Movement on disaster aid/supplemental spending | Moran writes Trump on farmer aid
— U.S./China trade policy update:
- The Trump administration introduced a special license for American companies, including Google with its Android operating system. It permits them to continue working with Huawei for the next three months, allowing its mobile-phone users and broadband networks in rural areas to keep operating. The change was effective May 20 and will be in place for 90 days. “The Temporary General License grants operators time to make other arrangements and the Department space to determine the appropriate long-term measures for Americans and foreign telecommunications providers that currently rely on Huawei equipment for critical services,” Commerce Secretary Wilbur Ross said. "In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks." The agency said it would decide whether to extend the action beyond 90 days but did not say when it would make that determination. Commerce added Huawei to what is called the "Entity List" after concluding they are engaged in actions contrary to U.S. national security or foreign policy interests.
- The reprieve “doesn’t mean much,” Ren Zhengfei, Huawei’s founder, said. He added that the company could “not easily” exclude U.S. chips from its devices, “but if there is a supply shortage, we have a backup.” He also said: “The current practice of American politicians underestimates our strength.” Chinese officials continue to warn the country will retaliate to the U.S. blacklisting of Huawei Technologies Co., but no details on the countermeasures.
- Will China play the “rare earths” card? China accounts for more than 90% of the world’s production of rare earths, 17 elements that are key components of high-tech equipment such as cell phones and guided missiles. With Chinese President Xi Jinping’s recent visit to a rare earth plant, renewed speculation has surfaced that Beijing would use the elements as a bargaining chip in the trade war.
- No trade talks scheduled with China. U.S. Trade Representative Bob Lighthizer is going to Paris later this week for discussions on reform of the World Trade Organization with his counterparts from the European Union and Japan. The trip will confer on proposals to confront China’s subsidies. Lighthizer, European Trade Commissioner Cecilia Malmström and Japanese Minister for Economy, Trade and Industry Hiroshige Seko will meet on the sidelines of the Organization for Economic Cooperation and Development (OECD) ministers gathering.
- China official: 5,000 years and counting. China's envoy to the European Union, Zhang Ming, in remarks on Monday stressed the longevity of Chinese civilization. China, he said, is playing a very long game and sees the trade war within that frame. “We have been holding on for 5,000 years,” Zhang said. “Why not another 5,000 years?”
- One of the barometers traders review to assess the U.S./China trade clash is China soymeal futures. If they are higher, talks are not going well; if lower, a consensus may be ahead. The Chinese prices have hit a five-month high as Sino/U.S. trade tensions deepen. The prices are being fueled by expectations of tighter supply as the trade conflict intensifies.
- A former top U.S. trade negotiator said talks with China for a trade deal had made significant progress despite recent setbacks and an agreement would eventually be reached. Clete Willems, deputy director of the White House’s National Economic Council until April, said China’s leadership includes figures that the U.S. hopes will steer the country to more market-oriented policies to underpin a trade pact. “We believe there is a strong contingent of reformers in China that want change,” Willems said via video link at the Wall Street Journal’s CEO Council conference in Tokyo on Tuesday. Speaking at the same conference, U.S. Ambassador to Japan William Hagerty said the top trade negotiators for the U.S. and Japan may come up with an agreement “in months.” Trump is scheduled to arrive in Tokyo later this week for summit talks with Japanese Prime Minister Shinzo Abe, where trade and security issues are set to be on the agenda.
- BOJ's Kuroda warns on U.S./China trade tension escalation. Increasing trade tensions between the U.S. and China could negatively impact businesses and have negative economic impacts, according to Bank of Japan (BOJ) Governor Haruhiko Kuroda. "If trade tensions persist, they would have a widespread impact on global and Japanese economies via business sentiment and market developments," Kuroda said in remarks to parliament. "We hope the United States and China engage in constructive discussions."
- USTR filed a notice, set for publication today (link), indicating that it would begin to accept requests to exclude certain products from higher tariffs on China-origin imports on June 30.
- Leading sneaker brands and retailers, including Nike, Under Armour and Foot Locker, are urging President Trump to immediately remove footwear from the proposed additional tariffs of 25% on goods imported from China. "Any action taken to increase duties on Chinese footwear will have an immediate and long-lasting effect on American individuals and families," a coalition of more than 170 footwear firms said in the letter. "It will also threaten the very economic viability of many companies in our industry."
— Sen. Moran urges round two of tariff aid package be based on historical plantings, not current. Sen. Jerry Moran (R-Kan.) wrote a letter (link) to USDA Secretary Sonny Perdue in which he joins a growing camp urging that USDA's round two of tariff aid relief be based on each farmer's recent history of planted acres and yields, rather than certifying 2019 production, to ensure farmers are “planting for the market, not government programs.” USDA's forthcoming package is expected to take this route, which would be different from the 2018 approach.
