U.S./China Phase 1 talks linger | Metal tariffs | Biodiesel tax incentive | FOMC | RFS
In today's updates:
* House Democrats and Trump both laud the U.S.-Mexico-Canada trade agreement
— USMCA update:
- Senate won’t vote on USMCA until 2020; House to vote next week. “We will not be doing USMCA in the Senate between now and the end of next week,” Senate Majority Leader Mitch McConnell (R-Ky.) said Tuesday. “That will have to come up in all likelihood right after the (impeachment) trial is finished in the Senate.” The Senate's USMCA punt followed House Democrats' announcing they had reached a deal on the trade pact and would likely vote on the U.S.-Mexico-Canada Agreement (USMCA) next week before Congress recesses for the holidays.
- Best evidence USMCA will be approved: both political parties are taking credit for it. “We’re declaring victory for the American worker,” House Speaker Nancy Pelosi (D-Calif.) said. “It is infinitely better than what was initially proposed by the administration,” Pelosi added. “I know there are those...who have said ‘Why? You shouldn’t do this. This gives him a win.’ No. We are so far away from the proposal that he put forth that this is a triumph for American workers. ... We are miles and miles from what he put forth. So he has yielded on what this is.” U.S. Trade Representative Bob Lighthizer called the announcement a victory for President Trump. “We have created a deal that will benefit American workers, farmers and ranchers for years to come,” he said.
- USMCA impacts. Studies by both the International Monetary Fund and the International Trade Commission conclude the revamped pact won’t meaningfully goose economic growth: The ITC projects it will raise GDP by 0.35% after six years; and the IMF says its broad effects will be “negligible.”
- USMCA impacts for U.S. agriculture. “USMCA is a big win for American workers and the economy, especially for our farmers and ranchers. The agreement improves virtually every component of the old NAFTA, and the agriculture industry stands to gain significantly,” said USDA Secretary Sonny Perdue. “We must not lose sight — the House and Senate need to work diligently to pass USMCA by Christmas.”
Here is how USDA sizes up USMCA's impacts:
Key Provision: Increasing Dairy Market Access
America’s dairy farmers will have expanded market opportunities in Canada for a wide variety of dairy products. Canada agreed to eliminate the unfair Class 6 and 7 milk pricing programs that allowed their farmers to undersell U.S. producers.
Key Provision: Biotechnology
For the first time, the agreement specifically addresses agricultural biotechnology – including new technologies such as gene editing – to support innovation and reduce trade-distorting policies.
Key Provision: Geographical Indications
The agreement institutes a more rigorous process for establishing geographical indicators and lays out additional factors to be considered in determining whether a term is a common name.
Key Provision: Sanitary/Phytosanitary Measures
The three countries agree to strengthen disciplines for science-based measures that protect human, animal, and plant health while improving the flow of trade.
Key Provision: Poultry and Eggs
U.S. poultry producers will have expanded access to Canada for chicken, turkey, and eggs.
Key Provision: Wheat
Canada agrees to terminate its discriminatory wheat grading system, enabling U.S. growers to be more competitive.
Key Provision: Wine and Spirits
The three countries agree to avoid technical barriers to trade through non-discrimination and transparency regarding sale, distribution, labeling, and certification of wine and distilled spirits.
— Where are those revived metal tariffs on Argentina and Brazil that President Trump threatened last Monday? Now, National Economic Council Director Larry Kudlow says no decision had been made on reinstating the tariffs, even though President Trump last week said the duties were “effective immediately.”
The Brazilian government has yet to be notified by the U.S. about the intention to impose more duties on the country’s steel, according to a person with direct knowledge of the matter, the Washington Post reported. Brazil plans to wait until it has official communication from the U.S. to make any decisions, the person said.
— Tax incentive push mounts in House as hurdles continue. House lawmakers are trying again to attach language to a must-pass spending measure that would extend several lapsed or about-to-lapse tax incentive, The pending language would include a $1 per gallon biodiesel tax incentive.
The blame-game. With just 10 days remaining before the Dec. 20 deadline to fund the government, lawmakers from both political parties are blaming each other for faltering negotiations. “It’s still so far apart,” said Rep. Tom Reed (R-N.Y.), who said he has been gathering updates from those involved in negotiations. “Democrats are asking for very big tax policies in exchange for things like technical corrections and others, it’s just not a reasonable deal.” House Democrats are making a last-ditch bid to reverse the $10,000 cap on state and local tax deductions before year’s end.
