Is China Waiting for U.S. 2020 Elections in Latest Trade Talks Strategy?

Posted on 07/16/2019 6:45 AM

MPF 2 payouts plan approved | U.S./EU aircraft battle | USMCA | H-2A rule | RFS reset

A U.S./China trade deal is not close, based on China's hawkish commerce minister signaling Beijing’s resolve. Meanwhile, more analysts are wondering if China is showing a more aggressive stance in talks because they want to see results of the 2020 U.S. presidential election. Despite all that negativity, Treasury Secretary Steven Mnuchin says there is a “good chance” he will travel to Beijing with U.S. Trade Representative Robert Lighthizer should talks by phone this week turn out to be productive.
     What is close: MFP 2 payouts. The latest $16 billion aid package for the U.S. ag sector was approved by the Office of Management and Budget. Payments are expected in August.
     European Union may be hit with up to $7 billion in U.S. tariffs over EU aid to Airbus. The tariffs would raise the costs of aircraft and helicopter parts, and also consumable goods like cheese, pasta, olives, and whiskey coming from the EU. Meanwhile, the European Commission’s new trade chief Sabine Weyand will be in Washington early next week for trade talks with the Trump administration.
     EU countries approved hormone-free beef deal with U.S. Washington and Brussels are poised to sign an agreement on imports of hormone-free beef into the EU, after EU countries approved the deal Monday, the Council of the EU said in a press release. The agreement will grant Washington an exclusive share of the bloc’s annual 45,000-ton meat import quota.
     President Trump threatens a 'better plan' if USMCA fails. Trump warned lawmakers who he fears might block passage of his NAFTA replacement: If the agreement fails, he has another plan up his sleeve. “If it doesn’t happen, I have a better plan, okay?” Trump said. “So don’t worry about it. You always have to have plan B, plan C — especially in politics.”
     New H-2A rules proposed. The 489-page rule released Monday to modify the H-2A visa certification process would also alter the calculations used to set minimum wages for guest-workers. The Dept. of Labor (DOL) would set specific wage rates for various agricultural occupations, rather than use a single minimum wage rate per state. The rule would also boost certain protections for workers, like guaranteeing that housing and accommodations provided by farmers are up to federal standards, and it would give employers the option of staggering the entry of H-2A workers authorized under a single application.
    Bayer stocks rallying after a judge slashed a payout over its Roundup weed killer by $55 million. Bayer's stock climbed as much as 3% today, after the original ruling of $75 million was cut to $20 million.
     Space for chile peppers... NASA will grow chile peppers in space. The hardy plants will be the first fruit the agency has ever grown on the International Space Station.


OMB completes MFP 2 review. The Office of Management and Budget (OMB) has finished its review of the $16 billion Market Facilitation Program 2. “So, I’m going to give the farmers — we’re going to help them out because they are great patriots,” President Trump said Monday. “We’re going to give them $16 billion. And we just did. Been approved ... And I approved it.” Eligible farmers could start getting those payments in August.

Trump says USMCA vote “down to politics.” Getting the U.S.-Mexico-Canada Agreement (USMCA) ratified is now a matter of politics and convincing House Speaker Nancy Pelosi (D-Calif.) to hold a vote, President Donald Trump said Monday. “We have to get the Democrats to pass it,” Trump said. “They may or may not, depending on how they feel politically. It’s all politics, unfortunately … We have a lot of bipartisan support, but they may not be allowed to show that support because the leaders may not allow that to happen.”

Pelosi and other Democrats want major changes to the accord.

While Trump said he has “a better plan” to fall back on, he provided no additional information. Meanwhile, Treasury Secretary Steve Mnuchin Monday said he was "hopeful" that Congress will approve USMCA.

