Washington Insider-- Tuesday

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

Lighthizer Urges Biden Administration Stay The Course On China Tariffs

Outgoing U.S. Trade Representative (USTR) Robert Lighthizer is urging the Biden administration to keep tariffs on China as they get results, according to comments he made in an interview with the Wall Street Journal. “We changed the way people think about China,” Lighthizer told the WSJ. “We want a China policy that thinks about the geopolitical competition between the United States and an adversary — an economic adversary.”

Lighthizer said the Biden plan to bring other countries into the battle with China was a concern, saying it could let other nations slow or veto U.S. actions and tie up the U.S. in endless, pointless discussions with China. The U.S. and China “started dialogues in the '90s,” he noted. “That did nothing. All of them were just a waste of time.”

He still wants the Biden administration to keep tariffs on all $370 billion in Chinese goods — three-quarters of everything China sells to the U.S. The 25% tariffs he slapped on Chinese car imports stopped China from potentially selling millions of vehicles in the U.S., he said.

Commenting on his replacement to head USTR, Katherine Tai, Lighthizer said she helped garner Democratic support for the U.S.-Mexico-Canada Agreement (USMCA). “She learned good skills on the Hill,” Lighthizer said. Those include “how to manage different people who have different objectives and still get things done.” His stance of keeping a push on China is not surprising and has echoed comments since the election.

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Supreme Court To Review 10th Circuit Ruling On SREs

The U.S. Supreme Court Friday said it would review the ability of small oil refineries to win exemptions from Renewable Fuel Standard (RFS) requirements, agreeing to hear an appeal by units of HollyFrontier Corporation and Wynnewood Refining Company relative to the 10th Circuit Court of Appeals ruling that invalidated three small refinery exemptions (SREs) for the 2016 compliance year as they were not a continuation of prior SREs.

The court will examine whether the EPA exceeded its authority when it exempted three small oil refineries from obligations under the statute.

EPA cited the 10th Circuit decision in rejecting scores of gap-year SREs in the fall of 2019, but it has not made any decision on additional gap-year requests for the 2011-2018 compliance years nor has it decided on ones submitted for the 2019 and 2020 compliance years.

However, Reuters reported Monday afternoon that sources told them the Trump administration was expected to grant “some” waivers out of the 32 that are pending under the RFS for the 2019 compliance year.

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Washington Insider: Weird Loans Under PPP

The New York Times highlighted a strange aspect of the Paycheck Protection Program this week. Many of the loans provided were really tiny because of the way rules were written. Still, the program was called a lifeline for many small businesses as it distributed $523 billion in forgivable loans that averaged just over $100,000 to more than five million companies, the Times said.

It noted that there also were roughly 300 business that received loans of $99 or less, surprisingly small the article says. For example, Stephanie Ackerman, a self-employed college admissions consultant, was shocked when her loan deposit, for $13, showed up. “That's supposed to help my business? It was a joke,” she said.

The tiny sums were equally frustrating for the banks and other lenders. For each, they were paid 5 percent of the value — meaning the lenders collected just pennies on the smallest loans, far less than they cost to make. Ackerman's loan netted her lender, Bank of America, a fee of 65 cents, paid by the government.

The Times said that the profusion of minuscule loans is an illustration of how some of the program's hastily constructed rules sometimes led to absurd outcomes. And, it thinks that “they could be repeated: in last month's stimulus package, Congress allocated $284 billion to restart the loan program for to the hardest-hit businesses.” Lending began this week.

Congress created the PPP in late March to help small businesses retain their employees. Sole and self-employed entrepreneurs were an afterthought and weren't eligible for loans in the program's first week. When it did expand to include them, the government created an alternate set of rules that blocked them from receiving loans unless their business was profitable — a restriction that did not apply to larger companies that were eligible as long as they had salaried employees.

Small businesses were eligible to borrow 2.5 times their average monthly payroll, up to $10 million, to cover their workers' wages and some other expenses. So long as most of the money was spent paying workers, the loan could be fully forgiven, giving recipients a rare infusion of free money to help them endure disruptions as the pandemic wore on.

For companies without salaried employees, the SBA which ran the PPP, told lenders to look at the profit the business owner reported on their 2019 taxes — even though payroll and profit are totally separate measures of a company's business activity.

The loan that went to Amy Jeanchaiyaphum, a photographer in Minnetonka, Minn., illustrates the pitfalls of that approach, NYT says. Like most sole proprietors, she doesn't pay herself a fixed salary. Her income first goes to expenses and she lives on the remainder. In 2019, her gross sales added up to a modest five-figure sum.

But, her “profit” after taking legal deductions was only $458. Following SBA rules, her lender, Wells Fargo, treated that as her annual salary and issued her a loan for the maximum amount for which she qualified: $95 — for that, the bank collected a $4.75 fee. She reached out to the local SBA office, where an official told her the loan couldn't be increased. Frustrated and defeated, she accepted the tiny loan.

Lenders and accountants have spent months poring over the program's complicated and frequently revised rules and noted that the relief effort was focused on minimizing job losses not preserving struggling businesses.

“What's payroll for a solo entrepreneur?” said Sean Mullaney, a financial planner in California who worked with several clients on their loans. This was created in almost a fog of war, and there's lots of scattershot things in it, he said.

Sole proprietorships are the most common business structure in America, accounting for around 26 million businesses. Many are sidelines — workers who pick up an occasional freelance project or collect royalties they report on their taxes as business income—and many rely on their business income as their primary source of support.

Yet, because of the SBA edict that sole proprietors had to be profitable to get a PPP loan, many didn't qualify. Nicole Davis, an accountant in Georgia who specializes in small businesses, estimates that about 60 of her sole-proprietor clients were locked out of the relief program because their companies are not profitable.

“They were surprised; they thought they were eligible, and it was hard to explain why they didn't qualify,” Davis said.

NYT called the rule barring unprofitable sole proprietorships a significant obstacle for lenders that work in vulnerable communities. “It's barbers, stylists, drivers, janitorial — really small mom-and-pop businesses. If they had a negative number on their Schedule C, they just weren't eligible for anything,” said José Martinez, the president of Prestamos CDFI.

Some big banks chose not to work with businesses that qualified for so little. JPMorgan Chase, the program's largest lender, set a $1,000 minimum on its loans but two other national lenders, Bank of America and Wells Fargo, did not, so each made scores of loans to sole proprietors for sums as low as $1.

Ackerman, the college consultant, kept her $13 loan, and plans to file the paperwork to have it forgiven. Others rejected such scant aid. “I was so flabbergasted, I sent it right back,” said Jeff Ostashen, a self-employed trucker in Lakeland, Fla., who got a $17 loan from Wells Fargo. “It felt like a slap in the face.” Still, Ostashen — whose sales have been slow since the pandemic began — plans to apply for a second loan. “I'm going to try again and see what happens, and hope and pray for the best,” he said.

So, we will see. Certainly, small sole-proprietor businesses are important to the U.S. economy, and to agricultural producers—who should watch closely as this and similar programs are mobilized to assist the still lagging economy, Washington Insider believes.

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