Former USDA Chief Economist Glauber looks at MFP payouts and WTO obligations
In today's updates:
* China invited U.S. officials for more trade talks in Beijing
Markets: Hong Kong’s Hang Seng Index saw a 1.6% drop, after the U.S. House passed a bill in support of antigovernment protesters in Hong Kong.
Strange bedfellows... Nearly 50 employees at the Social Security Administration as well as members of the public have been exposed to bedbugs and poor air quality for almost a year and a half at a hearing office in Tulsa, Okla., officials with a union representing administrative law judges said this week. Link for details.
— U.S./China trade policy update:
- China’s chief trade negotiator has invited his U.S. counterparts for a new round of face-to-face talks in Beijing, the Wall Street Journal reported, citing people briefed on the matter. U.S. negotiators signaled they would be willing to meet in person, but China must first make it clear it would make commitments on intellectual-property protection, forced technology transfers and agricultural purchases, the article noted.
- Talks with China are continuing and that there is progress on the text of a Phase 1 trade deal, said White House Deputy Press Secretary Judd Deere. A Fox News reporter quoted him as saying negotiations are continuing and progress is being made on the text of the phase-one agreement.
- Trump comments. Asked if he would secure a pact by the end of the year, President Trump said, “China would much rather make a trade deal than I would” and added, “I haven’t wanted to do it yet. Because I don’t think they’re stepping up to the level that I want.”
- Trump is "looking at" whether to exempt Apple from a coming round of tariffs on Chinese imports, adding, "We have to treat Apple on a somewhat similar basis as we treat Samsung."
- China’s chief trade negotiator said he’s “cautiously optimistic” about reaching a Phase 1 deal with the U.S. Vice Premier Liu He made the comments in a speech in Beijing on Wednesday ahead of the Bloomberg New Economy Forum, Bloomberg reported, citing people who attended the dinner and asked not to be identified. Liu also explained China’s plans for reforming state enterprises, opening up the financial sector, and enforcing intellectual property rights —issues at the core of U.S. demands for change in China’s economic system. Separately from the speech, he told one of the attendees that he was “confused” about the U.S. demands, but was confident the first phase of an agreement could be completed, nevertheless.
- U.S. equity losses Wednesday fell near session lows after Reuters reported that the first phase of a trade deal between the U.S. and China may not materialize by year-end. But others scoffed at the initial reaction, saying the Reuters report was simply catching up with other reports in recent days which noted an impasse if not a stalemate in recent negotiations.
- Hong Kong bills head to President Trump’s desk. On Wednesday, the U.S. House passed two bills with an overwhelming majority to support Hong Kong’s protesters. The first, the Hong Kong Human Rights and Democracy Act, would put Hong Kong’s special trading status with the U.S. under scrutiny and sanction officials responsible for rights violations. The other bill would ban the export of tear gas, rubber bullets, and other weapons to the Hong Kong police. If President Trump signs the legislation, it could undermine U.S./China trade talks. And if he chooses to veto it, Congress is expected to have the votes to override any veto. However, Trump is expected to sign the legislation, setting up a potential confrontation with China that could imperil a long-awaited trade deal.
- China to revise GDP data based on fourth economic census. Revised 2018 gross domestic product (GDP) estimates would be published in the near future, Li Xiaochao, deputy commissioner of the National Bureau of Statistics, said at a press conference announcing the results of the fourth National Economic Census. If data for previous years is revised up, it could help the government meet its ambitious goal to create a “moderately prosperous society” by doubling the size of the economy and per capita income between 2010 and 2020.
- A U.S./China trade deal could be bad news for the rest of the world. "In the absence of a meaningful boost in China’s domestic demand and imports, bilateral purchase commitments are likely to generate substantial trade diversion effects for other countries. For example, the European Union, Japan, and Korea are likely to have significant export diversion in a potential deal that includes substantial purchases of U.S. vehicles, machinery, and electronics by China," according to an IMF working paper.
- Huawei export waivers will not compromise U.S. national security, the Commerce Dept. said. Commerce Secretary Wilbur Ross said the administration has started to respond to waiver requests. Last year U.S. semiconductor makers sent $44 billion in goods to overseas buyers, making it the fourth largest U.S. export. The next few months will determine how much damage Huawei’s blacklisting did to the industry’s supply chain. Huawei has said it found other suppliers to make up for the loss of U.S. chips and other components.
