Washington Insider -- Tuesday

Looking at NAFTA 2.0

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

China to Launch Sales of State-Owned Corn This Week

China will start its auctions of state-owned reserves of corn this week, aiming to continue their process of paring down the mountainous supplies of the grain. The National Grain Trade Center (NGTC) said in a notice it would start the offerings April 12 and 13, with seven million metric tons of corn, primarily from the 2014 crop year. A floor price of 1,350 yuan per metric ton ($214.40) has been set, which is just above the level from last year's sales.

Reports indicate China still has around 179 million metric tons of corn despite selling around 50 million metric tons via its auctions last year. The sales this year are starting a month earlier than they did last year, according to reports. On wheat, the NGTC also announced it would lower the floor prices for 2014 to 2016-crop wheat offered for sale to 2,350 yuan ($372.22) per metric ton vs 2,410 per ton currently.

Trump Administration Softens Tone with China Comments

After threatening to slap China with new tariffs, Trump administration officials on Sunday softened some of the rhetoric, reemphasizing the penalties are not imminent and there is ample time to work out a deal and step back from a possible trade war.

The Trump administration would like to open formal negotiations with the Chinese government over its trade practices, White House Press Secretary Sarah Huckabee Sanders said. Asked if the president is willing to fight a trade war with China unless Beijing makes some changes, Sanders replied: "We don’t want it to come to that." But China's reaction so far has been that they will protect their interests.

"The U.S. has misjudged the situation and taken the wrong action,'' China's Commerce Ministry spokesperson Gao Feng said Friday night in the Global Times. "China is fully prepared and will take immediate action with major countermeasures if the U.S. releases the list of the additional $100 billion tariff."

Washington Insider Looking at NAFTA 2.0

After heavy trade shocks last week, things seem a little calmer now. For example, Bloomberg is reporting that a “stopgap NAFTA deal could be around the corner.”

The group hastens to note that in spite of recent progress, including on the critical issue of autos, “the majority of North American Free Trade Agreement chapters are unfinished and key disputes remain unresolved.” Still, it is focusing on what it calls “a preliminary accord” that would need to be changed to satisfy the next U.S. Congress or Mexican Senate and president.

Then, it brings on the qualifiers—so, its report merely focuses on “how the new NAFTA is shaping up.”

After a near blow-up in October when the U.S. proposed dramatic auto sector overhauls that Canada and Mexico said was unworkable, Canada and the U.S. decided to look at calculating the value of a car in a way that supports domestic jobs by awarding credit for elements such as higher wages and research-and-development costs. Dropping its 50%-content demand, the U.S. is said to have instead proposed a tiered system where not every car part would need to hit the 85% threshold. Canada and Mexico aren’t particularly opposed to something higher than 62.5%, but want it done in a way that’s not so complex it simply drives production offshore.

In addition, Bloomberg thinks new NAFTA will probably include raising Mexican wages or labor standards. That said, major gaps remain. “This auto deal is much farther apart than people are letting on,” said Dan Ujczo, an Ohio-based trade lawyer at Dickinson Wright.

“How you basically keep the status quo but give the president a win is you count research and development, because a lot of companies are innovating, and you count labor.”

The U.S. also wanted a clause that would kill NAFTA after five years unless all three countries agree to extend it -- a move business leaders say would add too much uncertainty.

All signs now point to some kind of periodic review. “They basically already agreed that the U.S. was going to back down on a strict hard deadline,” said Welles Orr, an assistant U.S. Trade Representative under George H. W. Bush now a senior adviser at law firm Miller & Chevalier. “They’d do a review and a mechanism and a study and everybody can call a win on that one, too.”

However, “procurement” remains a major sticking point. The U.S. wants to cap the combined value of government contracts available to Canada and Mexico at the value of contracts awarded to U.S. firms in those countries. Canada and Mexico say that would leave them with less access than nations with fewer U.S. ties. “They probably get to an agreement some way on procurement that satisfies the Canadians,” Orr said.

Three sections of NAFTA deal with resolving disputes. Chapter 11 is investor-state dispute settlement; Chapter 19 deals with anti-dumping and countervailing duty cases; and Chapter 20, the least controversial, deals with disputes over NAFTA’s interpretation.

The U.S. wants to kill Chapter 19, though it’s one of the most important parts of NAFTA for Canada and wants to make Chapter 11 optional.

Canada and Mexico have proposed having their own side-deal on Chapter 11, meaning their companies could have rights that U.S. firms don’t. “And the entire business community wants it,” Ujczo said of the investor-state mechanism.

So, Bloomberg thinks it may come down to a trade off: keeping some anti-dumping measures in exchange for watering down Chapter 11.

Bloomberg also notes that agricultural issues are another file with big divisions, little movement and some form of status quo as the most likely outcome. The U.S. proposed dismantling Canada’s system of quotas and tariffs for dairy and poultry is a political non-starter in that country. It also proposed a measure that would effectively lower the bar for U.S. farmers to hit Mexican fruit growers with anti-dumping cases.

Observers expect no major change to Mexican import rules. “The seasonal fruit thing has gone away for a while,” Orr said.

Looking forward, Bloomberg says time is running out for this U.S. Congress to pass a deal. “You want to be starting just about at the beginning of a two-year Congress,” said Phil Levy, former senior trade economist in George W. Bush’s Council of Economic Advisers, now a senior fellow at the Chicago Council on Global Affairs. “There has not always been a great deal of realism in this administration’s approach to how you do trade agreements.” He said the prospect of a comprehensive deal being reached soon is “exceedingly unlikely.”

Mexican elections are approaching, with U.S. midterms following soon after. Levy said he could envision Trump giving notice of withdrawal from the current NAFTA and “basically holding Congress hostage to pass the deal we just put in front of you.” Otherwise, this could stretch into late 2018 or 2019, even with something “in principle.”

So, what’s clear about NAFTA is far from certain, except that a sudden wrap up seems not to be in the cards. Certainly the negative politics surrounding the China fight will have an effect on the NAFTA deal as well, and may carry over for some time in the future. Trade policy and politics remains a flashpoint ahead of the midterm elections, and is creating a debate producers should watch closely as it proceeds, Washington Insider believes.

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