Lighthizer on Phase 1 | Feb. 11 WASDE key to China import updates | $1 trillion deficit in 2019
In today's updates:
* SCMP: China to make huge purchases of U.S. goods totaling $200 billion
— U.S./China trade policy update:
- SCMP: China to make huge purchases of U.S. goods as details of Phase 1 deal revealed. The South China Morning Post, quoting sources, said that China has committed to making large scale purchases of $200 billion of American goods as part of the Phase 1 trade deal. The purchase target for manufactured goods is around $75 billion, with China also committing to buy huge amounts of energy, agriculture and services — $50 billion worth of energy, $40 billion in agriculture and $35 billion to $40 billion in services, the paper said, citing three people. The figures are reportedly on an annual basis. Meanwhile, signing of the U.S./China Phase 1 trade deal won’t impact trade with other nations, Zou Zhiwu, deputy head of General Administration of Customs, said at briefing in Beijing. Also, China is reviewing applications for tariff exemptions on U.S. goods worth $60 billion, according to the government.
- U.S. Trade Representative Bob Lighthizer was on Fox Business Network last evening to talk about the Phase 1 agreement. He held up a copy of the completed text. The cover is black, with white lettering. Highlights of Lighthizer's comments:
— “We are going to make [the text] public on Wednesday before the signing. But we've given a lot of people briefings, so people know more or less what's in it.”
— Regarding currency provisions, “there are a variety of real structural changes. One of those is commitments on currency — not to manipulate your currency and not to do competitive devaluations. Also there are certain transparency provisions so we have an enforceable commitment on currency in this agreement. I think that's the reason that the [Treasury] Secretary (Steven Mnuchin) decided that it was not necessary to have them be a currency manipulator.”
— “We believe that we have a serious problem with China, both an imbalanced economic relationship like $450 billion or more in yearly deficits. In addition, there are a lot of unfair practices. And then there are practices like cyber and the like. The president (Trump) has been talking about this for at least 30 years. And so, he decided we would try to tackle it. You have two choices: You try to decouple the economies, but that probably is not practical. Or, you try to write rules that work for the United States and benefit the United States, and that's what the president decided to do. This deal has real structural change. It has substantial purchases. It also is completely enforceable, and we maintain $380 billion worth of tariffs on important products. So, across the board, it is a really, really good deal for the United States and it will work — if reformers in China want it to work. And if that happens, great. If it doesn't happen, it's fully enforceable.”
— “There are other problems that exist with China and we will take on those in Phase 2 or Phase 3 as needed. There are really serious problems, but the biggest thing to me is to get a really big deal going. There are a lot of ways you can tell what they're doing... the purchasing is easy to enforce. Regarding their currency and other issues, we will have people looking at whether or not they're living up to their commitments on tech transfer on intellectual property, on financial services, on opening agricultural standards issues and the like. So, this is something that we all have to monitor. I'm not Pollyanna about any of this. We're tough, hard people and we expect them to live up to the letter of the law, but we will bring cases and will bring actions against them if they don't, but for right now this is a really, really big agreement and a huge step forward.”
— Regarding critics of the Phase 1 accord that is not yet officially released, Lighthizer said, “There's an old expression that nothing's impossible for the man that doesn't have to do it. The great Teddy Roosevelt's quote about the critic... the person who ends up getting the credit is the person who's actually in the fight. The president is in the fight and he's the one who was standing up and really for the first time ever. This is not a new problem, this [goes back to] Obama, it goes back to George W. Bush and it was made massively worse in the Clinton administration. Every single person said they would take it on, but this is the first president who's done it. I think that the president's got a vision. He's got us working hard on it and we have taken a huge step forward.”
- Chinese negotiator's schedule. China's top trade negotiator, Vice Premier Liu He, is in Washington to sign the Phase 1 trade agreement with President Trump. He is expected to participate in last-minute discussions with U.S. officials today before attending a dinner hosted by Lighthizer and Treasury Secretary Steven Mnuchin. China says Liu's visit to the U.S. will end Jan. 15, according to the People's Daily.
- At least some people think China can fulfill its commitment to purchase $80 billion of U.S. farm products over two years. Rosa Wang, Shanghai-based analyst at agricultural data provider JCI China, said that she was “quite confident” that China could meet the targets. She suggested that most of the expenditure would be on soybeans, followed by smaller purchases of nuts and fruits, pork, poultry, corn, sorghum and ethanol by-products.
- An industry analyst sizes up JCI's forecasts. “According to estimates made by JCI about what products and how much volume China could buy, China’s annual buys of corn and wheat each could reach 8 million MT, very near the tariff-rate import quotas (TRQs). Though sorghum and DDGS were not under China’s TRQs system, import volume of the two products could also hit 8 million MT respectively. Given the 50% replacement rate of DDGS to corn, 8 million MT of DDGS was equivalent to 4 million MT of corn. Besides, if China buys 4 million MT of fuel ethanol imports from the U.S. as expected in 2020, it is equivalent to more than one million MT of corn imports. Thus, China’s buying of corn, DDGS and sorghum in 2020 is equivalent to an import of at least 12 million MT of grain.” The analyst added, “Ask freight people how we could ship the amounts JCI signaled... barge freight has been weak lately.”