- U.S. to provide ship to Vietnam to boost South China Sea patrols. The U.S. announced on Wednesday it will provide Vietnam with another coast guard cutter for its growing fleet of ships, boosting Hanoi's ability to patrol the South China Sea amid tensions with China. U.S. Defense Secretary Mark Esper disclosed the decision during an address in Vietnam.
- Henry Paulson issues warning on U.S./China relations. Even if the world’s two biggest economies reach a truce, their relationship is likely to worsen, Henry Paulson, the former Treasury secretary, told the New York Times columnist Andrew Ross Sorkin. Animosity between the two countries has merged “military prisms and ideas into economic policies,” Paulson said in a preview of a speech he planned to make today at a Bloomberg event on the economy in Beijing. “It should concern every one of us who cares about the state of the global economy that the positive-sum metaphors of healthy economic competition are giving way to the zero-sum metaphors of military competition,” he planned to say. More worrisome: the U.S. could close off its financial markets to Chinese investment, Paulson said. “It would eventually threaten U.S. leadership in finance, as well as New York City’s role as the world’s financial center,” he said. He also raised a worst-case scenario. China, which owns more than $1 trillion in U.S. debt, could decide to sell Treasury bonds, potentially sending their value down and pushing interest rates much higher
— Hong Kong may import live hogs from Southeast Asian countries. African swine fever (ASF) has cut the supply of hogs that are shipped to Hong Kong daily for slaughter, prompting Hong Kong officials to consider importing live pigs from Southeast Asian countries, including Malaysia, said Food and Health Secretary Sophia Chan. Hong Kong had been importing 4,000 head per day from China for slaughter, but that has dwindled to 1,700 per day as ASF has reduced the Chinese hog herd.
Hong Kong has contacted officials in Thailand, South Korea and Malaysia relative to importing hogs, Chan said in a response to a question raised by a member of Hong Kong’s Legislative Council. Hong Kong is reaching out to Singapore to learn their rules on importing live hogs from Malaysia via ships, Chan noted. "As importation of live food animals entails public health and food safety considerations and the outbreaks of African swine fever in the neighboring countries are emerging, we have to exercise caution," said Chan.
— Ag tariff reductions lauded in U.S. mini-deal with Japan, but concerns voiced on limited scope of deal. An initial US-Japan trade agreement focused on agriculture and digital trade is a positive step but concerns over areas left out of the first stage deal and the lack of consultations with Congress emerged as friction points during a House Ways and Means Committee hearing Wednesday.
Lack of auto provisions cited. Matthew Goodman, senior adviser for Asian economics at the Center for Strategic and International Studies (CSIS) Goodman, lauded the agreement’s tariff reductions and digital trade provisions but said because of areas unaddressed under the deal, it “fails to maximize the potential of the U.S./Japan economic relationship.” The lack of provisions on automobiles in the initial agreement drew criticism from Josh Nassar, legislative director for the United Automobile Workers (UAW) union. He called the deal “a mistake” and said “the idea of trading industrial goods for ag access could be really bad for, frankly, industrial workers.”
The partial agreement would eventually eliminate Japanese duties on U.S. agricultural goods valued at $7.2 billion and reduce U.S. tariffs on some Japanese industrial and agricultural products. A separate digital commerce agreement between the two trading partners establishes rules under which U.S. e-commerce companies will compete in Japan.
Under Japanese law, the national legislature, the Diet, must approve the agreements for them to take effect in January. Congress won't vote on the deals because the Trump administration negotiated them under a section of the Trade Promotion Authority that does not require lawmaker approval if U.S. law is not changed or tariff rates slated for reduction or elimination are 5% or less.
Rice not in accord with Japan. Darci Vetter, chief agricultural trade negotiator under President Barack Obama, and Matthew Goodman, senior Asian economics adviser at the Center for Strategic and International Studies, said they don't think Japan will be eager to tackle tougher issues not addressed by the U.S./Japan agreements. Vetter noted that rice, a culturally important crop in Japan, is not covered by the partial agriculture agreement although Japan made concessions to the U.S. on rice as part of the Trans-Pacific Partnership trade agreement that President Trump pulled the U.S. out of the third day of his presidency.
