Washington Insider -- Monday
Future Trade With China
Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.
EPA Finally Unveils WOTUS ReplacementThe final rule to replace the Obama-era Waters of the U.S. (WOTUS) rule was released by EPA Thursday, with the Navigable Waters Protection Rule representing “step two” of the plan from EPA and the U.S. Army Corps of Engineers to repeal and replace the Obama-era regulation.
The rule scales back the categories of waters that fall under Clean Water Act (CWA) jurisdiction. Under the new rule, four categories would be federally regulated: The territorial seas and traditional navigable waters; perennial and intermittent tributaries to those waters; certain lakes, ponds and impoundments; and wetlands adjacent to jurisdictional waters. The rule also spells out 12 categories that would be excluded, including those that only contain water in direct response to rainfall, groundwater, ditches that are not traditional navigable waters and tributaries that are not next to wetlands.
EPA also noted that states may still choose to regulate waters that do not fall under the scope of the federal CWA. The rule would become effective 60 days after being published in the Federal Register.
Ag interests welcomed the rule while many environmental groups criticized the plan as expected. The rule is expected to end up being challenged in the courts.
US Eyes Trade Deal With UK Before Year End
The Trump administration is looking to complete a trade deal with the United Kingdom before the end of 2020, Treasury Secretary Steven Mnuchin said Thursday. Talks could start as soon as February.
“The president is very focused ... on Europe,” Mnuchin said in an interview with CNBC. “The good news is we have seen a lot of investments in the U.S. from the European car companies. But the president wants to make sure that we have free and fair and reciprocal trade in Europe. And by the way, we are very focused on a UK Free Trade Agreement, which we hope to get done this year as well.”
British Prime Minister Boris Johnson is expected in Washington next month to begin talks with President Donald Trump though the exact dates have not yet been set.
Key in the U.S.-UK trade deal will be in large part dictated by the way the UK aligns itself with the EU upon Brexit. The closer it hones its rules to those of the EU, it could make it much more difficult for negotiations in areas like agriculture.
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Washington Insider: Future Trade With China
There has been something of a surge in skepticism regarding parts of the recent phase one deal with Beijing, especially China’s pledge to buy billions of dollars of U.S. foodstuffs. “The farmers are really happy with the new China Trade Deal,” the president tweeted the day after a signing ceremony in the White House.
However, that “euphoria” may be fading fast, Bloomberg reported this week. The dispute exposed Beijing’s vulnerability when it comes to food imports and the Communist Party leadership is expected to do all it can to wean itself off the U.S.
David MacLennan, chief executive of Cargill Inc., the world’s largest agricultural commodity trader said, “I think they don’t want to be in the same position again of being overly dependent on one supplier.”
Food security has long been a Chinese policy priority and officials there remember the political impact of price rises in the late 1980s that stoked dissent in the run-up to the Tiananmen Square protests. A generation later, China is many times richer but still depends on food and other imports.
For U.S. farmers, the trade deal means a potentially short-lived benefit — but possible long-term challenges as “America’s biggest customer looks elsewhere.” The extent of this response will affect the fortunes of global ag companies from traders like Cargill and Louis Dreyfus Co. to farming equipment manufactures and beyond, Bloomberg said.
China has long been striving for self-sufficiency, paying huge subsidies to farmers to grow corn and rice and more than 95% of its cereal needs can now be satisfied locally. But declining arable land, water shortages and an aging farm labor force mean that domestic production alone isn’t enough in the rapidly urbanizing country, Bloomberg says.
President Xi Jinping launched the Belt and Road initiative in 2013 to expand its trading routes, after also embarking on a multi-billion-dollar spree in global agriculture firms and infrastructure over the last decade. Before trade hostilities escalated in 2017, the U.S. was China’s top agricultural supplier for 18 years running, providing almost 20% of its farm goods imports amounting to $24 billion a year.
In the China-U.S. trade war, imports from the U.S. tumbled 45% in 2018. Beijing slapped retaliatory levies ranging from 5% to 60% on almost all American farm goods including soybeans, pork and corn. As a result, the administration announced a $28 billion bailout for farmers. The fight also forced China to search for supplies elsewhere — and to double down on efforts to diversify, with rivals Brazil and Argentina the most obvious beneficiaries.
Brazilian President Jair Bolsonaro and China’s Xi promised to continue increasing bilateral trade that surged to record levels during the trade war. China also bolstered its alliance with Argentina, opening the door to the South American nation’s soybean meal shipments for the first time.
“Food security is always critical to China’s leadership, and this trade war just affirms the importance of having strong domestic production and diversified import sources,” said Li Qiang, chief analyst with Shanghai JC Intelligence Co., an influential Chinese agricultural consultant.
But China is seen as unlikely to attempt to rely on South America alone. Brazil typically exports soybeans during March to September, before new-crop U.S. supplies are available. Despite record imports from Brazil, China briefly experienced a recent soybean deficit due to lack of American supply. So, it also has been looking for other sources, for example by investing in Russia and the Black Sea regions.
The reality is that it will be hard for China to wean itself entirely from the U.S. China’s annual soy demand is about 110 million tons, of which domestic output satisfies just 15%, according to China’s ministry of agriculture.
Thus, many Chinese officials regard the U.S. as “just too influential.” America will remain an important trading partner for soybeans, China’s minister of agriculture and rural affairs said last year. It may also prove politically expedient for Beijing to maintain some trade with Washington to keep its truce in place.
There’s historical precedent for how trade disputes can permanently reshape global trade, and the lessons from a battle more than 40 years ago suggest American farmers may suffer over the longer term, Bloomberg asserts.
In 1973, Washington imposed an embargo on soybean exports to Japan. The conflict lasted only five days, and Japan returned to purchase U.S. soybeans — but “has never again seen America again as a reliable supplier,” Bloomberg said. Instead it diversified purchases and invested heavily in the then-nascent Brazilian soybean industry.
In addition, the Nixon administration embargoed trade with China over two decades through 1971, policies that may also have stained the U.S.’s reputation as a reliable partner in the minds of Chinese leadership. “Given those experiences, it’s not surprising they put a lot of emphasis on food security,” Friedrichs said. “They don’t want to be overly dependent on a single supplier.”
So, we will see. Questions have frequently been raised across the ag industry regarding the future impacts of the recent trade fight, and these likely will resurface as the two-year duration of the current truce approaches its end—and the phase two considerations take shape. These are debates that will be crucial to ag producers and which should be watched closely as they emerge, Washington Insider believes.
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