People’s Republic of China in particular — present to U.S. national security.” The administration has taken a number of actions to create barriers to trade with China in goods that may threaten national security (see next section) and Tai also accused China of using “economic coercion” to bend countries to their will. Ambassador Tai’s remarks, as well as the aforementioned speech by Jake Sullivan, and an April speech by Treasury Secretary Janet Yellen, are all part of a concerted approach by the administration to reshape the international trade and economic arena.

Mexico Passes China as America’s Top Trading Partner

According to new U.S. Census Bureau figures and research from the Federal Reserve Bank of Dallas, after narrowly lagging behind China in 2022, Mexico officially became the U.S.’s largest trading partner at the start of 2023. China had been the U.S.’s top trading partner since 2014, when it surpassed Canada. However, the current rise of Mexico reflects a shift in the shape of the global economy; “nearshoring” is a critical part of the emerging global trading environment as more U.S. companies find alternatives to China and global manufacturing is shifting away from low prices and greater efficiency to something more resilient to shocks. Politics is another factor driving this trend—the U.S. has a fractious trade and economic relationship with China. While the Biden administration is pushing to improve the bilateral relationship with China, with recent visits by Cabinet Secretaries and senior administration officials, the administration has not removed the tariffs on Chinese goods imposed during the Trump presidency. American consumers will see the price of goods rise as companies reshore their supply chains and cut Chinese imports, but this is part of the administration’s overall strategy to reshape global trade (see previous section). 

Chip War with China Escalates, More Curbs Coming

The White House is considering imposing new bans for America’s leading technology companies on exporting chips to China, citing concerns over the possibility of their use in the military and cyber industry. Specifically, the Department of Commerce is considering new restrictions on exports of artificial-intelligence (AI) chips. This move would follow earlier export controls on advanced chips and chip-making equipment announced in October. Those earlier rules require U.S. chip-makers to obtain a license from the Commerce Department to export certain chips used in advanced artificial-intelligence calculations and supercomputing. Some chip-makers, namely Nvidia, responded to the October restrictions by producing a version of its AI chips for the Chinese market—replacing the A100, which is widely used in data centers to do AI computations, with one called the A800 that fell below performance thresholds. Advanced Micro Devices (AMD), another industry leader in advanced semiconductors, similarly recallibrated manufacturing of chips to maintain access to the Chinese marketplace by producing a version of its chips that did not need a licence for export. The new regime would ban the sale of the lower capacity chips without a license, such as the A800, to further crimp China’s ability to build its AI capabilities. The Commerce Department could make the announcment as early as July. U.S. officials and policymakers increasingly see AI through a national-security lens and they have persuaded the Netherlands and Japan to work with them to unify the list of controlled items.

Blinken, Yellen, Make Visits to China in an Effort to Easy Tensions, Kerry to Soon Follow

There were a series of high-profile Biden Administration officials traveling to China over the last month. In mid-June, Secretary of State Antony Blinken traveled to Beijing for meetings with President Xi Jinping, Director of the CCP Central Foreign Affairs Office Wang Yi, and State Councilor and Foreign Minister Qin Gang. Blinken’s visit, delayed after the Chinese spy balloon episode earlier this year, came at a point of high tension and amid increasing worries by other countries in the Indo-Pacific region that the United States and China have entered into a new Cold War. Beyond the substance of the high-level discussions, the trip carried great significance as Secretary Blinken became the first top U.S. diplomat to visit China in five years. Blinken also meet with Yi on the margins of the Association of Southeast Asian Nations (ASEAN) gathering of foreign ministers in Jakarta, Indonesia on July 13—in what was describes as “candid and constructive” talks they discussed a range of issues including fentanyl, hacking and Beijing’s military activities.

