U.S./Japan Conclude ‘Frank' FTA Talks, More Sessions Ahead

Posted on 04/17/2019 6:45 AM

Anxiety about possible U.S./China trade accord builds as end zone nears

Japan and the U.S. have agreed to accelerate their trade talks after an initial meeting in Washington suggested the two sides will stick to a narrow range of topics. Further talks are expected in May.
     The best signal the U.S. and China may be getting close to an agreement: Anxiety about what may or may not be in the final language is mounting.
     China’s economy grew 6.4% in the first quarter of 2019 versus a year earlier, according to official figures released today, but beating analysts' expectations. Now observers are debating whether or not the great-than-expected figure will impact ongoing U.S./China trade talks.
     African swine fever is one of the reasons behind China’s slowdown in soybean imports.



— U.S./China trade policy update:

  • Even before any U.S./China agreement, some farmers/farm groups fret about specifics. The high anxiety comments by some show that whatever any final accord may bring, it will not please everyone. Uncertainties include which U.S. farm commodities will be included in any accord, the quantity and/or dollar amount, and the timeframe of any farm product purchase commitments. In Congress, some lawmakers likely have their press releases mostly written, saying “too little, too late.”
  • U.S. pork, poultry exports to China a focus in talks. Reuters reported that China is likely to lift its ban on imports of U.S. poultry linked to the 2015 bird flu outbreak in the U.S. and may buy more U.S. pork, but the country is resisting requests from the U.S. to drop its ban on imports of ractopamine. While the lifting of the ban on U.S. poultry is expected based on China's recent action to lift a similar ban on imports of French poultry, China is also said to be pushing for allowing its poultry products to enter the U.S., something that has been a sticking point between the two countries.
  • Trump is causing alarm that he may give China a new trade weapon in pursuit of a deal, Bloomberg reports (link). This is another example of how a potential U.S./China trade and investment accord will find naysayers the minute any agreement is announced.
  • Talkative White House economic adviser Larry Kudlow said that “very good progress” is being made in the negotiations which he expects to continue this week. Enforcing any deal remains one of the main sticking points, with comments from Treasury Secretary Steven Mnuchin that any agreement would have a two-way enforcement.
  • Will China’s more upbeat Q1 economic growth impact trade talks? Some China watchers say yes, others say no. But Beijing needs such hopeful signs for its economy as it tries to reach a trade deal with the Trump administration while under pressure to lift conditions at home. The improvement, some note, probably has more to do with all that stimulus cash than with any sudden increase in business confidence. And it’s unclear how long the cash can keep flowing.
  • This will get President Trump’s attention: China steel production hits record in Q1. China churned out a record 231 million tons of steel in Q1 spurred by consumption in the infrastructure sector due to government stimulus. The Q1 figure is up almost 10% from a year earlier, with production in March rising 10% to 80.3 million tons.

— ASF one of the factors behind China's decline in soybean imports during Q1 2019. Customs data reported China's March soybean imports totaled 4.9 million metric tons (MMT). The Q1 2019 soybean import total of 16.75 MMT was down 14% from a year earlier, with one of the reasons being cited as the impact of African swine fever (ASF). According to Grain and Oils News, China's Feed Industry Association estimates that 2019 feed production will be down 1-to-2% and 2018-19 consumption of protein meals will be down 4-to-6 MMT due to the influence of ASF.

— U.S./Japan trade talks conclude; more talks ahead. Top trade officials from the two countries renewed their hope for striking a bilateral trade agreement focused mainly on goods and some services, ending two days of talks on Tuesday, the Office of the U.S. Trade Representative said. "The United States and Japan discussed trade issues involving goods, including agriculture, as well as the need to establish high standards in the area of digital trade," USTR said in a statement following a two-day meeting between U.S. Trade Representative Bob Lighthizer and Japan’s Economic Revitalization Minister Toshimitsu Motegi. USTR noted the U.S. “raised its very large trade deficit with Japan — $67.6 billion in goods in 2018.”

Lighthizer and Motegi agreed to meet again "in the near future to continue these talks," USTR said.

The Trump administration will not press Japan to open its agricultural market more than it already has in the Trans-Pacific Partnership (now CPTPP) and other trade agreements.

Early results pushed. Motegi, at a briefing for reporters, said he hoped to reach good results in the talks "at an early stage," Reuters reported. Motegi could accompany Abe when the prime minister visits the U.S. next week for talks on North Korea and trade.

Meanwhile, Japan posted a trade deficit in the fiscal year ended in March, the first deficit in three years. March exports fell 2.4% from year ago, putting the deficit for the fiscal year ended with March at 1.59 trillion yen ($14.2 billion), according to the Ministry of Finance.

