Washington Insider -- Wednesday

The Fragile Trade Truce with China

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

House Vote on Farm Bill After Immigration Measure

The House will have another chance to vote on the farm bill June 22, according to House Agriculture Committee Chairman Mike Conaway, R-Texas.

Conaway said the Freedom Caucus will get the immigration vote that it demanded before the House takes the farm bill up again. The bloc of conservative Republicans helped sink the bill as all Democrats and 30 Republicans voted against the package. Conaway said he does not plan to alter the farm bill, adding it was defeated because of the immigration vote issue between House leaders and the conservatives.

The Freedom Caucus has demanded a floor vote on a conservative immigration bill (HR 4760) by Rep. Bob Goodlatte, R-Va.

"I got the votes if we have the immigration thing settled. The issue Friday was immigration not the bill," Conaway said. "My magic number is 215 given the current seven (open) seats."

House Majority Whip Steve Scalise, R-La., said the plan is to vote on the Goodlatte immigration bill some time before the June 22 second vote on the farm bill.

Some Lawmakers Push Back on 'Deadlines' for NAFTA 2.0 Talks

North American Free Trade Agreement (NAFTA 2.0) talks should proceed as needed to “get these negotiations right,” Senate Finance Committee Chairman Orrin Hatch, R-Utah, said this week in remarks on the Senate floor. He says the most important factor for determining when Congress will vote on an eventual agreement is the quality of the deal.

Hatch said substance matters “and we should not allow other considerations to impede achieving our goals.”

Meanwhile, a group of senators also warned U.S. Trade Representative Robert Lighthizer against using a potential threat to withdraw from NAFTA to force Congress to support the trade deal.

Washington Insider: The Fragile Trade Truce With China

POLITICO is reporting this week that the current trade “detente” with China is fragile, in spite of the president's partial victory claims, and despite the recent the market reaction.

The reality behind the scenes is significantly less rosy, the group argues.

The temporary detente is “masking continuing internal White House battles over how hard to push China for major concessions.” And, it papers over threats that a tariff battle could easily reignite over multiple flash-points including U.S. sanctions on China telecom giant ZTE and China’s role in high-stakes talks between the U.S. and North Korea.

“In the long-term there is a 100% chance that the trade war reignites because we have not crafted anything close to a long-term solution,” said Derek Scissors, a China expert at the American Enterprise Institute.

Nevertheless, the president was in a celebratory mood on Twitter on Monday. He issued a series of tweets praising the relatively muted joint statement – in which the Chinese only pledged to “significantly increase” purchases of U.S. goods and services, rather than the specific $200 billion commitment the U.S. wanted.

Trump did inject a note of caution, tweeting that “China must continue to be strong & tight on the border of North Korea until a deal is made.”

Beneath the surface, however, there remain sharp differences within the White House negotiating team over the approach to China with more hawkish voices including trade adviser Peter Navarro, Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer arguing that much bigger structural changes are needed from China rather than just some commitments to buy more U.S. products.

On Sunday morning, Treasury Secretary Steven Mnuchin declared on Fox News that “we’re putting the trade war on hold” sending Asian markets higher and setting the stage for a Wall Street rally. But on Sunday evening, Lighthizer issued a statement that took a seemingly much sharper line.

The differences were still sharply apparent on Monday morning, despite White House efforts to tamp them down.

Ross appeared on TV to argue that the U.S. essentially has a gun pointed at China’s head.

“This is not a definitive agreement. This is what we hope will be a path forward. If it doesn't work, the tariffs will go into effect,” Ross said before invoking the U.S. review of Chinese trade practices. "The review is still there. Our trade tools are getting ready to be used. And if need be, they will be used."

Those words contrasted sharply with the sunnier views offered on Monday by Mnuchin and National Economic Council Director Larry Kudlow who together represent the more staunchly pro-free trade wing of the White House.

Mnuchin on Monday rejected the idea that his comments on Sunday were at odds with Lighthizer’s statement. “The team is unified on this.”

"We’re going to continue to have meetings and if these things aren’t fixed and we don’t get what we want, the president can always put tariffs back," Mnuchin said.

Mnuchin declined to comment on a shouting match he had recently in Beijing with Navarro or blind quotes in the press from administration officials criticizing the Treasury Secretary for taking a soft line with the Chinese.

Senior administration officials say the internal disputes are real and significant with Kudlow now taking over the free-trade advocacy portfolio that once belonged to his predecessor, Gary Cohn. One senior official said on Sunday night that Trump himself, for the moment, is siding with Kudlow and Mnuchin but that he could easily slip back into a desire to punish China with tariffs, siding once again with the White House hawks.

For now, Trump’s threat to put as much as $150 billion in tariffs on Chinese exports to the U.S., and China’s threat to retaliate is on hold. But it could easily come back if the Chinese drag their feet on actions that could actually reduce the $375 billion trade deficit the U.S. has with China, which is the president’s biggest concern.

And administration officials acknowledge that much of Trump’s inclination to take a softer line with China is based on his hope that they will help him with an upcoming summit meeting with North Korean leader Kim Jong-un. Trump is counting on China to play a major role in helping deliver an agreement that would see North Korea drop its nuclear program in return for an easing of economic sanctions.

There is also the fraught issue of ZTE, sharply sanctioned by Ross' Commerce Department last month after the Chinese telecoms giant was caught violating the terms of a March 2017 $1.19 billion penalty agreement for making illegal sales to Iran and North Korea.

Chinese Vice Premier Liu He, who led the recent round of negotiations for China in Washington, has made relief for ZTE a key component of any agreement with the U.S. on trade. U.S. negotiators refused to include anything on ZTE during talks over the weekend, leading the Chinese to decline to agree to any specific dollar target for new U.S. imports. Congress is also moving to block any effort by the Trump administration to remove sanctions on ZTE, meaning the White House may not even be able to offer the biggest thing the Chinese want.

So, if the Chinese determine that the U.S. has failed to deliver on the thing they want the most, they could back out of any agreement, putting the trade war back into effect. “You saw what happened with Trump’s ZTE tweet just a week ago and how much blowback he got from that,” Scissors said. “There are just so many ways this deal could blow up.”

So, there is much to be concerned about on trade issues, but some reasons for optimism, as well. This is a fight producers should watch closely as it proceeds, Washington Insider believes.

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