EU Threatens WTO Challenge of U.S./China Phase 1 Pact; U.S. and China Respond

Posted on 01/17/2020 6:51 AM

USTR Lighthizer: 'Only arbitrator I trust is myself'

In today's updates:

* EU threatens challenge of Phase 1 pact at WTO; U.S. and China respond
* Phase 1 contains new, accelerated U.S./China approach to dispute resolution
* Lighthizer: 'Only arbitrator I trust is myself'
* WSJ survey: Trade deal with China is likely to provide extra fuel for growth in 2020
* Critics say new China deal relies heavily on managed trade rather than free trade
* NYT and Washington Post back to criticizing Trump trade deal, policy
* China pork production down 21.3% in 2019
* EU's new trade chief takes swipe at Trump
* Senate as expected easily clears USMCA ratification bill, 89-10
* China’s economic growth slows to 29-year low, impacted by trade war w/U.S.
* Michael Bloomberg has spent $217 million on TV and digital ads
* Iran’s supreme leader delivers rare sermon, slams Trump
* Port of Los Angeles reports near-record cargo levels in 2019
* Troubles in U.S. commodities markets starting to hit sector’s supply-chain providers
* Coalition of 14 states, D.C. and New York City sued USDA over its food stamp cuts
* House will release an infrastructure bill at the end of the month: Pelosi
* President Trump's ratings in key areas per WSJ survey
* Trump nominates two to Federal Reserve

Markets: Treasuries dipped after the U.S. announced plans for a new 20-year bond. The U.S. government will begin issuing 20-year bonds in the first half of 2020, as budget analysts expect years of continued growth in federal budget deficits. "We seek to finance the government at the least possible cost to taxpayers over time, and we will continue to evaluate other potential new products to meet that goal," Treasury Secretary Steven Mnuchin declared. Offering a 20-year bond would be a reintroduction of a security last issued in March 1986.

South Koreans say no to facial hair. Social media users in South Korea have launched a campaign against U.S. Ambassador Harry Harris’s mustache, accusing him of insulting his host country by sporting a look that, according to the Guardian, “reminds many South Koreans of the days of Japanese colonial rule,” when several Japanese governors had mustaches. Harris, who is Japanese-American, has dismissed such concerns, telling local journalists, “I’m the American ambassador to Korea, not the Japanese American ambassador to Korea.” Link to Korea Times article.

TMI or when xxx hits the fan... Kohler displayed its $10,000 Numi 2.0 Intelligent Toilet this week. Shaped like a box, it features an automated square lid and lighting that runs around the base and back panel. The toilet also has a proximity sensor that senses when a person approaches it and raises its lid automatically, and a pressure sensor on the seat detects when a user stands up, triggering a flush. Additionally, a Kohler app lets people personalize the position of the toilet’s bidet wand and choose the color of the lighting around the base and back panel.


U.S./China trade policy update:

  • The European Union threatened a challenge to the World Trade Organization (WTO) regarding whether a pledge by China to increase purchases of U.S. goods by at least $200 billion over the next two years is WTO-compatible. "We're not trigger-happy about taking cases to the WTO — we don't want to create that impression. But we'll stand up for our own economic interests,” according to EU Trade Commissioner Phil Hogan, whose team will "analyze the document in detail." Some critics question whether the purchasing commitments violate the WTO's most-favored nation (MFN) rules, which require WTO members to treat trading partners equally. U.S. Trade Representative Bob Lighthizer dismissed any potential violation when asked about it this week. “China is going to buy what they’re going to buy. It’s not saying not to buy from other people,” he said. “I don’t think it affects anyone else’s rights under the WTO.” As for China, Chinese Vice Premier Liu He addressed that issue in his remarks at the White House, commenting, “…this agreement is not directed at, nor will it affect, the lawful rise in interest of any third country. It is in line with WTO rules.”
  • The Trump administration has been fiercely critical of the WTO's dispute resolution format, and that is why the Phase 1 agreement contains a new and accelerated approach to trade disputes that pop up between the two largest economies. “The only arbitrator I trust is myself,” said U.S. Trade Representative Bob Lighthizer, President Trump’s lead trade negotiator, in a meeting with visiting business groups. Under the Phase 1 deal, conflicts will be addressed through three rounds of negotiations between the two sides, ultimately giving the U.S. the right to impose tariffs if it isn’t satisfied with the outcome. If the U.S. acts, China can’t retaliate — or even appeal the dispute to the WTO — unless it pulls out of the deal. All parts of the Phase 1 deal are subject to those enforcement provisions. (China also has the right to impose tariffs, but it made nearly all the concessions in the deal. However, China has the right to request consultations if it believes the U.S. is blocking its ability to fulfill its purchasing promises by “an action or inaction.”) “I think they would see it in their interest to stay in the agreement,” said a senior U.S. official. “And this was designed to avoid them counter-retaliating or challenging us at the WTO.”
  • In the U.S., the trade deal with China is likely to provide extra fuel for growth in 2020 and prompt a pickup in business investment, economists surveyed by the Wall Street Journal said. The survey also found most economists expect U.S. growth to continue at a slow-but-steady pace this year. On average, forecasters expected gross domestic product would expand 1.9% this year, measured from the fourth quarter of 2019 to the fourth quarter of this year, compared with an anticipated 2.3% in 2019. Link for details.
  • Some critics say the new China deal relies heavily on managed trade rather than free trade. That is the gist of Gary Hufbauer’s analysis of the deal, in which he says the only way Beijing will be able to meet some of its purchasing commitments “is to resort to Soviet-style managed trade — in other words, China promises to import a certain dollar or physical volumes of detailed goods and services, regardless of market prices or demand conditions.” Hufbauer, a senior fellow with the Peterson Institute for International Economics, said negotiations instead should should have focused on lowering China’s tariff and non-tariff barriers to more organically boost American exports to their market. Link to analysis. Others say in a country like China that is managed so much by the government, managed trade is one possible approach.
  • Usual critics of Trump trade policy are back at it. A U.S.-China trade deal meant to heal rifts between the two countries could actually make them worse, the New York Times reports (link). The next China trade battle could be over electric cars, the Washington Post reports (link).
  • A bruising trade war with the U.S. and sputtering investment saw China's GDP growth expand by 6.1% last year (see details below), as a slowdown rippled through many sectors of the economy. While that was the lowest level in nearly three decades, the figure met expectations, falling within the government's target of 6% to 6.5% for 2019. Trade deal help... Beijing is counting on improving consumer confidence and consumption to play a major role in boosting growth this year, according to Ning Jizhe, China's chief statistician.

