Phase 1 Signing Day for U.S./China Trade Accord

Posted on 01/15/2020 6:05 AM

Senate vote on USMCA Thursday


In today's updates:


* No-new-news development re: U.S./China tariffs impacted markets Tuesday
* Naysayers galore on impact, duration of Phase 1
* Phase 1 text, fact sheet and signing occurring today
* Confidential annex with detailed purchase commitments won’t be released
Battle over technology will keep U.S./China tensions on the front burner
* Remaining Senate committees will vote on USMCA today; chamber vote Thursday
* U.S., EU and Japan increase pressure on Beijing over its state-sponsored actions
* DOE to provide funding for research on bioenergy crops
* EIA assesses impact of IMO 2020


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— U.S./China trade policy update:

  • A no-new-news development about the coming Phase 1 accord impacted markets on Tuesday. Bloomberg reported that existing tariffs on billions of dollars of Chinese goods coming into the U.S. are likely to stay in place until after the Nov. 3 presidential election, and any move to reduce them will hinge on Beijing’s compliance with the terms of the Phase 1 accord. But any trader reading or hearing (or understanding) reports of last December’s truce between the two countries knew that was old news. President Donald Trump and U.S. Trade Representative Bob Lighthizer had for months insisted some $370 billion in tariffs on China would remain as leverage for follow-on talks with China via other phases; Trump has said on several occasions that Phase 2 talks would likely continue after November elections. Chinese officials previously used some news agencies to push their preference for greater tariff reductions, only to see Trump and Lighthizer cancel planned new tariffs and reduce in half some other tariffs, leaving others in place. A Wall Street Journal in depth article about this was released earlier this week. Chinese officials accepted that compromise last December when the truce was announced along with agreement on Phase 1. “When at the appropriate time if China signs a Phase 2, and it’s enforceable, we’ll consider additional tariff reduction,” Treasury Secretary Steve Mnuchin told reporters Tuesday. Lighthizer and Mnuchin put out a joint statement Tuesday responding to the Bloomberg report that said those tariffs are expected to stay in place until after November’s presidential election. “There is no agreement for future reduction in tariffs,” the statement said. “Any rumors to the contrary are categorically false.”
  • Some observers who did not think there would even be a Phase 1 accord are now saying it either will not work, or won’t last. Meanwhile, some news operations were quick to note the Democrats’ frequent critic of any deal with China, especially comments from Senate Minority Leader Chuck Schumer (D-N.Y.).   “People can chirp. It doesn’t bother me at all,” Lighthizer said Monday. “I think that the president has got a vision. He’s got us working hard on it and we have a huge step forward.” Link to New York Times article on the coming details. It notes that the agreement includes “substantial changes to Chinese regulations surrounding food, which Robert Lighthizer, Trump’s chief negotiator, discussed in a briefing with reporters in December. The changes will reduce barriers for products including meat, poultry, pet food, seafood, animal feed, baby formula, dairy and biotech, likely increasing American exports to China in those categories.”

    Trade war impact
  • Phase 1 text, fact sheet and signing will occur today. The signing is set for 11:30 ET, with the text coming around that time. Lighthizer Monday evening told Fox Business Network the text would be released before the signing, but his department in remarks on Tuesday said the text would come around the time of the signing.
  • Every word/nuance in the coming text will be parsed, with some analysts and traders likely giving them too much consequence to suit their positions. Skepticism continues on whether China will fulfill farm product purchase commitments. Senate Finance Chairman Chuck Grassley (R-Iowa) said those purchases will be easy to track and his panel will be holding hearings about China’s commitments. Trump administration officials said they hope people allow time for the Phase 1 pact to be implemented.  
  • A confidential annex with detailed purchase commitments won’t be released. That has been known, but could still be “news” to some. Expected additional annual purchases — which the administration has said would total at least $200 billion above 2017 purchasing levels — would include around $75 billion in manufactured goods, $50 billion in energy, $40 billion in agriculture and $35 billion to $40 billion in services.
  • A continuing battle over technology will keep U.S./China tensions on the front burner.  The Trump administration’s immediate focus: Huawei Technologies, a Chinese telecom giant the White House and Congress view as a national-security threat. Efforts to crack down on technology exports while easing tariffs represent different factions within the administration, the Wall Street Journal reports (link). While there is broad agreement that China’s power should be checked, there is no consensus among or even within various agencies on the best approach, the article concludes.

— Remaining Senate committees will vote on USMCA today; chamber vote Thursday. The Senate Appropriations, Foreign Relations, Commerce and Health, Education, Labor and Pensions Committees hold markups today to vote on the US-Mexico-Canada Agreement (USMCA). That clears the way for the chamber to take the agreement up, with Senate Majority Leader Mitch McConnell (R-Ky.) saying they will do so Thursday.


— Other items of note:

  • The U.S., EU and Japan increased pressure on Beijing over its model of state-sponsored capitalism, calling for tougher World Trade Organization (WTO) curbs on government subsidies. The three issued a joint statement on Tuesday on a proposal for more stringent global rules to prevent Chinese companies relying on state support to gain advantage over foreign rivals. The proposed rule changes take aim at core parts of China’s economic model, calling for a wider WTO ban on various types of state support and for governments to do more to prove that aid to companies does not distort trade. The agreement could help the Trump administration deflect criticism that its deal with China fails to address industrial subsidies and that the U.S. has not sufficiently worked with its allies to pressure Beijing. Brussels hopes the proposals can be a first step in a wider reform effort at the WTO. EU officials said on Tuesday that they had identified examples of Chinese authorities writing off loans they had given companies and of excessively large subsidies to failing companies that were propped up rather than being wound down. 

  • DOE to provide funding for research on bioenergy crops. Up to $75 million over five years will be provided for research on development of sustainable bioenergy crops that can withstand environmental stress and changing environmental conditions, according to an announcement from the Department of Energy (DOE). The funding will be directed at universities, industry and nonprofit research institutions as the lead researchers and they may collaborate with DOE national labs and other federal agencies. The funding will be awarded on a competitive basis in the form of five-year grants ranging from $1 million to $3 million per year starting in fis al year 2020. Planned funding is $75 million over five years, with outyear funding dependent on appropriations.

— Markets. The Dow on Tuesday rose 32.63 points, 0.11%, at 28,939.67. The Nasdaq fell 22.60 points, 0.24%, at 9,251.33. The S&P 500 declined 4.98 points, 0.15%, at 3,283.15.


     EIA assesses impact of IMO 2020. The Jan. 1, 2020, enactment of the International Maritime Organization (IMO) rules that lower the maximum sulfur content of marine fuel oil used in ocean-going vessels from 3.5% of weight to 0.5% is expected to result in shifts in the petroleum industry, according an analysis of the situation by the Energy Information Administration (EIA). “The regulation will encourage global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oil into low-sulfur distillate fuel to create compliant bunker fuels,” EIA said in its Short-Term Energy Outlook (STEO) report. U.S. refinery runs are expected to increase by 3% from 2019 to a record mark of 17.9 million barrels per day (bpd) in 2020. EIA predicts this will mean refinery utilization rates will average 93% in 2020. The most significant effects, EIA said, “will be on diesel wholesale margins, which will rise from an average of 43 cents per gallon in 2019 to a forecast peak of 53% per gallon in March 2020.” They further predict those prices will average 50 cents per gallon in 2020. They also expect those margins will decline to 49 cents per gallon in 2021.



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