— Algeria caps soft wheat imports to save foreign currency. Algeria is capping its soft wheat imports at four million tonnes per year, according to an announcement from the government, down from a level of 6.2 million tonnes. The statement said the action was being taken to “preserve foreign currency and reduce Algerian imports of cereals, especially soft wheat.” The level of imports reflects the government’s estimate of needs of the domestic market for soft wheat — four million tonnes, with the change effective immediately.
— Glauber looks at MFP payouts and WTO obligations. Former USDA Chief Economist Joseph Glauber, now a visiting fellow at the American Enterprise Institute, authored a report (link) that looks at the Trump administrations trade mitigation program (MFP). He notes that:
“Critics abroad have questioned whether the level of trade aid payments provided to farmers, when combined with existing farm program and crop insurance payments authorized under the 2018 Farm Bill and other legislation, are consistent with U.S. domestic support obligations under the World Trade Organization (WTO). Preliminary analysis suggests that while 2018 support levels are within U.S. domestic support commitments, 2019 payments may exceed WTO bindings. Moreover, the size of those payments could encourage WTO members to challenge U.S. agricultural spending before the WTO Dispute Settlement Body. A longer-term concern is how trade compensation comports with U.S. obligations in the WTO and, more generally, how it will affect future U.S. efforts to seek further reforms in the WTO.”
As for the MFP payments, Glauber wrote, “While those payments will help the sector in the short term, the subsidies have been criticized. Critics at home have questioned whether the level of compensation is commensurate with the losses absorbed by the agricultural sector due to the tariffs. Several empirical studies have suggested that the actual damages could be more than 50% less than USDA’s payment formula.”
— EU doubts Trump in car import tariff threats. The European Union’s chief trade negotiator said the U.S. likely won’t follow through on a threat to impose tariffs on car imports, a move that would have significantly escalated trade tensions between the two economies.
EU Commissioner Cecilia Malmstrom said that because a U.S. deadline for the tariffs came and went last week without any action, President Donald Trump would abide by an agreement reached with European Commission President Jean-Claude Juncker last year that would forestall the levies.
— USMCA update:
- House USMCA working group won’t hold any more meetings with U.S. Trade Representative Bob Lighthizer to discuss potential changes, according to Rep. Earl Blumenauer (D-Ore.), a senior member of the group.
- USTR Lighthizer instead will meet with House Speaker Nancy Pelosi (D-Calif.) and Ways and Means Chairman Richard Neal (D-Mass.) today to discuss the deal. Today's today could determine whether USMCA gets done this year.
- Senate Majority Leader Mitch McConnell (R-Ky.) on Wednesday argued that Democrats are giving AFL-CIO President Richard Trumka too much sway in talks on the USMCA. “How ironic. We’re talking about a trade deal that would create more American jobs, and Democrats are considering outsourcing their judgment to Big Labor special interests — who, to my recollection, have not supported a single major trade deal in living memory,” McConnell said on the Senate floor.
- Mexico’s Congress delayed the government’s 2020 spending bill, which includes proposed funds to implement the country’s landmark labor reforms required under the USMCA.
— Two recent USDA reports were published more than 10 minutes late, leading to a market imbalance that kept grain traders from accessing vital information on crop production and other market-moving data. Link to an impact assessment article from the Midwest Center for Investigative Reporting.
USDA Chief Economist Rob Johannson told Reuters the agency has identified the issues with the report release delay. “Going forward, we’ve identified those issues and made sure that there are redundancies in place to make sure that it doesn’t happen again," he told the news service. "We had contracted with outside vendors to help up manage this process and it’s still unclear to me whether those safeguards had been appropriately set up for this kind of event or whether we have to change them. We’re looking at a number of different ways to prevent this from happening again." While the system was stress-tested before the November release, Johannson said it would be stress tested again ahead of the Dec. 10 reports and would upgrade equipment deemed insufficient to deliver the data. “We’ve got IT professionals that saw what happened and are making sure it doesn’t happen again. If it costs a lot more money, then we’ll spend it. But we’re looking at ways to optimize that spending," he noted.