Perspective: U.S. officials concentrated on agriculture provisions rather than controversial issues such as pharmaceutical pricing or currency manipulation. While the U.S. side wants an “early harvest” to reduce its bilateral trade deficit, Japan will be unwilling to accept a one-sided deal where it cuts agriculture tariffs without getting anything in return. “From the American side, [we heard] they want to reduce their deficit, and at the same time they have a lot of interest in the agricultural sector,” said Motegi. He added that the U.S. had not sought to raise issues that would take a long time to discuss. Motegi signaled that the addition of digital trade, such as rules on the cross-border flow of data, was an acceptable area of services for Japan to include in the talks. Reports note that Japan may offer to increase investment in U.S. vehicle production, but it is likely to resist pressure for any kind of voluntary restraint on exports. Japan will also want some concrete gains, in the form of U.S. tariff cuts, if it is to cut its own agricultural tariffs. Meanwhile, Prime Minister Shinzo Abe is expected to travel to Washington next week for a summit with President Trump, who may visit Japan twice in the coming months, for a possible state visit in May followed by the G20 in June, giving further impetus to the trade talks.

— Mexican Senate to begin debate next week on labor reform. Mexico’s Senate will begin debates next week on the major labor reform law it must pass under USMCA, Ricardo Monreal, the Mexican Senate’s majority leader, announced. The goal, he said, is to pass the labor reforms by the end of the month. Democrats in the U.S. House of Representative have said they’re waiting to see the reforms passed before they consider the new pact.

Meanwhile, Vice President Mike Pence is in Texas today to tour an oil rig and promote the Trump administration's United States-Mexico-Canada Agreement.

— Facts, figures and concerns about possible Trump auto tariffs.  President Trump repeatedly has threatened to impose a 25% tariff on imported cars from several nations, including Canada, Mexico, Japan and the EU. That could boomerang on several Republican states if trade partners impose retaliatory penalties. GOP lawmakers fear that could hit states such as Ohio, Indiana, Texas, Tennessee, Missouri, Kentucky, Alabama and Mississippi, which all rank in the nation’s top 10 for auto manufacturing. Economic analysts say if Trump follows through on any of his auto tariffs threats, that could tilt an already tepid world and U.S. economy into a tailspin.

Other items of note:

  • Trump vetoes measure ending U.S. support for Saudi-led war in Yemen. The vetoed measure rebuked Congress for a second time this year. In a statement to the Senate released by the White House, Trump called the joint resolution "unnecessary" and argued it would negatively affect U.S. foreign policy.

  • A fast-growing part of Canada’s agriculture sector is retrenching because of trans-Pacific trade tensions. Canola producers and shippers estimate Canada’s production could drop around 10% this year, the Wall Street Journal reports (link), halting a decade of booming expansion for one of the country’s most profitable crops. Canada’s canola output surged more than 60% in the past decade to 20.3 million metric tons by 2018, driven largely by expanding orders from China. Beijing halted canola shipments from two of Canada’s largest grain shippers last month, however, on pest concerns. Canadian authorities believe the action is tied to the arrest of Huawei Technologies Inc.’s chief financial officer. The impact is already reaching into supply chains, with some farmers restraining production while others “roll the dice” with plantings in hopes of a trade truce or openings in new markets, the article noted.

  • A U.S. move to toughen pressure on Cuba may reach into trade relations with the European Union. The Trump administration plans to allow U.S. nationals to lodge claims against foreign companies that do business in Cuba setting up a fresh front in a widening U.S. economic rift with Europe. EU officials have privately warned they could sue in the World Trade Organization if the U.S. proceeds with a plan that would open the way for foreign companies that do business involving confiscated property in Cuba to be sued. The U.S. says there will be no grace period and no exceptions after the May 1 expiration of the latest waiver. Some container lines began operations in Cuba when relations opened up under the Obama administration.

Markets. The Dow on Tuesday gained 67.89 points, 0.26%, at 26,452.66. The Nasdaq rose 24.21 points, 0.30%, at 8,000.23. The S&P 500 added 1.48 points, 0.05%, at 2,907.06.

China’s economy grew 6.4% in the first quarter of 2019 versus a year earlier, according to official figures released today, but beating analysts' expectations. GDP growth matches the fourth quarter growth figure of 6.4%, which matched the lowest growth rate since the Chinese government began publishing quarterly growth rates at the beginning of 1992. The tally falls within the government’s growth target range of between 6.0% and 6.5% for this year. Last year the economy grew at 6.6%. Fixed asset investment grew by 6.3%, retail sales were up 8.7% and industrial production grew by 8.5%, showing improvement in the economy. The latest figures suggest that Beijing’s stimulus measures are starting to boost the Chinese economy, as intended. It has cut taxes, lowered short-term interest rates and revved up infrastructure spending.


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