U.S./China Talks... They Are Not Yet Talking Amid Additional Setbacks

Posted on 05/16/2019 6:50 AM

Trump tariff aid plan #2 bulks up to $20 billion | Metals accord near | USMCA | Auto tariffs

It seems like U.S./China trade talks are on a slow walk, with disagreements not being settled and in fact may be increasing.
     USDA Sec. Sonny Perdue late Wednesday commented on the second installment of Trump tariff aid, providing few details other than the taxpayer cost could be as high as $20 billion, $5 more than President Trump signaled last Friday. Meanwhile, farm-state lawmakers may legislate some adjustments to the plan via ongoing talks regarding a supplemental spending measure. Some farm commodity groups that felt they were not dealt fairly with via the last program are lobbying for bigger payouts this time, including the ethanol industry. Some want the new program to base payments either on 2018 and not 2019 production, or on historical base acres/production. Perdue said the aid will fully comply with WTO limits on agricultural subsidies. USDA so far has paid $8.5 billion in direct aid to farmers under last year’s program. Producers have until Friday to certify their 2018 production numbers to receive payments from USDA under the existing program, which included about $9.5 billion for direct payments. Link for details.
     President Trump today will reveal his updated immigration plan that is expected to move the U.S. from a family-based immigration system to what officials describe as an employment-and skills-based system. The proposal also includes plans to build more “physical barriers” along the border with Mexico. Key to the proposal is Democrats' reaction and thus far they are decided cool toward the coming plan. It is not expected to go anywhere in the House.
     President Trump is expected to postpone European auto tariffs by up to six months ahead of a Friday midnight deadline, according to multiple reports. Trump faces broad opposition from industry and lawmakers on his threat to impose tariffs on cars produced by major trading partners as the U.S. seeks to negotiate new trade agreements. Tariffs on the auto sector would have taken aim at Japan and Europe, big auto manufacturers, and likely disrupted trade talks that the Trump administration had just begun. But the threat of auto tariffs remain and one of President Trump's favorite tactics is to threaten them. Observers say Trump wants auto exporters to agree to limit their shipments into the U.S. Link to the Wall Street Journal's take on the delay.
     Metals accord forged? Treasury Secretary Mnuchin said the U.S. was "close to an understanding" with Canada and Mexico on resolving steel and aluminum tariffs that were not resolved during negotiations over their new trade agreement. Key lawmakers have signaled they would not vote for USMCA unless the levies were removed.
     Dead but alive... "I've seen dead people vote, but when they start cashing checks there's obviously a problem there," Sen. John Kennedy said about improper IRS payments, including scam returns filed for dead people.


U.S./China trade policy update:

  • Major differences linger in goal to reach final accord. Sources are in agreement that U.S. and Chinese officials must bridge major differences on key portions of trade policy talks if there is a final agreement. One of the major hurdles is China does not want any deal that will let the U.S. impose new tariffs and use them as an enforcement mechanism. And the China trade team, as usual, stripped details of various sections out of the proposed accord, as they historically do not want details to be made public in China. Another thorny issue is that China is pulling back some from apparently earlier signals of what they would commit to purchase relative to U.S farm and energy products.
  • Mnuchin expects to go to Beijing to continue trade talks 'in the near future'. Treasury Secretary Steven Mnuchin said today he expects to go to Beijing to continue trade talks with the Chinese "at some point in the near future." Speaking at a Senate Appropriations hearing, Mnuchin said talks with China have been "constructive" but there is "still a lot of work to do." He added recent talks have been “intensive” and promise lawmakers he would keep them informed.
  • China and Huawei hit back at Trump. Beijing said President Trump’s executive order barring U.S. companies from installing foreign-made telecom equipment would lead to worse trade relations, with Huawei calling them “unreasonable restrictions." The order did not single out any nation or company, and White House officials called it “agnostic.” The executive order effectively blocks sales of Huawei equipment in the U.S. The White House declared a national emergency order that in effect bars the Chinese telecoms giant, among others, from selling technology in America. Separately, the Commerce Department ruled that American companies must obtain licenses before selling technology to Huawei, a move that could hobble it.
  • China confirms espionage charges against two detained Canadians, hours after the U.S. placed new limits on tech giant Huawei. Michael Kovrig and Michael Spavor could face harsh punishment for the charges. China has slammed the U.S. for waging what it says is an unfair campaign against Huawei — and accused Canada of helping Washington by detaining Huawei executive Meng Wanzhou.
  • Speculation as to whether China would dump its U.S. debt as a trade war weapon was renewed as Beijing sold the most Treasurys in almost 2.5 years in March, offloading $20.45 billion and taking the country's total holdings to $1.12 trillion. Except for a small net purchase in February, China has now sold Treasuries every month since September. The data covers trading in Treasuries with a maturity of more than one year by foreign official institutions such as central banks as well as private investors. Other major foreign holders, including Japan and the U.K., were also net sellers. One of the reasons China buys Treasuries is because of the dollars it acquires from exports to the U.S. Analysts note China typically sells Treasuries when it needs to support its own currency, in effect selling dollars.
  • Ag industry analysts and others are scoffing at USDA Sec. Sonny Perdue's assertion there will be no long-term pain from the ongoing U.S./China trade war. Perdue has made that assessment before, but observers say history of prior U.S. trade policy moves make that prediction an errant one.
  • What will Trump's latest tariffs mean for inflation? The latest tariff increases on Chinese imports will likely deliver a modest and temporary boost to U.S. inflation, in part reflecting the relatively small portion of American spending that goes to goods rather than services. Link to Wall Street Journal article.

