Washington Insider-- Tuesday

Coming Economic Policy Inheritance

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

EPA Will Not Make Call On 2019 Refiner Waivers

EPA is now proposing to extend the deadline for small refiners to show compliance under the Renewable Fuel Standard (RFS) for 2019 until Nov. 30, 2021 “in light of uncertainty surrounding small refinery exemptions (SREs) under the RFS program.”

EPA is also proposing that for 2020, all obligated parties would have a compliance deadline of Jan. 31, 2022, and a June 1, 2022, attest engagement report deadline.

The Supreme Court consideration of the 10th Circuit Court of Appeals decision that invalidated three SREs for the 2016 compliance year, EPA said the resolution of that process “has the potential to impact the availability of SREs going forward.” EPA's notice also stated “a presently unknown number of small refineries' compliance obligations will be affected by ongoing litigation and it is consistent with our eligibility requirements regarding SREs.” The decision to extend the 2020 compliance dates for all parties comes due to the agency not yet putting for the 2021 biofuel and 2022 biodiesel RFS levels, and action EPA said can impact the level of Renewable Identification Numbers (RINs) available as those have a two-year lifespan.

While EPA does not state in the notice that it will not make decisions on 2019 or even 2020 SREs, it is clear the Supreme Court case will impact those decisions and thus that means reports the agency was prepared to grant a majority of the 32 pending SREs for the 2019 compliance year are not on the mark.

EPA also made no reference to when they will propose the 2021 biofuel and 2022 biodiesel RFS levels. Given that situation, it would appear the Biden administration will now be the ones responsible for making the call on SREs and likely the 2021 biofuel and 2022 biodiesel RFS levels.

US, Mexico Spar On Energy

The outgoing Trump administration is upset over Mexico's preferential treatment of its state-owned energy companies, triggering concerns that could threaten U.S. ag exports.

In a letter, Secretary of State Mike Pompeo, Energy Secretary Dan Brouillette and Commerce Secretary Wilbur Ross wrote to their counterparts in Mexico, the U.S. officials said that "recent regulatory actions by the Mexican government have created significant uncertainty about Mexico's regulatory processes, especially regarding the energy sector, and have damaged Mexico's overall investment climate," pointing to reports of a memo and meeting last year where regulators were "allegedly instructed to block permits for private sector energy projects and to exercise their regulatory authority to favor state-owned energy companies."

If true, the secretaries warned, it would be "deeply troubling and raise concerns regarding Mexico's commitments" under the U.S.-Mexico-Canada Agreement. It is not clear how this situation will play out, but it will clearly fall to the Biden administration to sort the issue out.


Washington Insider: Coming Economic Policy Inheritance

Bloomberg is reporting this week that President-elect Joe Biden stands to inherit a “line-up” of unresolved trade and other issues from President Trump and that these will “pose an early test for his administration even as it focuses on taming COVID-19 and repairing the domestic economy.”

As Biden takes office tomorrow, the U.S. and China have tariffs on hundreds of billions of dollars of each other's goods. A long-running dispute with the European Union over illegal subsidies to Airbus and Boeing persists, the U.S. and UK have yet to reach a free-trade agreement, and the World Trade Organization is blocked from appointing a new leader because the U.S. objected to the leading choice.

Then there's the overhauled North American Free Trade Agreement negotiated by outgoing U.S. Trade Representative Robert Lighthizer. The deal won Democratic support after changes were made in Mexico's labor system, as demanded by House Speaker Nancy Pelosi and engineered by her chief trade lawyer Katherine Tai, who now has been nominated for the post of USTR. The AFL-CIO labor union says it plans to bring a complaint under the deal, which could result in factory-specific tariffs or import prohibitions.

With President Biden promising to prioritize healing the American economy savaged by lockdowns and job losses, trade might appear to be taking a back seat in the economic agenda. But Trump and Lighthizer gave trade such a central place in public attention that Biden may find the campaign that they started “impossible to ignore,” Bloomberg said.

Tougher enforcement of trade rules “can be a key part of the President-elect's Build Back Better agenda,” Senator Ron Wyden, D-Ore., and incoming chairman of the Finance Committee responsible for trade, said last week. Wyden said he expects Biden to use trade as one element of a strategy of work with allies to confront China on human rights, labor rights and its treatment of the environment, and to make sure Mexico meets labor obligations.

Bloomberg – and others – are saying that Biden's challenge will include “setting a new direction after Trump tore up the trade playbook. While Biden is unlikely to follow Trump's example of using obscure parts of trade law to slap tariffs on allies like the EU, he probably won't go back to the business-friendly stance of past presidents, either.

In a speech last week, Tai pledged to pursue trade policies that benefit American workers, combat the threat of climate change — a non-consideration during the Trump years — and increase U.S. competitiveness.

One of the pressures that she likely will face will be the balance between the interests of corporations and unions. The U.S. Chamber of Commerce wants to see the tariff dispute with Beijing resolved, especially since it sees China as the fastest-growing market for U.S. companies, while recognizing that it has some important, unfair trade and regulatory practices that need changing.

Reciprocal tariffs imposed by China have hammered American agricultural producers and manufacturers. Still, the Biden administration may be wise to use the incentive of removing U.S. duties remaining on about $370 billion of annual Chinese goods imports as a way to exact policy changes that it wants from the world's second-biggest economy, said Demetrios Marantis, who served as deputy USTR under President Barack Obama and is now a senior vice president at Visa.

Trump “is leaving a lot of things on the table,” said William Reinsch, a trade official in the Clinton administration and senior adviser at the Center for Strategic and International Studies. “The mantra for the Biden people has been mostly 'No sudden moves.' I don't think they're going to rush to fix all those things. I think they're going to take their time to review them.”

Also, at least some U.S. economic prognosticators are looking somewhat farther into the future now, and noting that U.S. debt ceiling traders in short-term funding markets are already busy assessing the potential impact of a return to the U.S. debt ceiling as an issue likely to reappear in the second half of this year.

The country's borrowing limit, which was suspended back in August 2019, is scheduled to come into effect once again on Aug. 1. Without a Congressional deal that extends or defers it once again, the Treasury will eventually have its ability to borrow curtailed, although it has historically found ways to delay officially hitting that limit.

Perhaps more critically for dollar funding markets, the reinstatement of the ceiling is also likely to cause the Treasury to slash its cash holdings and the tools it uses to do that could have a market impact. The amount of cash that the Treasury currently holds is around $1.73 trillion, but it will need to whittle that down over the next seven months to its level when the last ceiling suspension took place – around $118 billion. That's a far bigger reduction than it has historically had to do around debt-limit episodes.

The COVID-19 pandemic and the government's response to its economic fallout are at the heart of this dilemma. To fund emergency stimulus measures, the Treasury ramped up its issuance of debt – in particular short-dated Treasury bills. Now that they need to shrink the cash pile, there is a risk that the supply of bills will drop too quickly, forcing market rates below zero and forcing the central bank to intervene.

So, we will see. Clearly, the new administration will need to undertake a considerable amount of heavy lifting in a short time, especially to meet its frequently challenging goals. These will be fights producers should watch closely as they emerge, Washington Insider believes.

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