U.S./China trade policy update:

  • Treasury’s Mnuchin: Another China trade call this week, ‘good chance’ for trip to China. Treasury Secretary Steve Mnuchin and U.S.Trade Representative Robert Lighthizer will hold another call with China trade negotiators this week and the two could head to China soon if the discussion this week yields progress, Mnuchin said at the White House. “We expect to have another principal-level call this week, and to the extent we make significant progress, I think there’s a good chance we’ll go there later,” Mnuchin said.
  • China acknowledged contacts between the two sides, but little else. “I believe you know that the two teams have been in contact,” Chinese Foreign Ministry spokesman Geng Shuang told reporters in China.
  • Commenting on the China situation, President Trump indicated his relationship with Chinese President Xi Jinping has changed. “I used to say he’s a good friend of mine, probably not quite as close now,” Trump told reporters Monday at the White House. “But I have to be for our country. He’s for China and I’m for the U.S.A., and that’s the way it’s gotta be.”
  • The U.S. expects China to announce significant purchases of U.S. farm products, Trump’s top economic adviser Larry Kudlow told reporters on Monday, implying that the step is necessary for the trade talks to advance. “We expect China to be announcing shortly some large-scale purchases of farm goods and services,” Kudlow said.
  • China’s hawkish new participant in talks with U.S. signals a go-slow and more aggressive stance. Zhong Shan, China's Commerce Minister, recently joined trade negotiations with the U.S. He told People’s Daily the “the U.S. started this economic and trade dispute” and “we must make the best of the spirit of struggle.” In an interview published Monday with People’s Daily, the Communist Party’s mouthpiece, to discuss a nationwide campaign by President Xi Jinping to emphasize political loyalty, Zhong outlined a “Six Plus One” game plan for his ministry. “The ‘One’ is that we need to do a good job in handling the trade conflicts between China and the U.S.,” said Zhong. “The U.S. has started this economic and trade dispute with us in violation of the principles of the World Trade Organization — a classic example of unilateralism and protectionism. We must make the best of the spirit of struggle, and stand firm in defending the interests of our country and the people, as well as the multilateral trading system,” he said. The “six” included other prioritized initiatives, Zhong said. Among those, he said that Beijing would step up its efforts in pushing the belt and road program, grow domestic consumption, and run a successful China International Import Expo in November, as well as speed up development of free trade zones in mainland China.
  • Analyst: Beijing in no hurry to reach trade pact with U.S. Zhang Lifan, a Beijing-based commentator, said Zhong’s comments indicated China was preparing for a protracted trade war with the U.S. “The remark is mostly intended for a domestic audience but it clearly shows China is in no hurry to reach a deal and ready for protracted talks,” said Zhang. “It looks like China is waiting to see what happens after the 2020 election.”
  • Some reports note that within Trump administration, there is a push for no agreement with China ahead of the 2020 elections. Observers note a Monday blog post from American Enterprise Institute scholar Derek Scissors titled "A China deal could cost Trump the election" (link). But Scissors has been very aggressive in the past regarding the lengthy U.S./China talks. Meanwhile, others are said to be urging another Trump/Xi meeting, potentially at the sidelines of the United Nations General Assembly in New York in September.
  • China cracks down on subsidies to offset trade war. China unveiled a new reform plan today to make it easier for companies, including so-called zombie state-owned enterprises, to be closed down so resources can be better allocated in the economy as Donald Trump’s tariffs take effect. The government “must fully employ the decisive role of the market in resource allocation, standardise market competition, reduce market distortions … and promote the flow of components and resources to the most efficient market entities,” the joint circular from 13 major ministries said. The plan specifically forbids central government agencies and local governments from providing subsidies or loans to prop up the operation of state-owned firms that would not be financially viable without such help, which are known as zombie enterprises.
  • Trade war’s costs: Revenue that the U.S. has collected from tariffs on $250 billion of Chinese goods doesn’t cover the cost of the aid for American farmers hurt by China’s retaliation, government figures show. Trump’s tariffs on Chinese imports raised $20.8 billion through Wednesday, according to data from United States Customs and Border Protection. President Trump has already committed to paying American farmers hurt by the trade war $28 billion. Link to details from the New York Times.
  • Relative to Trump's tweet Monday that Chinese GDP data signals China needs a deal with the U.S., Foreign Ministry spokesman Geng Shuang labeled the GDP result as a "not bad performance" in light of global economic uncertainties and slowing world growth.  He also labeled as "totally misleading" the U.S. saying because China's economy is slowing, China urgently hopes to reach an agreement with the U.S. side.