Moran added his name to the growing list that warned of the “long-term damage to U.S. agriculture” from the trade war with China, in contrast with USDA Secretary Sonny Perdue who repeatedly has said there would not be any long-term negative impacts for farmers because President Trump will strike a deal that includes expanded Chinese purchases of U.S. farm goods.
Moran said another round of farm trade aid would help, but he worried that “farm income generated from government payments instead of markets is not sustainable.”
— Other items of note:
Top congressional and White House officials will meet on Capitol Hill this morning to discuss spending caps and the debt limit. Treasury Secretary Steven Mnuchin, acting White House Chief of Staff Mick Mulvaney and acting budget director Russell Vought will confer with four congressional leaders — House Speaker Nancy Pelosi (D-Calif.), Senate Majority Leader Mitch McConnell (R-Ky.), Senate Minority Leader Chuck Schumer (D-N.Y.) and House Minority Leader Kevin McCarthy (R-Calif.). Without an agreement, discretionary spending in fiscal 2020, which begins Oct. 1, would be forced downward to limits included in a 2011 deficit reduction law, although certain war-related accounts would be exempt. Separately, the government’s debt limit would need to be raised or suspended, likely by this fall, to avoid a default on U.S. obligations.
Emergency spending/disaster measure nearing resolution. Negotiators are nearing agreement on a supplemental spending bill to address disaster recovery and issues at the southern border. After meeting with President Trump, Senate Appropriations Chairman Richard Shelby (R-Ala.) said Monday evening that he's dropped his contentious proposed change in the Harbor Maintenance Trust Fund from consideration for the package. Shelby also said Trump appeared to support the level of border funding in the measure. Other issues include how to oversee the spending of the border aid. The package includes a portion of the White House’s $4.5 billion border request, but the exact amount is murky. The bill is expected to include more funding for Puerto Rico, and provisions to provide oversight of the territory's spending of such funds.
Sen. McConnell and Sen. Tim Kaine (D-Va.) introduced a bill that would raise the federal minimum age to buy tobacco products, including e-cigarettes, to 21. Majority Leader McConnell said a spike in vaping use among youth is a public health crisis and notes his home state of Kentucky has the U.S.'s highest rate of cancer tied to smoking. Fourteen states and hundreds of local governments have already raised the minimum age, and federal legislation has been anticipated.
South Korea says it will move fast on plans to give $8 million worth of humanitarian aid to North Korea, which is suffering its worth drought in decades.
— Markets. The Dow on Monday lost 84.10 points, 0.33%, at 25,679.90. The Nasdaq dropped 113.91 points, 1.46%, at 7,702.38. The S&P 500 fell 19.30 points, 0.67%, at 2,840.23.
Fed chairman warns of risks from rising business debt. Fed Chairman Jerome “Jay” Powell said financial regulators must take seriously potential dangers that rising levels of business debt pose to the U.S. economy. But he said that some comparisons to last decade’s subprime-mortgage bubble overstate the risks. U.S. business debt has grown and is being monitored by the U.S. central bank, Powell told an Atlanta Fed conference Monday evening in Florida. While some have expressed concern, Powell said he views the risks from increased corporate debt as "moderate." He noted much of the debt is "financed opaquely, outside the banking" system, and that has prompted worries about a threat to financial stability. “The financial system today appears strong enough to handle potential business-sector losses, which was manifestly not the case a decade ago with subprime mortgages,” Powell said. A key difference between the current corporate debt situation and the 2008 mortgage-drive financial crisis is that the rise is not taking place via a dramatic asset price bubble. Powell did not delve into monetary policy in his remarks but did note in a question/answer session that the Fed is closely monitoring "inflation dynamics," adding that the central bank is “well aware dynamics have changed. I think we have good answers. I do not think we have perfect answers." He also said the U.S./China trade situation is in focus, but cautioned it would be "premature" to make any judgment on that at this stage.
OECD trims global growth outlook again; calls on U.S., China to reverse trade situation. Global GDP is seen at 3.2 % in 2019 by the Organization for Economic Cooperation and Development (OECD), down from a prior expectation for growth of 3.3%. The updated outlook would be the slowest since 2016. The subject of U.S./China trade continues a focus for the OECD, noting that global economic growth would likely be 3.4% if the US. and China do not follow through on tariff increases signaled earlier this month. For the U.S., the OECD said growth would be 2.8% without the tariff hike, but is still seen slowing to 2.3% in 2020 even without the additional tariffs. China's growth is expected at 6.2% in 2019 and 6.0% in 2020. The OECD outlook for Japan of 0.7% in 2019 and 0.6% in 2020 reflects a downgrade to both outlooks of 0.1 percentage point. The OECD also expects trade growth to drop to 2.1% in 2019, down nearly half from the 2018 mark.
British Steel is reportedly on the brink of collapse, as it lobbies the British government for a £30m ($38 million) emergency loan to tide it over. Britain’s second-largest steelmaker says it has been walloped by “Brexit-related issues,” which have led to a slump in European orders. Unless given a helping hand, the firm reportedly could enter administration within two days.