Washington Insider - Friday

US and Europe in New China Fight

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

USDA Further Trims 2017 Net Cash, Net Farm Income Forecasts

U.S. net cash farm income is now forecast to be $96.9 billion for 2017, up 3.9% from 2016 but down from a forecast of $100.4 billion in August, according to USDA's Farm Income Forecast update. U.S. net farm income is now seen at $63.2 billion, down from a forecast of $63.4 billion in August, now a 2.7% rise from 2016 which saw income plummet 24.4% from 2015 to a level of $61.5 billion. "The stronger forecast growth in net cash farm income is largely due to an additional $2.1 billion in cash receipts from the sale of beginning-of-year crop inventories," according to the Economic Research Service (ERS).

The net cash farm income measure counts those sales as part of current-year income while the net farm income measure counted the value of those inventories as part of prior-year income. As for the financial health of U.S. agriculture, ERS noted farm sector assets are forecast to increase $81.1 billion (2.7%) to $3.0 trillion while farm sector debt is seen rising $70.1 billion (2.7%) to a total of $2.65 trillion. That leaves the debt-to-asset and debt-to-equity ratios at still-low levels.

Nearly $1 Billion of Administration's Disaster Request For USDA

Almost $1 billion out of the $44 billion in disaster aid requested by the Trump administration would be earmarked for USDA, with around $465 million for the Farm Service Agency (FSA) and $500 million for the Natural Resources Conservation Service (NRCS).

Of the amount for FSA, around $375 million would be for the Emergency Conservation Program, $50 million for the Emergency Forest Restoration Program and $40 million for Emergency Assistance for Livestock, Honeybees and Farm-Raised Fish program, according to USDA acting deputy undersecretary for farm production and conservation Rob Johannson told House appropriators.

Washington Insider: US and Europe in New China Fight

Much of the world is focused on the administration’s tax proposals just now, and these are certainly the economic and political headliners. However, another battle deserves attention, the New York Times says. It is reporting that the United States has filed arguments to the World Trade Organization in a looming dispute over China’s future role, and says that the outcome of this fight could shape the global trading system for decades to come.

The Times said that senior United States officials reported on Wednesday that they had filed a brief to the WTO as a third party in a case that China has brought against the European Union. The brief argues that China does not deserve the designation of a “market economy,” a distinction that would entitle it to preferential economic treatment under the WTO.

However, the move is likely to ratchet up trade tensions with China, which the White House has called one of the world’s biggest trade offenders. And if China is awarded the designation against the wishes of the United States, it could test the Trump administration’s willingness to remain in the WTO, an international body for establishing trade rules and settling disputes. The administration has previously called the organization a “disaster.”

China is now classified as a nonmarket economy, which allows the United States and other countries to use a special framework to decide whether it is “dumping” its products in other countries at unfairly low prices. This framework allows the United States to add an extra duty on some Chinese products.

China argues that the United States and other WTO members promised to award it the market economy label in 2016, the 15th anniversary of its accession to the WTO. But the United States and the European Union are opposing that, claiming that China has failed to hold up its end of the bargain by curtailing the state’s role in the economy. United States officials say the Chinese government’s heavy hand distorts costs and prices in the country and harms competitors abroad.

Last December, China challenged both the European Union and the United States at the WTO, saying that it was merely protecting its lawful rights. The case with the EU is proceeding and could serve as precedent in China’s challenge against the United States, which a WTO panel will consider next.

If China succeeds in this case, that would weaken the ability of European and American officials to levy anti-dumping duties against it. It could also strengthen the resolve among top Trump administration officials in their claims that the WTO has been ineffective in defending the interests of Americans abroad — and perhaps lead to the organization’s demise altogether.

Those officials include Robert Lighthizer, the United States trade representative, who in his confirmation hearing before the Senate in June described China’s challenge against Europe and the United States as “the most serious litigation matter we have at the WTO right now.”

Lighthizer said that he had “made it very clear that a bad decision” on China’s status “would be cataclysmic for the WTO” Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, said Lighthizer’s statements called into question whether the United States was looking for a reason to withdraw from the WTO.

The WTO and its predecessor, the General Agreement on Tariffs and Trade, have been led for decades by the United States and other relatively developed and open economies. As other countries joined, the presumption was always that they were seeking to become more market-driven economies like the United States.

But the rise of China has called this into question. Since beginning to open up to world trade in the 1980s, China has maintained an economy that melds market capitalism with state control. Some analysts argue that the state has taken a bigger role in the economy in the last few years, under the leadership of President Xi Jinping.

The Trump administration has identified recalibrating trade with China as one of its defining challenges. The president repeatedly referenced China on the campaign trail, and his message that cheap Chinese imports decimated American manufacturing resonated with voters.

The Trump administration says it is preparing a range of trade actions that could affect China, including investigations into imports of steel and aluminum, as well as China’s violations of intellectual property.

Members of Congress on both sides of the aisle have proposed tighter restrictions on Chinese purchases of American companies and technology.

On Wednesday, United States officials said that China’s behavior violated the language of the agreement China signed when it joined the WTO 15 years ago, as well as the text of the WTO’s precursor, the General Agreement on Tariffs and Trade, which calls for using market-determined prices in calculations.

Clearly, this effort will be extremely important to the WTO, and to U.S. trading partners. The extent to which China’s support for state-owned enterprises can be limited is singularly important to U.S. producers and should be watched closely as the WTO processes unfold, Washington Insider believes.

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