High-level U.S./China Talks May be Cut Short; China Continues to Push Phased Strategy

Posted on 10/10/2019 6:52 AM

USDA report expected to show less corn, soybean production

In today's updates:

* U.S./China high-level talks: Same issues, same players, no major breakthroughs
* China delegation may leave early: South China Morning Post
* Navarro: 'Either a big deal or no deal'
* Both U.S. and Chinese negotiators have hardened their stances
* Bottom line for U.S./China trade talks: Uncertainty and curb your enthusiasm
* Analysts already saying today's USDA report will not fully capture corn, soybean size
* AFL-CIO’S Trumka: USMCA would be defeated in pre-Thanksgiving vote
* Turkey launched a military ground incursion into northeastern Syria
* Defining negative interest rates
* House Ways & Means and Senate Finance staff are negotiating tax extenders
* Pompeo denies Turkey had been given a “green light” to invade north-eastern Syria
* OECD unveils proposals to overhaul the tax system for big global companies
* Trump opens door to cooperating with impeachment probe
* Different Federal Reserve viewpoints on interest rates ahead

Markets: Impact of negative interest rates: you are paid to borrow. The latest such country is Greece, which emerged from its debt crisis only in April 2018. It is now being paid to borrow: its latest bond issue fetched a negative interest rate. The Greek government issued 13-month bonds worth 487.5m euros ($535 million) with a yield of -0.02%. Other countries hit by the euro-zone crisis, such as Italy and Spain, are also now able to borrow at negative rates.

About 700,000 households and businesses in northern and central California are without electricity. PG&E, the state’s largest utility, cut power in an effort to prevent wildfires, which last year killed dozens of people. Residents rushed to stock up on essentials. Some schools and shops shut, and failing traffic lights caused accidents. Meanwhile, the judge overseeing PG&E's bankruptcy case said he will allow for the consideration of alternative restructuring plans, stripping the company of the sole right to propose a Chapter 11 plan covering billions of dollars of damages.

Taking hot coffee to another level. Scientists are working to engineer more resilient coffee plants as hotter conditions threaten to reduce the area in the tropics suitable for growing the crop. Link to WSJ article.


U.S./China trade policy update:

  • Not much has changed as key U.S./China trade negotiators meet for what was expected to be two days of meetings, with a possible visit with President Trump on Friday, but the South China Morning Post (link) reported the Chinese delegation will stay for just one day. Little has changed in the discussions, as China has simply returned to a strategy it used in the early days of the trade war: try to woo the U.S. into an interim agreement by pledging to buy a significant amount of U.S. soybeans and perhaps pork, but no final conclusions on more sensitive areas like enforcement, intellectual property/forced technology transfers, the issue of state subsidies, which the Trump administration says give Chinese companies an unfair advantage over international competitors, and U.S. national security concerns over Chinese telecom giant Huawei Technologies Co. that Trump and his top trade advisors have insisted on. China has also reportedly agreed in principle to dozens of changes to import procedures, such as strict sanitary and phytosanitary rules, that U.S. officials say are used to discriminate against American exporters.
  • China clearly wants to avoid slated U.S. tariffs to take effect Oct. 15, with another round on Dec. 15, and this is the reason for its retro approach to the talks amid promises of commodity purchases with big numbers (but frankly at levels for soybeans that are below the tonnage that prevailed before the trade war began). China watchers do not think Chinese purchases will return to pre-trade-war levels unless the U.S. removes all its tariffs. But that would take resolution of the thorny issues raised by Trump and his top team of negotiators. But reports note that China refused to talk about forced technology transfers. (The U.S. plans to raise tariffs to 30%, from 25%, on $250 billion of Chinese goods, which is set to happen Oct. 15. Also, new tariff of 15% on around $160 billion in smartphones, apparel and other consumer goods are scheduled to start Dec. 15.)
  • Trump's two-fold strategy is now also well known: Whenever talks are about to begin, the U.S. plays both sides: aggressive and a call for cooperation in the talks. For example, in recent days the U.S. has taken action on Chinese trading practices and has blacklisted Chinese companies and entities linked to China’s repression of its Muslim minorities. Now comes word that the White House has been considering an executive order that would increase inspections on parcels from China to detect any illegal contents. “China sends the U.S. close to 1 million small air parcels a day, and a disturbingly high percent appear to contain contraband ranging from counterfeit goods to deadly fentanyl and other opioids,” Peter Navarro, the White House trade and manufacturing policy adviser, said on Wednesday.
  • Trump on a mini deal: Asked Monday if the administration was heading toward a partial deal with China, Trump said, “I think it’s not what we prefer at all.” White House trade adviser Peter Navarro told NPR on Monday that Trump had “steely resolve” and that it was “either a big deal or no deal.”
  • A key GOP senator wants a 'rebalancing' in the U.S./China relationship. “I don’t have high expectations for these talks,” said Sen. Marco Rubio (R-Fla.), who has consistently pushed a tough approach to Beijing. “What we’re going through here is not just a trade dispute but a much-needed rebalancing in our relationship.”
  • Congressional Democrats want it both ways when it comes to U.S./China strategy. Most Democrats back a tough approach to China, but many have criticized Trump’s tactics and reliance on tariffs. Sen. Maria Cantwell (D-Wash.) said it is “clear from the latest report on U.S. manufacturing that the tariff-first approach on trade is hurting the United States.”
  • Another typical development ahead of talks: reports about how the lengthy trade war is negatively impacting U.S. businesses, as China is the world's largest consumer market, and as small businesses are increasingly impacted by the U.S. tariffs on many Chinese imports.
  • Commerce’s Ross: focus with China is on getting them to follow world trade rules. The U.S. is “not opposed to trade with China,” Commerce Secretary Wilbur Ross said at an American Chamber of Commerce meeting in Australia. But the U.S. is seeking to address “fundamental issues in our trade relationship with China, including forced technology transfers, cyber intrusions, the stealing of [intellectual property] and industrial subsidies to state-owned enterprises.” He blamed China for causing “massive dislocations due to overcapacity and dumping excess production into global markets.” Getting China to “abide by the global rules of trade, every nation in the world will benefit — including China. China is, after all, a real powerhouse. It is growing rapidly. And with its success comes responsibility — it's responsibility to act as a member of the global community." China has not changed its behavior since joining the WTO, Ross stated. "In fact, its practices have become more protectionist than before,” he said. In other remarks in Australia, Ross noted that the U.S. does not like to use tariffs. “In fact we would prefer not to use them, but after years of discussions and no action, tariffs are finally forcing China to pay attention to our concerns," Ross said, according to Reuters.
  • This week's meetings: Lower-level deputy officials have been meeting to lay the groundwork. Today and perhaps Friday, high-level meetings will be held between Chinese Vice Premier Liu He and other senior Beijing officials with U.S. Trade Representative Bob Lighthizer and Treasury Secretary Steven Mnuchin. The Chinese delegation was previously working to secure a meeting between Liu and President Trump, according to reports. The best case scenario, some say would be to find ways that Trump and Chinese President Xi Jinping can ratchet back tensions at an expected meeting in mid-November at a summit of world leaders in Chile.
  • China will ask the U.S. to lift sanctions on the Dalian units of China COSCO Shipping, sanctions imposed by the U.S. as it believes the company is carrying Iranian petroleum, Bloomberg reported. Reports Wednesday indicated that some COSCO Shipping ships had turned off their locating devices, a move that makes the ship movements undetectable.
  • Bottom line: Most do not expect a major breakthrough in talks other than a possible delay in threatened U.S. tariffs ahead and a previously agreed currency pact as part of an early harvest deal. But it appears both sides have hardened their stances on the most thorny issues. “It’s unrealistic to think we’re going to solve all the issues in one go — we have too many issues,” said Craig Allen, president of the U.S.-China Business Council. The best development, some say, would be a phased process whereby China would pledge certain things like their commodity purchases, while the U.S. would not implement increases in tariffs, in return for a specific timeline for the two countries to discuss and implement provisions relative to more thorny issues. So we are down to the latest rumors on the topic: No change to the negotiation schedule, next week's tariff hike could be suspended, concessions may be announced for blacklisted Huawei, a currency pact is underway, a partial trade deal is in the works and Beijing is offering to increase agricultural purchases. Expect more twists and turns today.

Today's USDA Crop Production report will lead to discussion about next month's surveys for corn and soybeans. Reason: Traders and analysts think whatever USDA estimates today for corn and soybean crop prospects will overstate the eventual result due to weather and crop developments (or lack of development) since surveys were taken for this month's report.

Analysts polled by Reuters expect the department to trim its harvested acreage and yield estimates for both corn and soybeans, translating to a corn crop of 13.684 billion bu., down 115 million bu. from September, and a soybean crop of 3.583 billion bushels, a 50-million-bu. decline from September.