More meetings this and next week on RFS reset plans. The notice of proposed rulemaking for the reset of the Renewable Fuel Standard (RFS) is still a ways off as there are now additional meetings scheduled on the topic at the Office of Management and Budget (OMB) which is currently reviewing the EPA proposal on the topic.

A total of nine meetings have been held or will be held at OMB on the reset plan. Sessions this week include one Monday with representatives of the Coalition for Renewable Natural Gas, a meeting will take place Wednesday with a representative of the National Corn Growers Association (NCGA) and a session Friday with PBF Energy.

Two meetings are now scheduled for July 22 — one with representatives from Fuels America and one with the National Biodiesel Board (NBB).

Background. EPA in the proposed RFS levels for 2020 biofuel and 2021 biodiesel proposed only a small increase in the level of cellulosic and advanced biofuel for 2020. That indicates the agency has likely proposed similar incremental increases for 2021 and 2022, the years covered by the reset plan.

Dept. of Labor unveils proposed changes to H-2A program. Proposed changes to the H-2A temporary agricultural labor certification program were unveiled Monday by the Department of Labor (DOL) via a notice of proposed rulemaking (link) that will be published in the Federal Register. The pre-publication version of the plan indicates the DOL focus is trying to adjust the program “in a way that is responsive to stakeholder concerns and enhances employer access to a legal source of agricultural labor, while maintaining the program's protections for the U.S. workforce and enhancing enforcement against fraud and abuse.” Link to DOL statement.

The plan would streamline and simplify the H-2A application process, strengthen protections for U.S. and foreign workers and ease unnecessary burdens on employers,” DOL said. The effort includes mandating electronic filing of job orders and applications, promoting the use of digital signatures, and providing employers with the option of staggering the entry of H-2A workers on a single application.

The effort would also enhance standards for rental housing and public accommodations and would also expand enforcement tools. Key in the plan is an update to methodologies used to determine the Adverse Effect Wage Rates (AEWR) and prevailing wages to ensure US workers similarly employed are not adversely impacted. While DOL proposes maintaining the AEWR structure, they are proposing to set separate AEWR’s by ag occupation to better protect against adverse effects on wages of similarly employed workers.

The plan would also update the prevailing wage methodology. While using the USDA Farm Labor Survey (FLS), if the FLS does not report a wage for a state or a region, then DOL is proposing to set the AEWR at the statewide annual average hourly wage for the standard occupational classification from the Bureau of Labor Statistics Occupational Employment Statistics survey.

Agricultural groups have pressed for changes to make it easier to bring in foreign workers to meet seasonal needs. The H-2A visa is intended for temporary agricultural workers in cases where there are insufficient American workers able or willing to fill openings.

Perdue comments. “The proposed rule will increase access to a reliable legal agricultural workforce, easing unnecessary burdens on farmers, increase enforcement against fraud and abuse, all while maintaining protections for America’s workers,” USDA Secretary Sonny Perdue said in a statement. “When this rule goes into effect, our farmers will be released from unnecessary and burdensome regulations.”

Reaction. Representatives for the American Farm Bureau Federation and the Western Growers Association said Monday that the groups were still analyzing the new regulations. United Farm Workers President Teresa Romero and UFW Foundation Executive Director Diana Tellefson Torres said the proposed rules “would make it easier to deny jobs to domestic farm workers so growers can hire more temporary foreign agricultural guest workers and pay them less, thereby depressing pay for domestic workers.”