Weeks after Blinken’s visit, Secretary Yellen also traveled to China for high-level consultations. Yellen’s primary goals were to meet the new team of senior Chinese economic officials and to ease what have been increasingly rising tensions. While Yellen used softer language for America’s economic strategy toward China, she did not shy away from criticizing Chinese treatment of U.S. companies, specifically calling out Beijing stating she’s “been particularly troubled by punitive actions that have been taken against U.S. firms in recent months.” There were no new policies announced by the U.S. or China during the visit and one can foresee further conflicts over trade, investment, and technology between the world largest economies. John Kerry, the Special Presidential Envoy for Climate and former Secretary of State, is scheduled to visit China July 16-18 and there will be additional opportunities for high-level engagement over the coming months to cool tensions and correct course on what is, arguably, the world’s most important bi-lateral relationship as Commerce Secretary Gina Raimondo is likely to visit China by year’s end and President Xi is expected to attend the APEC Summit in San Franscisco, CA in November. Nevertheless, there is a great deal of mistrust on each side and, while a visit of this nature opens the door to to increase the frequency and broaden the scope of high-level dialogues, it is unlikely to change the intensely competitive nature of U.S.-China relations. The level of tension in the relationship is significant, many members of Congress believe that China poses an existential threat to the United States and China-based hackers recently gained access to the emails of a number of senior officials, further complicating the relationship. 

Surpreme Court Term Ends, Public Confidence in the Court at a Historic Low

The United States Supreme Court wrapped up its most recent term on June 30 and released a number of high-profile decisions in the closing days. In Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, and Students for Fair Admissions, Inc. v. University of North Carolina , the justices ruled, in a 6-3 decision, that the admissions programs used by the University of North Carolina and Harvard violate the Constitution’s equal protection clause, which bars racial discrimination by government entities.  This ruling effectively will end the use of affirmative action in college admissions. The Court also took on the issue of religious liberty and LGBTQ+ rights in 303 Creative LLC v. Elenis, which involved a website designer who challenged a Colorado law prohibiting businesses from discriminating against LGBTQ+ customers. A six-justice majority agreed that Colorado cannot enforce a state anti-discrimination law against the business who does not want to create wedding websites for same-sex couples. The Supreme Court rejected a controversial Trump-backed election law theory, called the independent state legislature theory, in Moore v. Harper. President Biden’s student loan forgiveness program was also struck down by the Supreme Court in a 6-3 ruling in Biden v. Nebraska. Increasingly, the American public no longer believes the Supreme Court is impartial and Americans’ confidence in the court has dropped sharply over the past year.

“Who’s Who” – Personnel Updates from the Biden Administration

Department of AgricultureXochitl Liana Torres Small was confirmed as Deputy Secretary.

Department of DefenseDerek Chollet, currently State Department Counselor, has been nominated to serve as undersecretary for policy at the Pentagon.

Department of EnergyGiulia Siccardo is the Director of the Office of Manufacturing and Energy Supply Chains.

Department of Homeland SecurityKristie A. Canegallo is the Acting Deputy Secretary. Dan Watson is the Assistant Secretary for Public Affairs at Office of Public Affairs. Aaron Armando Arriaga in now a Special Assistant in the Infrastructure Security Division at the Cybersecurity and Infrastructure Security Agency. 

Department of StateLiz Allen was confirmed as undersecretary for public diplomacy and public affairs. Jeffrey M. Prescott was nominated to be the U.S. Permanent Representative to the United Nations Agencies for Food and Agriculture. Kelly Razzouk is now the Chief of Staff for Policy at United States Mission to the United Nations.

Department of TransportationMohsin Raza Syed is now the Chief of Staff to the Secretary.

Office of the United States Trade RepresentativeAllison W. Smith is now Deputy Assistant U.S. Trade Representative at Environment and Natural Resources.

The White HouseJared Bernstein was confirmed as Chairman of the Council of Economic Advisers. Tom Perez in now Assistant to the President and Senior Advisor and Director at Office of Intergovernmental Affairs. Mira Rapp-Hooper is now the Senior Director for East Asia and Oceania on the National Security Council (NSC) staff. Raven Bukowski Stein in now Director for Legislative Affairs at the NSC, and Garrett Berntsen is now Director for Technology and National Security on at the NSC. Christian L. Tom is now Assistant to the President and Director at Office of Digital Strategy. Kristen D. Orthman is now Deputy Director of Communications. Ryan S. Uyehara is now the Deputy Chief of Staff to the Director of the Office of Personnel Management. There have been several moves at the Domestic Policy Council (DPC)—Brent C. Woolfork in now the Chief of Staff at the DPC, Chad P. Maisel is now a Special Assistant to the President for Housing and Urban Policy, and Ursela M. Ojeda is now the Director for Immigration Policy. Jonathan M. Kemper is now a Senior Policy Advisor at the Office of Science and Technology Policy. Alejandro Molina is now a Senior Policy Advisor on the National Economic Council staff.



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© 2022 Created by ABCPRODUCTION.digital