Washington Insider -- Thursday

China, Germany Fill in as US Steps Back on Trade

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

WTO Establishes Dispute Panel to Investigate Chinese Farm Subsidies

A dispute panel was established by the World Trade Organization (WTO) to investigate U.S. allegations that China provided more than $100 billion in illegal government subsidies for producing rice, wheat and corn.

WTO on June 25 named three dispute panelists to oversee the case: Gudmundur Helgason of Iceland, Juan Antonio Dorantes Sanchez of Mexico and Elaine Feldman of Canada. The panel will examine U.S. claims that Beijing supported farmers between 2012 and 2015 at levels that were substantially above China's WTO commitments, according to a June 26 WTO filing.

Specifically, the panel will determine if China's actions violated Articles 3.2 and 6.3 of WTO's Agriculture Agreement, which governs China's bound subsidy commitments. Further, the panel will determine if China's domestic support for wheat, rice, and corn exceeded Beijing's commitment to cap its product-specific subsidies at 8.5% of the value of production.

Though WTO rules generally permit countries to maintain de minimis levels of domestic support of between 5% and 10% of the value of production, China agreed to cap its de minims levels at 8.5% as part of its 2001 WTO accession agreement.

If WTO finds that Beijing violated its international trade obligations, it could force China to reduce its agricultural subsidies or face retaliatory trade tariffs worth tens of billions of dollars.

EPA Releases 2018 RFS Proposed Volumes

The Environmental Protection Agency (EPA) on Wednesday proposed to reduce the volume of biofuel required to be used in gasoline and diesel fuel next year as it signaled the first step toward a potential broader overhaul of its biofuels program. Under federal law, EPA has until November 30 to issue final biofuel quotas for 2018.

EPA’s proposed total volume marked a slight decline from current levels and was more than 20% below targets laid out in a 2007 law. The Renewable Fuel Standard (RFS) requires increased volumes of renewable fuels each year, but EPA's 2018 proposal would keep targets for use of conventional biofuels at current levels.

EPA proposed a requirement that U.S. refiners use 15 billion gallons of conventional renewable fuels in 2018 (mostly corn-based ethanol), unchanged from 2017. Meanwhile it while lowered targets for advanced biofuels, including cellulosic ethanol, that oil refiners have described as unattainable, at 4.24 billion gallons, down from 4.28 billion this year, and far lower than the 5.25 billion sought by the biofuel industry’s leading trade group.

The agency proposed setting the requirements for cellulosic below the current year's levels at 238 million gallons, a drop from 311 million currently. Cellulosic ethanol, typically made from corn stalks, switchgrass and other materials, has been commercialized at a slower pace than supporters had hoped. The biomass-based diesel (BBD) mandate was kept unchanged for 2019 at 2.1 billion gallons, unchanged from the levels set for 2018.

Washington Insider: China, Germany Fill in as US Steps Back on Trade

Earlier this year Last year as the United States withdrew from the Trans-Pacific Partnership trade deal, there was a murmur of concern over the geopolitical impacts of this decision over time. Now, the press is reporting just such a development—that exporters Germany and China are setting the “tone” on trade and climate change at the upcoming G-20 summit, Bloomberg says.

The report notes that that the U.S. traditionally takes point in the search for common approaches to the big global issues of the day at G-20 summits. But, no longer. “When world leaders meet in Hamburg on Friday, China and Germany will move in to usurp the U.S. role.”

Bloomberg also says that “the two industrial powerhouses of Asia and Europe are being nudged into an informal alliance to pick up the leadership baton that the U.S. is accused of having dropped since President Trump’s inauguration earlier this year, according to diplomats and officials from several Group of 20 members.”

The situation is crystalizing ahead of this year’s annual G-20 meeting, which will be held in Germany’s busiest commercial port later this week. That’s in part because, for the first time since the group’s founding, the U.S. will be represented by a president who embraces protectionism, abandoning decades of American leadership for growing market access.

“The strategic character of Chinese-German relations is steadily gaining in importance,” Chinese President Xi Jinping said in an op-ed article published Tuesday in German newspaper Die Welt. The two countries “should intensify cooperation on implementing China’s ‘One Belt, One Road’ and jointly make contributions to the security, stability and prosperity of neighboring countries.”

As the previous and current hosts, Xi and Germany’s Chancellor Angela Merkel would, in any case, have worked together on the G-20 agenda. Yet three visits to Germany by Chinese Premier Li Keqiang to date, the latest just last month, suggest the two nations are aligned on stepping more broadly into a space that the U.S. has, at least temporarily, left vacant.

Diego Ramiro Guelar, ambassador to Beijing for G-20 member Argentina, said “the two most important leaders in the world are President Xi and Chancellor Merkel at the moment.”

Ties between China and Germany have been strengthening for years, driven by common economic interests and unobstructed by the kinds of geopolitical rivalries that complicate relations between Beijing and Washington. Germany needs markets for its high-end industrial machinery and motor vehicles, and China wants them -- so much so it bought German robotics company Kuka AG.

“Relations between China and Germany are at their historic best,” said Michael Clauss, Germany’s ambassador to Beijing. “The economic and political dynamic from a German perspective is moving toward the east.”

The U.S. has “left somewhat of a vacuum” in the region by abandoning the proposed 12-nation Trans-Pacific Partnership free-trade agreement, Clauss said. The deal sought to build a U.S.-centered free-trade bloc among Pacific Rim countries from Chile to Vietnam, as an alternative to more China-dominated initiatives such as One Belt One Road.

The Trump “vacuum” is still more evident when it comes to climate change, after the administration announced last month that it was pulling the U.S. out of the 2015 Paris Agreement to slow global warming. The accord had been signed by more than 190 countries, including all of the G-20 members.

The U.S. and China, the two biggest polluters, had formed a de facto G-2 for climate change. Other partners were brought in only once the big two had settled on the framework they wanted for reducing harmful emissions; neither wanted the quota-based approach favored by the European Union.

That format for climate change negotiations now has disappeared. A new vanguard group comprising Canada, China and the EU met for the first time in May and a bilateral China-Germany working group on climate change met in Berlin last week, when each side jointly re-committed to take “an ambitious” approach to implementing Paris agreement goals.

There are still significant limits to how far a Germany-China tandem can go, reflecting frustrations at what Merkel -- like Trump -- sees as lopsided terms of trade. Germany sold more than $85 billion worth of goods to China last year and was Europe’s largest investor. But it thinks those figures could be much higher, if the Chinese didn’t impose barriers that don’t exist in Europe.

Merkel is aware of the dangers of allowing China to peel Germany away from the EU, creating a decidedly unequal partnership between countries that have very different political systems and few shared values. Interviewed in this week’s edition of the German business magazine Wirtschaftswoche, Merkel backed French President Emmanuel Macron’s call for EU governments to be able to do more to block foreign purchases of important companies.

“If countries such as China want to simply buy up something that’s been built up with a lot of subsidies, we have to react to that,” she told the magazine, citing the kinds of technology companies that interest China most, such as microchips and artificial intelligence.

So, it will be important to note how the new leadership efforts function, and what they mean for trade—especially now in a period of growing geopolitical tensions that can mean growing threats to trade, Washington Insider believes.

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