House Ways and Means Committee Chairman Richard Neal (D-Mass.) said he hoped after the House passes the USMCA measure it will free up some bandwidth. “Once this now is done and dusted, we can move to these other things,” he told reporters.
Senate Finance Committee Chuck Grassley (R-Iowa) said House Democrats were asking for too much. “We haven’t had any success in our negotiations with the House, even though it’s been good-faith negotiations,” said Grassley. “What they want we could not get through the Senate.”
— U.S./China trade policy update:
- Removal of some existing tariffs is part of the discussion with Chinese officials over a Phase 1 deal, according to National Economic Council director Larry Kudlow.
- Both countries are signaling Phase 1 negotiations could be extended beyond Dec. 15, the date President Trump initially threatened to invoke sanctions on around $160 billion on Chinese products. If President Trump delays those tariffs to allow more time for negotiations, it would be the fifth time this year that he has delayed or canceled tariffs. That would boost talk that China is taking advantage of the negotiating process.
- There’s a good reason to expect a delay in threatened U.S. tariffs, according to Bloomberg News analysis. “For the U.S., the December tariff round would have more costs than benefits. Using granular trade data, Bloomberg Economics calculated what share of U.S. imports from different tariff tranches come from China. For the first tranche a mere 7% of the total came from China, allowing imports to be sourced from elsewhere and the disruption to the U.S. economy to be contained. For the final tranche, the share of Chinese goods is a whopping 86% and fallout would be elevated.”
- Michael Pillsbury, a Hudson Institute scholar who advises President Trump, drafted a memo that has been circulated to the White House outlining possible actions, the New York Times reported. The memo, reviewed by the NYT, included options like extending the deadline with a commitment to hold additional talks. A more aggressive approach would entail Trump ratcheting tariff rates higher, perhaps beyond 50%, and refusing to soften on any of his original demands.
- Jared Kushner, a close adviser to the president, said that he did not know what decision Trump would make but that the talks were “heading in a good direction.” Kushner has recently taken a more prominent role in the talks, offering to try to find common ground between the Chinese negotiators and his father-in-law.
- Biggest hurdle in Phase 1 negotiations continues to be the U.S. insistence that China guarantee ito buy a specific amount of U.S. farm products. China wants to link the size of any upfront commitment to purchase U.S. farm products on how much tariff relief the U.S. would be willing to extend immediately. Treasury Secretary Steven Mnuchin has said China had committed to annual purchases of between $40 billion and $50 billion a year within the second year of a deal, but Chinese officials have never publicly acknowledged any level of purchases.
- U.S. negotiators want China to detail in the text of the deal that there would be a quarterly review of promised purchases and that the purchase amount wouldn’t drop by 10% in any quarter, the Wall Street Journal reported. Chinese negotiators have pushed back against the demand, arguing that any guaranteed purchases would violate the rules of the World Trade Organization (WTO) and cause friction between China and its other trading partners.
- The Phase 1 parlor game continues as to whether or not an accord will be reached, and if so, when. Analysts at Eurasia Group, a New York-based consultancy, estimate that there is a 65% chance that the Phase 1 agreement will be reached early next year. “The key risk at this point is not re-escalation, but drift,” the firm wrote in a Dec. 6 report to clients.
- “We’re still in a high-stakes poker game,” said Myron Brilliant, the executive vice president at the U.S. Chamber of Commerce. “Having another round of tariffs would be a poison pill in the context of the current U.S.-China negotiations, and in the context of the global economy,” Brilliant added. “We hope both sides understand the urgency of getting an agreement finalized as soon as possible.”
— Sen. Grassley again says he has been assured regarding the coming EPA RFS plan. EPA will finalize its plan for 2020 biofuel and 2021 biodiesel levels under the Renewable Fuel Standard (RFS) in line with the September agreement between President Donald Trump and biofuel backers and corn producers, Sen. Chuck Grassley (R-Iowa) told reporters Tuesday. Grassley indicated he had been assured about the mandates when he spoke with Office of Management and Budget (OMB) acting director Russell Vought, and he also had conversations recently with White House economic adviser Larry Kudlow. Kudlow has been formulating the plan under a directive from President Trump.
“I believe Kudlow understands why the market reacted negatively to the proposed rule,” Grassley said. “I also called OMB acting director Vought on Friday and he assured me that he would work to make sure the rule is finalized according to the agreement that was made on September 12.”
The final EPA plan is currently at OMB for review with the agency planning to issue the final rule yet this month, after an interagency committee has a chance to review the topic.