The Trump administration could make as much as $20 billion available to the U.S. ag sector in a second round of assistance to help offset losses from China's latest retaliatory tariffs, USDA Secretary Sonny Perdue said late Wednesday from Seoul, South Korea, according to a transcript of the press conference (link for details).

Perspective: Big-city newspapers and some cable news continue to show they have no idea about U.S. ag sector. Headlines in major papers like the Washington Post and some cable television channels note the Trump administration is “exploring farm bailout options” amid trade war with China. Bailout implies farmers will be made whole, a far cry from the reduction in revenue last year and ongoing this year that is taking place, in part, due to several U.S. trade policy conflicts.

Update on CRP following Peterson's threat Wednesday to sue USDA. USDA said it will reopen signup for the Conservation Reserve Program (CRP) on June 3 for certain practices under the continuous signup effort and will offer extensions for expiring CRP contracts. But the move drew the ire of House Ag Committee Chairman Collin Peterson (D-Minn.) during am Ag subcommittee hearing held Wednesday (see Pro Farmer’s Evening report for background).

The lack of a general signup until December while the continuous signup starts in June set off Peterson. "I am going to stop it somehow or another," Peterson told Farm Service Agency (FSA) Administrator Richard Fordyce at the hearing. "If I have to sue you, I will." Peterson has championed the program's wildlife habitat aspect and said the continuous signup effort may offer benefits "in terms of water quality and so forth, but it does almost zero good for wildlife." Peterson said he does not think farmers will understand the changes to the program in the farm bill and warned he thinks there will be more acres that are enrolled via the continuous signup starting in June than the general signup to be held late this year.

Background info on CRP. There were 22.37 million acres of ground in the CRP as of April 30, with an average rental rate of $81.30 per acre. Of the total acres, there are 7.97 million that have been enrolled via the continuous signups and 13.47 million enrolled via general signups, with another 926,285 acres via Gasslands efforts.

USDA only enrolled about 295,000 acres via the continuous signup in Fiscal Year (FY) 2018 after enrolling 1.35 million each in FY 2016 and 2017.

Under the 2018 Farm Bill, rental rates under the general CRP signups will be capped at 85 percent of existing rental rates and the maximum level of acreage allowed in the CRP will rise from 24 million acres in FY 2019, to 24.5 million in FY 2020, 25 million in FY 2021, 25.5 million in FY 2022 and to 27 million acres in FY 2023.

Of the 1.58 million acres of contracts maturing September 30, 2019, there are 1.08 million of general signup acres and 500,000 via continuous signups. But the level of CRP contracts that currently mature September 30, 2020, surges to 4.4 million before the one-year extension that USDA will offer this year. Of the acres maturing September 30, 2019, some 210,418 acres are in Iowa, with 100,000 acres or more in four other states — Washington (189,915), Texas (165,693), Minnesota (165,235) and Montana (151,598).

Disaster aid update: Sen. Chuck Schumer (D-N.Y.) said regarding negotiations on a supplemental spending package for disaster relief: Republicans must not let President Donald Trump intervene in talks between Senate party leaders, and that "if he sticks his thumb into this again" he would further delay progress.

Mnuchin: Metal tariffs with Canada, Mexico is ‘close’. The Trump administration is close to negotiating a solution to the steel and aluminum tariffs it imposed on NAFTA partners Canada and Mexico, a development that is seen as a must-have for any congressional vote on its replacement, the U.S.-Mexico-Canada Agreement (USMCA). Mnuchin said during a Senate subcommittee hearing Wednesday that U.S. officials are "close to an understanding with Mexico and Canada,” on the tariffs, which have been in place for nearly a year. “It is a priority of ours.” It’s not clear what any compromise would entail.

