Washington Insider -- Friday

Canada Considers China Talks

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

Trump Administration Unlikely To Designate China a Currency Manipulator

The forthcoming report from the U.S. Treasury Department is not expected to name China as a currency manipulator, but instead keep it listed as a country of concern in a forthcoming Treasury Department report, an administration official said this week.

Treasury’s semiannual report on foreign exchange rate practices will be released Monday.

No U.S. administration has labeled a country a currency manipulator since the early 1990s. China was given the designation from 1992 to 1994.

Treasury Secretary Steven Mnuchin, in an interview published by the Financial Times, declined to comment on the upcoming report and also steered clear of personally calling China a currency manipulator. “The renminbi has depreciated significantly during the year. There are various factors for that, which we look forward to discussing with them,” Mnuchin said. “One of those factors has to do with their own economic issues and what has gone on in the Chinese economy."

The Treasury chief said currency issues will be part of any broader trade talks with China, which has been accused of lowering the value of the renminbi to increase the competitiveness of its exports.

“As we look at trade issues, there is no question that we want to make sure China is not doing competitive devaluations,” he said.

Lawmaker Warns About FTA with Philippines

Senate Finance ranking member Ron Wyden, D-Ore., expressed concerns about potential trade negotiations with the Philippines after U.S. Trade Representative Robert Lighthizer briefed lawmakers on the trade focus for the administration.

Wyden focused his concerns on potential Trump administration trade talks with the government of Philippines President Rodrigo Duterte. Wyden said such talks would reward a government accused of killing more than 12,000 people as part of a crackdown on illegal drugs. Lighthizer met for more than an hour with Senate Finance Committee members of both parties on potential talks with the Philippines, Japan and the European Union (EU).

Chairman Orrin Hatch, R-Utah, said Lighthizer did not give a timetable for notifying Congress on the start of formal negotiations.

Washington Insider: Canada Considers China Talks

Bloomberg is reporting this week that Canadians are still thinking about reaching out to China on trade.

Part of the reason is that the U.S.-Mexico-Canada (USMCA) trade deal – which still must be signed and ratified to take effect – includes a clause that would force any one of the U.S., Canada or Mexico to notify the others if it were to launch trade talks with a non-market economy, such as China. It then needs to provide text of any deal in advance; if a deal actually takes effect, the other countries can quit the USMCA deal and instead strike their own two-way deal.

The Canadian government and some trade lawyers have argued that the provision is “largely symbolic” since any country can quit the USMCA on six months’ notice for any reason. Others have said it sends a signal and undermines Canada’s authority to strike its own deals.

Interest in stronger links to China is not new in Canada, Bloomberg notes. China is Canada’s second-largest trading partner, behind the U.S. and ahead of Mexico. Prime Minister Trudeau took office in 2015 with “high hopes on China that have since fallen flat.” Early effort to launch exploratory trade talks with the country collapsed during a visit last year and Canada later rejected a takeover of Toronto-based Aecon Group Inc. by a Chinese state-owned enterprise. China then criticized the “politicization” of the negotiations.

More recently, Canada has been modestly engaged in an internal debate regarding its future ties with the Asian powerhouse. The idea was that “there is a new urgency to diversifying our trade” and a survey assessment was made by the Public Policy Forum. A final report is expected in the near future, co-author Kevin Lynch told Bloomberg on Wednesday. This work has been underway for some time – since well before the new “modified NAFTA” clause.

“It certainly came as a surprise to many people and it really is an interesting intrusion on Canadian sovereignty,” Lynch said, adding he doesn’t think sectoral agreements would trigger that clause.

The government released a summary of the survey last week, and noted that it included more than 600 stakeholders and other groups. The most heavily consulted business stakeholder group was agriculture.

In general, the government says that Canadians “have mixed feelings about a trade deal with China, seeing opportunities to sell to a major market while worrying about "inconsistent rule of law."

It said that while “intrigued by the potential of China as a market for goods such as crops and oil, Canadians worry about the country’s state-run economy and its legal system, particularly a lack of enforcement of intellectual property rights. The consultations also found concern about labor and human rights, as well as the environment,” Bloomberg said.

The summary report highlighted that Canadian concerns about the rule of law in China “were widespread,” with stakeholders saying any trade deal would need a robust dispute settlement measure. The agriculture and forestry sectors largely want a pact, while Canada’s metals sector hoped any deal would “meaningfully address Chinese over-production” of aluminum and steel, the summary said. Respondents “expressed concern” that China’s “unpredictable and opaque regulatory environment” stymies foreigners looking to do business and asserted that in some cases, these rules are a de facto means of protectionism. Lower tariffs in some cases are secondary to clearer regulatory regimes, it said. “Not all stakeholders are confident that an FTA with China would be able to meaningfully address the full spectrum of challenges faced by Canadian businesses trading with China,” the summary report said.

James Moore, a former Canadian industry minister who sits on Prime Minister Trudeau’s NAFTA advisory council, has warned against Canada-China trade talks, saying it would undermine Canada-U.S. relations and potentially hurt the USMCA talks.

Trudeau’s government nonetheless continues to signal interest in China, Bloomberg says. Pierre-Olivier Herbert, a spokesman for Trade Minister Francois-Philippe Champagne, said last week that “a comprehensive relationship” with China “is in the best interests of all Canadians,” but gave no indication when Canada would make a decision on whether to proceed.

“We will continue to consult Canadians to ensure that any possible future economic discussions with China are informed by their views and by Canada’s interests in pursuing a rules-based, progressive and strategic trade agenda throughout Asia-Pacific that helps create new opportunities for growth and puts our middle class values front and center,” Herbert said.

So, it looks like the odds are against any strong effort by Canada to reach out to China just now, although the potential for “collateral damage” to elements of the USMCA deal from the growing trade fight with China appears to be lingering and possibly intensifying. These are trends U.S. producers should watch closely as they emerge, Washington Insider believes.

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