Other items of note:

  • Trump tightens asylum rules at southern border. The White House moved to significantly limit Central American migrants’ ability to seek asylum at the U.S. border with Mexico. Exceptions will be made for people denied asylum in another country or victims of human trafficking. Under a new rule, Hondurans and Salvadoreans and others who pass through another country, such as Mexico, will be ineligible for asylum at the American border. Legal challenges are expected. The president previously failed to designate Guatemala a “safe third country” to which asylum-seekers may be forcibly returned.

  • Headquarters of the Bureau of Land Management will be moved to Grand Junction, Colo., one of the state’s senators said. The move would put officials closer to the lands they manage but farther from Washington policymakers.

  • EPA has sent the White House its final rule to repeal the Obama administration’s Waters of the U.S. (WOTUS) rule, with a goal to repeal and replace the prior WOTUS rule by December. Meanwhile, legal battles on the topic continue.

  • China’s pork output declined in the first half of 2019, as African swine fever decimated the country’s pig herds. But the drop in output was less severe than expected. Link to Reuters item.

  • Bayer’s share price rose after an American federal judge reduced the punitive damages awarded to a California man who claims the use of Roundup weed killer caused his cancer, from $75 million to $20 million. The German chemical company, which acquired Monsanto, the maker of Roundup, last year, said in a statement that while the judge's move is a step in the right direction, they still plan to appeal. Bayer faces more than 13,400 lawsuits in similar cases. U.S. District Judge Vince Chhabria in San Francisco had signaled he would cut the punitive damages awarded by the jury in the case, saying the higher level was "constitutionally impermissible" as he cut that portion of the award. "Monsanto's conduct, while reprehensible, does not warrant a ratio of that magnitude, particularly in the absence of evidence showing intentional concealment of a known or obvious safety risk," Chhabria wrote.

  • Europe continues to seek ways to help Iran. Although Iran violated the nuclear deal by breaking caps on the quantity and purity of enriched uranium, the European Union says the breaches are not yet significant. However, Iran threatens to go further if European signatories to the deal do not shield it from American sanctions. The bloc’s foreign ministers, who have been meeting in Brussels, hope to ease the matter with Iran through Instex, a barter system allowing trade between Europe and Iran. Currently it applies to food and medical supplies, which are not covered by sanctions. Iran wants it to apply to oil.

Markets. All three major indices managed to edge their way further into record territory Monday. The Dow gained 27.13 points, 0.10%, at 27,359.16. The Nasdaq rose 14.04 points, 0.17%, at 8,258.19. The S&P 500 was up 0.53 points, 0.02%, at 3,014.30.

The White House projected a soaring 2019 deficit. It will pass the $1 trillion mark, the Office of Management and Budget said, for the first time since the years following the 2008 global recession. Data earlier this year also showed a record trade deficit in 2018.

Federal Reserve Chairman Jerome Powell speaks at a conference in Paris at noon CT, with investors looking for any further clarification on the extent of his dovishness.

Crude prices are holding steady at $59 a barrel as U.S. oil companies begin restoring some of the nearly 74% of production that was shut in the Gulf of Mexico ahead of Hurricane Barry. There were 1.3 million barrels per day of oil production offline in the Gulf on Monday, about 80,000 barrels fewer than on Sunday, according to the U.S. Bureau of Safety and Environmental Enforcement.

Treasury Secretary Mnuchin warned that Facebook's Libra could be a tool for terrorists, traffickers, and drug smugglers. Bitcoin's price barely moved on the comments. In prepared testimony released before his Senate appearance, David Marcus, head of the social media giant’s blockchain subsidiary, Calibra, said that the planned cryptocurrency will be regulated by the Swiss government, but will comply with U.S. tax laws.

In a paper entitled "The Rise of Digital Money," IMF authors Tobias Adrian and Tommaso Mancini-Griffoli argue the two most common forms of money today, cash and bank deposits, will "face tough competition and could even be surpassed." While banks are "unlikely to disappear" as they face growing threats from big tech companies and fintech startups, "some will be left behind no doubt." It comes as PayPal expanded further in Europe on Monday by launching its international money transfers service Xoom in Britain and 31 other countries.


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