A top Mexican official said Mexico is nearing agreement with the U.S. on a proposal that would not include quotas. Jesús Seade, Mexico's undersecretary for North America, told The Globe and Mail that the potential deal Mexico has on the table would be based instead on a tracking system designed to prevent other countries from bypassing tariffs by shipping their steel and aluminum through Mexico.

Canada and Mexico imposed retaliatory duties on nearly $17 billion in U.S. goods, including many farm and agricultural products, in response to the steel and aluminum duties.

When asked if his comments meant the U.S. was unilaterally lifting the tariffs, Mnuchin said, “I didn’t say we were lifting tariffs. What I said is that we’re trying to resolve the tariff issues as part of the agreement with USMCA. That’s something we’re focused on.”

The persistence of the tariffs has angered Canada and Mexico, which hoped they would be lifted after the countries agreed to a revised version of North American Free Trade Agreement last year,” according to the New York Times (link). The NYT article said, “the possibility that a resolution to the matter is at hand suggests that Trump is seeking to smooth relations with America’s neighbors to the north and south as his trade dispute with China escalates.”

Following a meeting with Canadian Foreign Minister Chrystia Freeland, Mexican Economy Minister Graciela Marquez said, “We are, I think, close to negotiating the lifting of the tariffs. We’re having very fruitful conversations on lifting the tariffs not only in the U.S. but also here in Toronto.”

Democrats are expected to use a May 22 hearing by the House Ways and Means Trade Subcommittee to detail changes they would like to see in enforcement provisions in the proposed United States-Mexico-Canada trade agreement.

USMCA update. House Speaker Nancy Pelosi (D-Calif.) and her leadership team were positive about the U.S.-Mexico-Canada Agreement (USMCA) as they left a meeting earlier this week with U.S. Trade Representative Bob Lighthizer, saying that he finally noted their demands to modify the trade deal.

Meanwhile, Vice President Mike Pence will travel to Wisconsin to promote the USMCA during a tour and remarks at J&D Manufacturing in Eau Claire.

Reuters: EPA shifted small refiner waiver actions before court ruling. EPA took action to grant more small refiner exemptions (SREs) under the Renewable Fuel Standard (RFS) even before a court ruling was issued that the agency has cited in defense of the broader use of the SREs, according to a report from Reuters based on court documents and an interview with a former EPA official.

The Advanced Biofuels Association filed documents in court that show EPA changed its policy prior to May 4, 2017, telling a refinery in a letter "we are changing our approach" to the SREs, allowing exemptions even if they were not "significantly impaired" by compliance.

The U.S. Court of Appeals ruled in August 2017 that the agency had been too strict in its process of SREs, a ruling that officials have cited as a reason for the increased use of SREs — EPA granted 35 for the 2017 compliance year and there are currently 40 pending for the 2018 compliance year.

EPA game plan. Mandy Gunasekara, who retired as principal deputy assistant administrator at the EPA’s Office of Air and Radiation this year, told the news service former EPA administrator Scott Pruitt opted to put the SRE effort back in play to help the refining industry. The August court case, she noted, was viewed as a "vindication" of EPA's changes, she said.

Biofuel backers have complained that the stepped-up use of the SREs has negatively impacted the ethanol industry.

Other items of note:

  • President Trump to unveil new immigration plan today. The president will make a new bid to remake U.S. immigration policy, proposing an expansion of skills-based visas offset by new restrictions on refugees and family members — a proposal expected to spark a dispute over issues that divide political parties and the country. The proposal would significantly scale back the system of family-based immigration that for decades has allowed immigrants to bring their spouses and children to live with them. Instead, the plan would provide opportunities for immigrants who have specific skills or job offers to work in the U.S., provided they can demonstrate English proficiency and educational attainment, and pass a civics exam.

  • Brazil seeks China's OK for genetically modified sugarcane. Brazil's agriculture minister will ask Chinese officials today to accelerate exports to the Asian nation of sugar made from genetically modified (GM) sugarcane. Minister Tereza Cristina Dias told Reuters in Beijing on Wednesday, on her first visit to Brazil's top buyer of farm goods, that she would raise the GMO issue during a visit to China's General Administration of Customs today.

  • Democratic presidential sweepstakes update. Howard Schultz has reportedly delayed a decision on whether to formally run for the Democratic presidential nomination in 2020 now that Joe Biden has entered the race, according to Fox Business. Meanwhile, New York Mayor Bill de Blasio of New York City is officially running for president. After making his formal announcement, he will travel to Iowa and South Carolina.

Markets. The Dow on Wednesday advanced 115.97 points, 0.5%, to 26,648.02. The S&P 500 added 16.55 points, 0.6%, to 2,850.96, moving 3.2% below its April 30 record. It remains up 14% for the year. The Nasdaq Composite rose 87.65 points, 1.1%, to 7,822.15.


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