China pork production down 21.3% in 2019. China’s pork production totaled 42.55 million tonnes in 2019, down 21.3%, according to the National Bureau of Statistics (NBS). Data also showed the hog herd at 310.41 million head, down 27.5% from year-ago, with hog slaughter at 544.19 million head, down 21.6%.

EU’s new trade chief on an inaugural visit to Washington said President Donald Trump’s tariff threats amount to short-sighted electioneering and warned about economic damage from protectionism. Phil Hogan told Bloomberg that the race is on to avert an escalation in transatlantic commercial tensions as a result of U.S. objections to a French digital-services tax and talks in coming days could be crucial.

"I didn’t expect to be successful in resetting the relationship in a few days," Hogan said. "But this was an opportunity for me to meet people for the first time, and I was very happy with the level of engagement, the very positive cooperative spirit we had with all our interlocutors in the administration."

Commerce Secretary Wilbur Ross said Thursday on Fox Business that sealing the Phase 1 trade agreement with China and the passage of USCMA boosts the U.S.’ negotiating stance as the administration turns to Europe. “Our position is infinitely better already just because of these two deals,” Ross said.

When asked about Ross’ comments, Hogan highlighted the difference in negotiating strategy between the U.S. and EU. “If he believes that bringing the tariffs and the threat of tariffs brings people to the table, well, he’s wrong,” Hogan said. “We just don’t operate that way. We want to be at the table anyway.”

Section 232 auto report due Sunday. The recent fiscal year 2020 spending bill signed by Trump on Dec. 20 requires the Commerce Department to publish in the Federal Register within 30 days the results of its 2018 Section 232 investigation that found auto imports pose a risk to national security. It also requires the department to make any classified section of the report available to members of Congress and their staff with the appropriate security clearance. The report was not posted on the Federal Register public inspection site as of late Thursday. Government offices are closed Monday for the Martin Luther King Jr. holiday.

Senate as expected easily clears USMCA ratification bill. The vote was 89-10 and would have been 90-10 as USMCA supporter Jim Inhofe (R-Okla.) missed the vote because of a family medical issue. The House in December approved legislation to implement USMCA by a 385 to 41 vote, with 193 Democrats and 192 Republicans backing the pact. USTR Bob Lighthizer said the strong level of bipartisan support heralds a new chapter in Washington trade policy. “USMCA is now the new gold standard against which all future trade agreements will be judged,” he said in a statement. Of note, Senate Minority Leader Chuck Schumer (D-N.Y.) voted against the measure. “Despite the fact that it includes very good labor provisions, I am voting against USMCA because it does not address climate change, the greatest threat facing the planet,” said Schumer.

Waiting on Canada. Mexican legislators last month approved USMCA, and Canada’s Parliament, which had an election in October, isn’t scheduled to return until Jan. 27 when its House of Commons is expected to approve it. “All eyes will be on Canada to get the job done quickly so we can all work together to implement this agreement,” said Sen. Chuck Grassley (R-Iowa).

President Trump said he will sign the agreement next week, most likely on Tuesday.

The 10 voting against the USMCA measure (8 Dems, 1 Independent, 1 GOP): The deal’s Democratic opponents were Sens. Cory Booker, Kamala Harris, Kirsten Gillibrand, Ed Markey, Jack Reed, Brian Schatz, Chuck Schumer and Sheldon Whitehouse. Independent Sen. Bernie Sanders also voted no. Sen. Pat Toomey was the lone Republican against USMCA ratification.

