Washington Insider -- Tuesday

Ramping Up For Talks With China

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

Biodiesel Group Comments on E15 Decision

The Trump administration’s recent move to allow year-round sales E15 will not make up for the gallons lost to small refiner exemptions (SREs) from the Renewable Fuel Standard (RFS), the National Biodiesel Board (NBB) said to EPA Administrator Andrew Wheeler in a letter sent Friday.

The group noted a quote from Wheeler, who said that allowing E15 sales all year “will help make up the difference for any small refinery exemptions going forward.”

However, NBB pointed out, that the E15 waiver “will not provide market growth for biodiesel and renewable diesel,” Kurt Kovarik, NBB head of federal affairs, said in the letter. “EPA is required to repair the demand destruction for biodiesel and renewable diesel resulting from your agency’s flood of unwarranted, retroactive small refinery exemptions.”

More Funding For ASF Vaccine Research

Rep. Ted Yoho, R-Fla., attached an amendment to the House spending bill last week that would increase vaccine research funds for African swine fever (ASF), the disease gripping China and spreading into neighboring countries.

The measure, which was bundled into the manager’s amendment, was approved by voice vote. Yoho’s amendment would add $5 million to USDA’s Agricultural Research Service (ARS) in the race to develop an ASF vaccine. But most expect a vaccine for ASF is still not yet in the cards. The massive spending bill (HR 3055), which includes five spending bills including agriculture, is slated for more debate on the House floor today.

However, the White House has pledged a veto of the minibus package.

Plus, the Senate has yet to compile their version of the legislation. While the Senate is also expected to reject the administration’s proposed budget levels, there will be differences between the two versions that would need to be worked out. Plus, the potential for a continuing resolution to keep the government funded is rising.

Washington Insider: Ramping Up For Talks With China

The coming trade talks with China expected at the end of June and could decide whether tensions between these two huge economies will ease enough to allow for a resumption of negotiations, or whether the U.S. will place tariffs on another $300 billion worth of Chinese goods, as the President has threatened.

The prospects are alarming many in the U.S., especially in the retail sector. Part of the reason, the New York Times reported last week, is that they come amid an ongoing period of troubles. Already battered by the e-commerce revolution, the threat of new tariffs on Chinese imports is seen by many as “disastrous” since the next round will be aimed squarely at consumer goods like footwear, toys and apparel.

Even for healthy chains like Walmart and Costco, the new duties threaten business formulas that helped speed their rapid rise over the last few decades. This threat “couldn’t come at a worse time,” said Mark Cohen, a former Sears executive who is now director of retail studies at Columbia Business School. “It’s a squeeze that can’t be forecast or predicted.”

With profit margins of 5% 10%, Cohen said, sellers of apparel and accessories don’t have much room to maneuver. Adding to the challenge, these chains are beginning preparations for the make-or-break holiday season.

In a letter last month, over 170 shoemakers and retailers called on the President to halt the trade war with China, which supplies almost 70% of shoes sold in the United States.

The industry cannot easily return shoe production to the United States because labor costs are much higher here and there is little capacity for new production, said Matt Priest, chief executive of the Footwear Distributors and Retailers of America.

“I do think it’s catastrophic,” he said. “We are in the middle of right-sizing retail here in the U.S., with fewer brick-and-mortar stores.” The impact will be greater on traditional retailers because they can’t adjust prices as quickly as online retailers, Cohen said. “This is going to cause more stores to close and more people to lose their jobs,” he added.

So far in 2019, American retailers have announced plans to shut more than 7,000 stores, after announcing nearly 6,000 closings last year, according to Coresight Research. By the end of 2019, announced closings could climb to 12,000 stores, it said.

The tariffs could also hurt the broader economy at a time when recession worries have moved to the forefront. The retail sector has shed 50,000 jobs since January.

Torsten Slok, chief economist at Deutsche Bank, estimated that if the duties did take effect and remained in place, they would boost inflation and reduce economic growth on a sector that accounts for 70% of GDP. “My price targets are supposed to be 12-month targets, and now they’re 12-tweet targets,” Mr. Siegel said. He added that the new 25% tariff could have a “cataclysmic” effect on retailers, especially those that are already in pain.

Brian Goldner, chief executive of Hasbro, said the tariffs would be a setback for the toy industry just as it had begun to recover from the liquidation of Toys ‘R’ Us last year.

Hasbro, which makes toys and games like Play-Doh and Monopoly, said that it agreed to join other companies in testifying about the tariffs at a separate hearing the trade representative expects to hold. About two-thirds of the toys Hasbro sells domestically come from China, although it has been expanding production elsewhere in recent years, including in the United States.

Many executives still seemed hopeful, the Times said, that the duties would not be imposed even as they described their efforts to mitigate the damage: leaving China, negotiating with vendors and figuring out new pricing strategies.

Walmart, the nation’s largest chain as well as its biggest private sector employer, faces a broader challenge. Over all, only one-third of the goods it sells come from outside the United States. But China has been a principal source for many items like clothing and electronics.

As China grew into its position as the world’s workshop, Walmart prospered with it, said Richard Vedder, emeritus professor of economics at Ohio University and the author of “The Walmart Revolution: How Big-Box Stores Benefit Consumers, Workers and the Economy.”

Now, those prices might not be so low, according to the company’s chief financial officer, M. Brett Biggs. “Increased tariffs will lead to increased prices, we believe, for our customers,” he said on a call with reporters last month.

Retailers have mounted a furious lobbying campaign in Washington ahead of the meeting, the Times says.

“We are at a critical juncture for the retail industry, as companies evolve to meet the expectations of customers,” said Matthew Shay, president and chief executive of the National Retail Federation. “The imposition of tariffs just creates a further headwind in an already challenging environment.”

Everybody appears to recognize the high stakes involved in these talks, but everybody is deeply dug in. Certainly, the preparations and the talks themselves should be closely watched as they emerge, Washington Insider believes.

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