- USDA's next WASDE will be key regarding China. Reason: Until the Phase 1 trade accord with China is announced, USDA analysts could not assume any purchases under the accord. But with Wednesday's expected official announcement of the Phase 1 deal, that sets up the Feb. 11 WASDE as key decision time for USDA analysis regarding China import forecasts.
- The U.S. will remove China from a list of countries considered currency manipulators, a decision five months after the Treasury Dept. formally made the designation. “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability,“ Treasury Secretary Steven Mnuchin said in a statement, ahead of the scheduled signing of the Phase 1 trade deal on Wednesday. Treasury came under heavy criticism for labelling China a currency manipulator in the first place, with former U.S. officials saying it was a political move to punish Beijing and put pressure on its trade negotiators. Treasury kept China on its "Monitoring List" of trading partners whose currency practices deserve close attention. Nine other countries are also on that list: Germany, Ireland, Italy, Japan, Korea, Malaysia, Singapore, Switzerland and Vietnam.
- China renminbi climbs after U.S. drops ‘currency manipulator’ label. China’s renminbi strengthened to a five-month high after the U.S. Treasury department removed the label of the country as a currency manipulator.
- Taoran Notes comments. Taoran Notes, affiliated with the official Economic Daily newspaper used by Beijing to manage trade talk expectations, published its first piece for two months on Monday, saying the deal set to be signed in Washington this week is just “the first step to solve a problem... We must bear in mind that the trade war is not over yet — the U.S. hasn’t revoked all its tariffs on China and China is still implementing its retaliatory measures. There are still many uncertainties down the road.” It added that the broad meaning of reaching a trade deal is to find an approach to solving China/U.S. disputes in other areas. China is trying to project the deal as a proof that it is able to stop disputes with the US from erupting into confrontations, while downplaying the parts that could be viewed as Beijing’s concessions.
- WSJ: How the U.S., China settled on a trade deal neither wanted. Link to in depth article.
- Data showed Chinese trade with the U.S. dropped 12.5% in 2019, crimped by the trade war. China trade growth slowed in 2019; exports rose in December. Chinese exports grew 0.5% in 2019, down from a 10% increase registered in 2018, according to China’s General Administration of Customs (GAC). Imports registered a decline of 2.8% in 2019 after an increase of 16% in 2018. China’s December exports grew 7.6% from year-ago levels, reversing the November decline of 1.1%. Imports shot up 16.36% compared with December 2018, building on a 0.3% gain registered in November. China’s trade surplus was at $46.79 billion in December, up from $38.73 billion in November. The December increase was due to rising demand for imports from recovering manufacturing activities, rising prices of major commodities worldwide and growing confidence buoyed by the progress relating to trade consultations between China and the United States, said Huang Guohua, an official with the GAC, according to Xinhua.
Meanwhile, Chinese customs data showed the country had a trade surplus with the U.S. of $295.8 billion last year, compared with a record $323.3 billion in 2018. The figures represent China’s first full year of trade data since the trade war began. China’s 12.5% decline in exports to the U.S. last year would have narrowed the U.S. deficit more, but Chinese imports from the U.S. dropped even faster after Beijing imposed tariffs and directed state-owned companies to buy less from America. China’s imports from the U.S. fell nearly 21%.
- Chinese pork imports jumped 75% to a record in 2019, with imports of U.S. pork and soybeans increasing notably in December. Soybean purchases from overseas held steady. China imported 88.5 million tons of soybeans last year, just 0.5% higher than 2018, according to customs data released today. The nation shipped in 2.1 million tons of pork, the data show. Inbound soybean shipments in December were 9.5 million tons, the highest level since May 2018. China has been issuing regular tariff waivers for domestic firms to buy U.S. soybeans. The exemptions cover the 30% retaliatory duties on the oilseed, which buyers process into edible oil and animal feed. The following chart comes from Bloomberg:
— As widely expected, President Trump to keynote Farm Bureau convention Sunday, Jan. 19. President Donald Trump will fly to Austin on Sunday to keynote the 101st American Farm Bureau Federation’s annual convention. It’s his third straight year appearing before the nation’s largest farm group, and his 14th visit to Texas since becoming president three years ago next Monday. That is triple the number of Texas visits by former President Barack Obama during his first term. Trump's participation was widely expected as he signaled, he would return during his speech last year.
Farm Bureau comments. “The American Farm Bureau is honored President Trump will return for a third consecutive year to speak with farmers and ranchers who work tirelessly to produce the quality food and fiber our country needs,” said AFBF President Zippy Duvall. “We are grateful that he has made agricultural issues a priority and look forward to welcoming him to Austin at a time when there is much to talk about, from trade progress to important regulatory reforms.”
Besides Trump, Farm Bureau members will hear from USDA Secretary Sonny Perdue, EPA Administrator Andrew Wheeler, Senate Agriculture Chairman Pat Roberts (R-Kan.) and Sen. Jerry Moran (R-Kan.).