AFL-CIO’S Trumka says USMCA would be defeated in pre-Thanksgiving vote. If a House vote on the U.S.-Mexico-Canada Agreement (USMCA) is taken before Thanksgiving, AFL-CIO President Richard Trumka told the Washington Post in an interview that it would be a “colossal mistake” and “the agreement would be defeated.” However, Trumka did not rule out his organization backing the deal, provided that labor enforcement issues are addressed. “If they can’t enforce their own laws, we have a real problem," he said. “No agreement will be able to work.” Should those items be addressed, Trumka said, “we can get to yes. If we can’t get them fixed, we can’t get to yes.”

Other items of note:

  • Secretary of State Mike Pompeo denied that Turkey had been given a “green light” to invade north-eastern Syria. Turkish troops crossed the border into territory held by Kurdish-led forces allied to America in the war against Islamic State. President Trump tried to defend his decision to shift U.S. troops out of the area. Trump said the Kurds were not such essential allies and told an audience at a White House ceremony, “they didn’t help us in the Second World War, they didn’t help us in Normandy.” Meanwhile on Wednesday, a bipartisan pair of senators released an outline of a bill intended to directly sanction Turkish President Recep Tayyip Erdoğan and his top cabinet officials over unilateral action in Syria. Trump said he agrees with GOP Sen. Lindsey Graham (R-S.C.) that sanctions should be imposed on Turkey if its military operation in northern Syria goes too far. He added he would do something more severe, but did not specify what.

  • The OECD unveiled long-awaited proposals to overhaul the tax system for big global companies. Under its plans, firms would find it harder to shift profits across borders into low-tax jurisdictions and would pay more tax in the countries where they sell goods and services. The OECD reckons governments could gain $240 billion a year. It wants the change agreed on by 2020.

  • House Ways and Means and Senate Finance staff are negotiating tax extenders legislation "that can be put in the end-of-the-year omnibus appropriations bill," Senate Finance Chairman Chuck Grassley (R-Iowa) said. He noted "end-of-the-year" means Nov. 21 when the continuing resolution expires.

  • Trump opens door to cooperating with impeachment probe. Asked whether he would participate in the proceedings if the House voted to authorize the investigation and followed the same rules as previous impeachment efforts, Trump said, “Yes, if the rules are fair.” Meanwhile, Joe Biden, for the first time, called for President Trump to be impeached and Trey Gowdy, the former Republican lawmaker, has joined Trump’s legal team.

  • Acting Commissioner of U.S. Customs and Border Protection Mark Morgan said Tuesday that officers in September apprehended nearly 52,000 individuals at the southwest border, the lowest monthly total this year.

Markets. The Dow on Wednesday gained 181.97 points, 0.70%, at 26,346.01. The Nasdaq rose 79.96 points, 1.02%, at 7,903.74. The S&P 500 moved up 26.34 points, 0.91%, at 2,919.40.

Minutes of the Fed's September meeting released yesterday showed that "several participants" wanted the FOMC's post-meeting statement to give more guidance on when they expected the monetary policy rate adjustments to end. Since the meeting, Fed officials' standard line is "there's no preset course," and incoming data will help determine any further actions. Some policymakers wanted to keep rates unchanged and a couple wanted to cut rates by 50 basis points instead of the 25-bp cut that was taken. While noting “most” FOMC members backed additional policy easing at the session, “several” wanted to keep rates steady, citing similar reasons that those wanting to reduce rates cited — their economic projections had changed little since the prior meeting. While those wanting to keep rates steady acknowledged the uncertainties, they believed those were not likely to be resolved soon. But there were “a couple” of participants arguing for a bigger 50-basis-point cut — one of those we know was St. Louis Fed President James Bullard. Interestingly, “several” Fed members pointed to statistical models gauging the probability of a recession, “suggested the likelihood of a recession occurring over the medium term had increased notably in recent months.” But even those noting that situation admitted there is “difficulty of extracting the right signal from these probability models.” As we noted in the wake of the FOMC meeting conclusion, there are clearly divisions on the Fed and given that conditions creating this division have not been altered greatly, the Oct. 28-29 meeting will like those divisions continue. Fed members are not unified so putting out unified guidance on the future of Fed policy is not surprising. Hence, the Fed’s continued message that incoming data will drive their decisions.


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