— Other items of note:
Turkey’s foreign minister vowed that his country would retaliate against any American sanctions over Turkey’s purchase of a Russian missile-defense system. America’s Senate foreign-relations committee is expected to pass punitive measures today (it still needs approval by the rest of Congress). The two countries are NATO allies, but relations are strained over a host of issues.
Dairy farmers are wary of a possible merger between the largest dairy co-op in the U.S. and Dean Foods, a milk processing company that sought bankruptcy protection last month. Link to New York Times article.
EU's farm subsidies again come under attack. With uneven conflict-of-interest rules and murky influence peddling, the EU's $65 billion in farm subsidies are kept flowing by the people who benefit. Link to NYT article.
2020 presidential contender Andrew Yang has qualified for the next Democratic debate a week from tomorrow. Yang will join former Vice President Joe Biden, Mayor Pete Buttigieg, Sens. Amy Klobuchar, Bernie Sanders and Elizabeth Warren, and billionaire Tom Steyer. Michael Bloomberg doesn't meet the DNC's donor requirement to qualify for the debate.
— Markets. The Dow on Tuesday lost 27.88 points, 0.10%, at 27,881.72. The Nasdaq fell 5.64 points, 0.07%, at 8,616.18. The S&P 500 eased 3.44 points, 0.11%, at 3,132.52.
Fed likely to hold rates after meeting today. Federal Reserve officials are likely to hold their benchmark interest rate steady after their two-day meeting concludes today and are not expected to make notable changes to their wait-and-see posture on more rate reductions. The focus will be on the Fed's outlook, with the Federal Open Market Committee (FOMC) updating its rate forecast through 2022. Chairman Jerome Powell will give a press conference at 1:30 p.m. CT where he is expected to maintain his recent upbeat tone economic expansion. The CME FedWatch tool puts odds of a steady rate decision at over 97%. Looking ahead, odds for a steady rate path for the Fed are above 50% until November 2020. The post-meeting statement should echo the Fed’s stance since the October FOMC meeting that monetary policy is in a pause mode. Fed Chairman Powell will have a new USMCA to address and there will likely be questions that could delve into whether the Fed’s next move on monetary policy could be to raise — not lower — rates.
U.S. productivity registers first decline since 2015. U.S. productivity slipped 0.2% in the third quarter, according to the Bureau of Labor Statistics, a slight improvement from the initial 0.3% reported for the quarter. The upward adjustment came as output was revised up by 0.2 percentage points while the hours worked were revised up 0.1 percentage point. Productivity in the manufacturing sector increased 0.1% instead of the 0.1% decline initially reported. Unit labor costs rose 2.5% in the third quarter, down from 3.6% in the initial report. The productivity data reflect the impact of uncertainty created by the U.S./China trade situation and may well continue until the trade battle between the U.S. and China is largely resolved. For perspective, U.S. productivity has risen at an average rate of 1.3% since 2007 and 2.1% since the end of World War II.
Britain’s economy registered no growth in the three months to October, compared with the previous three months. Growth had been just 0.3% between July and September. The manufacturing sector was particularly disappointing, as Brexit uncertainty takes it toll. Year-on-year monthly GDP growth was the lowest since 2012.
Asian development bank lowers outlook for developing Asian countries. Economic growth in developing Asia is now seen at 5.2% in 2019 and 2020, according to an update from the Asian Development Bank (ADB). Previously, the ADP expected developing Asian GDP to be at 5.4% in 2019 and 5.5% in 2020. The outlook for China was also reduced, now seen at 6.1% for 2019 and 5.8% for 2020, reductions from their prior outlook that China would expand by 6.2% this year and 6.0% in 2020. “While growth rates are still solid in developing Asia, persistent trade tensions have taken a toll on the region and are still the biggest risk to the longer-term economic outlook. Domestic investment is also weakening in many countries, as business sentiment has declined,” said ADB Chief Economist Yasuyuki Sawada. “Inflation, on the other hand, is ticking up on the back of higher food prices, as African swine fever has raised pork prices significantly.” The ADB signaled the issues for China’s economy include “trade tensions and a slowdown in global activity coupled with weaker domestic demand, with family wallets being hit by pork prices that have doubled relative to a year ago.” However, they note that China’s GDP could accelerate “should the United States and the PRC [People’s Republic of China] come to an agreement on trade,” the ADB said. They expect Hong Kong’s economy to contract by 1.2% this year and expand by 0.3% in 2020.