— Other items of note:
- FT: Why U.S. farmers are falling out of love with Donald Trump. Anger over ethanol policy threatens the president in the Corn Belt, according to a Financial Times article (link/paywall). “We pretty much supported President Trump in the last election,” says Kelly Nieuwenhuis, one of 391 local farmers with a stake in Siouxland Energy Co-operative of northwest Iowa. “I know the polls say he has still got a lot of strong [farmer] support, but I’ve heard a lot of people that won’t support him again because of biofuels.” For many farmers, the article adds, RFS waivers are “the final straw after a year of suffering the costs of a trade war with China, an extremely wet planting season and tougher loan terms. Scrambling to address their complaints, the White House has instead only intensified the outrage.”
- Senate is expected to vote on a stopgap funding measure (HR 3055) late this morning, to provide funding through Dec. 20. President Trump is expected to sign the measure if it passes the Senate today. The temporary funding bill is designed to give appropriators more time to decide how to divvy up $1.37 trillion in spending between the 12 annual spending bills and approve the final bills. The House passed the stopgap measure Tuesday, 231-192, with 10 Democrats voting against it and 12 Republicans supporting it. The current continuing resolution (CR) expires at midnight today.
- White House Office of Management and Budget yesterday released its biannual regulatory agenda, a roadmap of upcoming rulemaking activity across federal agencies. Link for details. Link for USDA list including a final rule that would amend the Export Sales Reporting Requirements Regulation to clarify certain definitions as they relate to beef and pork, which are subject to this regulation to ensure accuracy of the weekly U.S. Export Sales report.
- California Supreme Court will rule on whether a law requiring presidential candidates to release their tax returns in order to take part in the state’s primary is constitutional.
— Markets. The Dow on Wednesday declined 112.93 points, 0.40%, at 27,821.09. The Nasdaq fell 43.93 points, 0.51%, at 8,256.73. The S&P 500 lost 11.72 points, 0.38%, at 3,108.46.
Most FOMC participants agreed that beyond October's cut monetary policy "would be well calibrated to support the outlook of moderate growth," according to the minutes of the FOMC's Oct. 29-30 meeting. Members also debated several options for keeping the repo market stable and one option that received considerable discussion was a so-called standing repo facility. The mechanism would see the Fed step in whenever needed to supply banks with reserves in exchange for ultra-safe collateral like Treasury debt. Meanwhile, the FOMC minutes reveal that Fed officials did not see negative rates as a monetary policy option now. In excerpts that will not likely sit well with President Donald Trump, the minutes said “all participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States.” They noted there was “limited scope” to use negative rates and that the “evidence on the beneficial effects of negative interest rates abroad was mixed, and that it was unclear what effects negative rates might have on the willingness of financial intermediaries to lend and on the spending plans of households and businesses.” But the minutes did note the FOMC members “did not rule out the possibility that circumstances could arise in which it might be appropriate to reassess the potential role of negative interest rates as a policy tool.”
Americans are moving at the lowest rate on record. New Census Bureau data show 9.8% of the U.S. population age 1 and older changed addresses over the past year, the smallest share in records dating back to 1948. In 2019, the most commonly cited reason for a move: 17% wanted a new or better home or apartment. Just over 12% moved for a new job or transfer, and less than 1% struck out because they lost a job or wanted to find work.
The global economy is at risk of settling into a low-growth rut without urgent action to roll back recently erected obstacles to trade and greater investment in tackling climate change, the Organization for Economic Cooperation and Development (OECD) said today. The Paris-based research body said it expects world output of goods and services will increase this year at the slowest pace since the financial crisis. But it doesn’t now expect any pickup in global economic growth next year, and only a modest acceleration in 2021. The world economy is growing at the slowest pace since the financial crisis, according to the new OECD estimates, which cut GDP growth to 2.9% this year and next (from 3% in 2020). "It would be a policy mistake to consider these shifts as temporary factors that can be addressed with monetary or fiscal policy: they are structural," OECD chief economist Laurence Boone wrote in the report. Besides trade wars and a sharp Chinese slowdown, bigger concerns include climate change, digitalization, and the crumbling of the multilateral order.