Bottom line on USMCA: The pact opens Canadian dairy markets to American producers, implements stricter rules for auto part rules of origin, and updates digital trade and copyright rules, among others. Industry groups have hailed the trade deal and said it would provide sorely needed certainty to revive investment flows.

Other items of note:

  • Michael Bloomberg has spent $217 million on TV and digital ads, about three-quarters of the amount spent by all other presidential campaigns combined. The strategy has increased prices of ads and personnel. Television ad rates jumped 45% in Houston after the Bloomberg campaign bought $1 million in ads. Bloomberg's spending is a large part of the reason roughly $20 billion is expected to be spent on political advertising this election cycle.

  • Iran’s supreme leader delivers rare sermon. After a two-week standoff with the U.S. and days of domestic protests, Iran’s Supreme Leader Ali Khamenei led prayers in Tehran on Friday for the first time in eight years. The rare sermon came at a moment of extreme tension, following the U.S. killing of Iranian military commander Qassem Suleimani and the accidental Iranian downing of a Ukrainian airliner in Tehran. Iran’s delayed admission that it shot down the jet prompted angry protests. Khamenei showed no sign of compromise, however, branding the U.S. an “arrogant power,” calling U.S. President Donald Trump a “clown,” and telling tens of thousands of chanting worshipers that Iran was able to “slap the face” of the U.S. with God’s backing.

  • Port of Los Angeles reports near-record cargo levels in 2019. The Port of Los Angeles moved near-record cargo in 2019 with a total of 9,337,632 Twenty-Foot Equivalent Units (TEUs), just short of the second-best year in its 113-year history, according to Port Executive Director Gene Seroka at the annual State of the Port event hosted by the Pacific Merchant Shipping Association. “In the face of lagging exports due to international trade tensions and tariff uncertainties, the Port of Los Angeles has maintained strong momentum and kept cargo flowing,” Seroka said. “This feat was only possible because of the extensive cooperation and continued efficiency improvements by our terminal operators, supply chain partners and longshore workforce.”

  • Troubles in U.S. commodities markets are starting to hit the sector’s supply-chain providers. Domestic waterways heavyweight American Commercial Barge Line Co. is in talks with lenders to restructure its more than $1 billion of debt, the Wall Street Journal reports (link), as the company seeks to steer away from a chapter 11 bankruptcy filing. The barge operator has been hurt on multiple fronts by events cutting into its core business moving industrial commodities, grain and liquid bulk, mostly along the Mississippi River. “Much of the industrial traffic on the corridor has dimmed under global trade tensions that have cut into U.S. manufacturing demand. Rough weather in the Midwest over the past year has also crushed a big share of the grain trade, with floods depressing farm yields and disrupting river traffic during the key shipping season,” the article notes. The company is owned by Platinum Equity.

  • Coalition of 14 states, D.C. and New York City sued USDA over its food stamp cuts that will rein in state waivers.

  • House will release an infrastructure bill at the end of the month, said House Speaker Nancy Pelosi (D-Calif.). Democrats have been working on a $1 trillion infrastructure package that they hope will earn President Trump’s support.

  • President Trump's ratings in key areas, per the Wall Street Journal survey:

    WSJ Presidential Ratings

Markets. Record finishes were scored by all three major indices on Thursday as the trade news continued positive with the approval of the US-Mexico-Canada Agreement (USMCA). The Dow moved up 267.64 points, 0.92%, at 29,297.64. The Nasdaq rose 98.44 points, 1.06%, at 9,357.13. The S&P 500 gained 27.52 points, 0.84%, at 3,316.81.

China 2019 GDP slowest in 29 years. China’s GDP in 2019 slid to 6.1%, the weakest pace since 1990, but still within the Chinese government’s target range for economic performance of 6% to 6.5%. The country is expected to provide more support for the economy this year, according to Ning Jizhe, head of the National Bureau of Statistics (NBS) and is expecting consumer confidence to rise and consumption to play a role in boosting economic growth ahead. December industrial output rose 6.9% compared with 6.2% in November and was above expectations. For all of 2019, industrial output rose 5.7%, down from 6.2% in 2018. Fixed-asset investment reached 5.4% for all of 2019. The NBS also said that the economy faces mounting downward pressure, and the country will take coordinated steps to ensure steady economic growth, the bureau said in a statement, according to China Daily.

China GDP

Trump nominates two to Federal Reserve. President Trump nominated Judy Shelton and Christopher Waller to be Federal Reserve governors. Shelton is currently executive director of European Bank for Reconstruction and Development. Waller currently is director of research at the St. Louis Federal Reserve. Waller will probably hold views on the board similar to his current boss Jim Bullard. The latter was a strong proponent last year of an "insurance cut" to help businesses worried by trade uncertainty, and was in favor of even steeper cuts in September. The nomination of Shelton, an adviser to the Trump campaign in 2016 and recent U.S. director of the EBRD, is more controversial. She has a long history of unorthodox economic commentary like questioning the basic role of the Fed and advocated pegging the dollar to the gold standard. NYT has the details (link).


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