— Other items of note:
Produce growers get scrutiny commitment to challenge Mexican imports. Southeastern produce growers did not get provisions in the USMCA making it easier to challenge Mexican imports, but the Trade Representative's Office told the Florida and Georgia delegations the U.S. will increase scrutiny of Mexican produce pricing and hold field hearings after Congress approves the trade agreement's implementing legislation.
Iowa hosts Democratic presidential candidate debate tonight. Six Democratic presidential candidates will debate — Joe Biden, Pete Buttigieg, Amy Klobuchar, Bernie Sanders, Tom Steyer, and Elizabeth Warren. The event will take place at Drake University in Des Moines, Iowa, at 8 p.m. CT. CNN and the Des Moines Register are hosting the event with Wolf Blitzer, Abby Phillip, and Brianne Pfannenstiel moderating. Ahead of the debate, Warren and Sanders clashed over Warren’s statement that Sanders told her in 2018 that a woman couldn’t defeat President Donald Trump (details in New York Times). The next Democratic presidential debate will take place in New Hampshire on Feb. 7, four days after the Iowa caucuses.
Consumer Brands Association unveils today as successor to the Grocery Manufacturers Association. The new group is changing course to focus on the broader packaged goods sector. Link for details.
U.S./EU/Japan trilateral trade policy talks today. U.S. Trade Representative Bob Lighthizer will hold trilateral talks with EU Trade Commissioner Phil Hogan and Japanese Minister of Economy, Trade and Industry Hiroshi Kajiyama this morning. Hogan will meet one-on-one with Lighthizer on Thursday regarding sensitive trade issues, including U.S. threats to impose retaliatory duties on $2.4 billion worth of French goods in a dispute over that country’s new digital services tax and to increase retaliatory duties on $7.5 billion of European goods in a separate dispute over subsidies for Airbus. The White House is in the final stages of deciding if it will slap 100% tariffs on $2.4 billion’s worth of French wine and luxury goods. The tariff threats are the White House’s answer to a French tax of 3% on the digital service revenues of giants like Apple, Facebook and Google. The European Union has said it stands with France and “will respond” if the U.S. follows through. Hogan is expected to also meet with Mnuchin and Commerce Secretary Wilbur Ross before leaving town Thursday evening.
Russian military intelligence hacked into Burisma, a Ukrainian gas company, the New York Times reported (link). Burisma is the firm on whose board Hunter Biden, the son of a frontrunner for the Democratic presidential nomination, Joe Biden, served.
Monday witnessed a third successive day of anti-government demonstrations in Iran over the accidental shooting-down of a Ukranian passenger jet last Wednesday. Protesters were filmed chanting “Clerics get lost!” and “Kill the mullahs!” Security forces reportedly fired tear-gas and then live ammunition to disperse the crowds, despite promises from the government that they had been ordered to show “restraint.”
Senate Republicans indicated they would not seek to summarily dismiss the impeachment charges against Trump, proceeding instead to a trial that could begin as soon as Wednesday, but most observers signal the Senate is readying for the impeachment trial to officially get underway next week. After the articles are sent to the Senate, the trial is expected to start soon. Sen. John Cornyn (R-Texas), a top adviser to Senate Majority Leader Mitch McConnell (R-Ky.), told reporters Monday that opening arguments of the trial are expected to start on Tuesday, Jan. 21.
— Markets. The Nasdaq and S&P 500 both scored records to open the week. The Dow rose 83.28 points, 0.29%, at 28,907.05 — just 0.2% below last week’s high. The Nasdaq gained 95.07 points, 1.04%, at 9,273.93. The S&P 500 was up 22.78 points, 0.70%, at 3,288.13. The S&P 500 finished 2019 with a gain of 29%, its strongest performance since 2013. The index has risen 1.8% to start 2020.
A cyberattack on the U.S. banking system could have a devastating effect on U.S. financial stability. "We estimate that the impairment of any of the five most active U.S. banks will result in significant spillovers to other banks, with 38% of the network affected on average. ... When banks respond to uncertainty by liquidity hoarding, the potential impact in forgone payment activity is dramatic, reaching more than 2.5 times daily GDP," New York Fed analysts Thomas Eisenbach, Anna Kovner, and Michael Junho Lee write in a staff report (link).
The U.S. fiscal deficit topped $1 trillion in 2019, the first time it passed that level in a calendar year since 2012, according to Treasury Department figures released Monday. The budget shortfall hit $1.02 trillion for the January-to-December period, a 17.1% increase from 2018, which itself had seen a 28.2% jump from the previous year. Rising corporate tax revenue helped lower the pace of increase in the spending gap. For the fiscal year, which began in October, the shortfall is already at $356.6 billion, an 11.7% increase from a year ago. If that pace continues it would also lead to a fiscal deficit for 2019-20 of more than $1 trillion. Through December, receipts have totaled $806.5 billion while outlays have come to $1.16 trillion. President Trump has now added more to the national debt than former President Barack Obama did in his full second term. Link to NYT article for more analysis.
The length of the current U.S. economic expansion surprised many economists.