Washington Insider -- Tuesday

Gloomy Trade Outlook

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

Next and Final Trump Trade Aid for Farmers Seen Around December 3

USDA Secretary Sonny Perdue is slated to announce the second and final round of trade aid for farmers and ranchers impacted by retaliatory tariffs “on or around” Dec. 3, Farm Service Agency Administrator Richard Fordyce during an interview on the radio show Adams on Agriculture.

Producers who already applied and qualified for the first tranche of $4.7 billion in direct payments will automatically be eligible for the next batch.

The application period will remain open until January 15.

But the Dec. 3 date is not really "new" as USDA indicated when they detailed the trade aid package earlier this year that the date of announcing the second installment would be on or around Dec. 3.

USDA's Perdue also recently said that the aid amounts for the second installment would not change from the initial levels. That ran counter to Perdue's comments just a few weeks ago that the aid they could change once the benefits for the U.S.-Mexico-Canada Agreement are figured.

US Charges India Has Exceeded WTO Commitments On Cotton Subsidies

India provided its producers with more subsidies for cotton production than allowed under their WTO commitments, according to a U.S. filing with the world trade body, with the U.S. contending India's payouts were "vastly in excess" of their limits.

The U.S. said that the market price support (MPS) for cotton by India was limited to 10% of the value of production, but the U.S. said India paid out a range of 53% to 81% of value since 2010.

India notified the WTO of market price support of 1.2 billion rupees ($18 million) for the 2015/16 marketing year, but the U.S. said their calculation is that the support was 504 billion rupees, with another 557 billion rupees in 2016/17; India has not yet notified the WTO of its spending for 2016/17.

"The United States looks forward to future discussion of the significance of India’s MPS for cotton for both India’s market and for world markets – both with India and with other Members," it said.

Washington Insider: Gloomy Trade Outlook

Lest anyone harbor an optimistic thought on trade policy ahead of the meeting with China’s Xi Jinping and President Donald Trump at the upcoming Group of 20 summit, move toward peace “is likely to take months to wrangle and is unlikely to bring immediate relief for companies from the tit-for-tat tariffs that have hit almost 60% of goods traded between the U.S. and China,” Bloomberg is reporting this week.

As a result, companies around the world are being forced to re-examine where they make and buy components and products with one eye fixed on what has become a new long-term risk to their business models. And, as they do so, “an awkward reality is emerging: Any decoupling is likely to take longer and be more disruptive than the ‘America First’ protectionists argue,” Bloomberg says.

“This is the struggle of our times,” Paul Triolo, head of global technology policy analysis at Eurasia Group in Washington, told Bloomberg. “And there will be lots of collateral damage.”

The Trump White House has framed its trade war as a national security priority and a response to what it calls China’s “economic aggression.” Hawks within the administration see a broader parting of ways as vital to guarantee America’s future preeminence.

China, too, sees the battle as existential. During a visit to the manufacturing heartland of Guangdong province in October, Xi reiterated a mantra that China must strive to be self-reliant, especially on innovation.

The result of this standoff, Hank Paulson who served under George W. Bush, warned last week was a “moment of change in the global economy” and “unprecedented political pressure on cross-national supply chains.”

The push by some in Washington for a decoupling has consequences for boardrooms far beyond the U.S. and China. European companies such as BMW AG are being forced by the new tariffs to rethink models that now see them export SUVs from South Carolina to China. Southeast Asian countries such as Vietnam are experiencing a new flood of interest as a manufacturing alternative to China.

Bloomberg’s analysis centers on key products that “underscore the complexities facing businesses stuck between the dueling giants” especially rechargeable batteries, solar panels and pain-relief devices.

A close look at those supply chains shows China’s control of raw materials, entrenched competitive advantages and ability to find alternative buyers at home and abroad, as well as the way tariffs and retaliation to them cause higher prices to ripple across the world, Bloomberg concludes.

Bloomberg says that the situation for batteries provides a good example of how hard shifting supply chains will be since the U.S. now relies on offshore production for most rechargeable batteries. China also controls a substantial portion of the market for raw materials used in lithium-ion batteries, including processed lithium.

Last summer, importers of electrolytes to domestic battery makers petitioned for tariff relief. “There are presently no other viable sources of these inputs outside of China,” Mitsubishi executives warned. Washington relented and dropped those raw materials from a $200 billion list of goods it hit with tariffs — and has also so far held off on imposing tariffs on lithium-ion batteries. But that could change in the months to come if peace is not forthcoming and Trump delivers on his threat to impose tariffs on all imports from China.

The solar industry has been one of those hit hardest by the new tariffs. The administration early this year imposed temporary “safeguard” tariffs on imported solar cells. In September it added tariffs on inverters—the boxes that convert power from solar panels into the alternating current used by household appliances and the grid.

According to John Smirnow, general counsel of the Solar Energy Industries Association, the majority of inverters used in the U.S. now come from China. That will change in the months ahead, but only because some Chinese companies are shifting their production overseas. China’s Sungrow, one of the world’s biggest manufacturers of solar inverters, announced in April that it was setting up its first factory outside China in Bangalore, India. That illustrates how—if and when supply chains shift — some of the changes will be cosmetic, rather than structural.

The “transcutaneous electrical nerve stimulation,” or “TENS,” devices the Japanese firm Omron now sells in the U.S. are part of a wave of increasingly popular alternatives to highly addictive opioids. They are also made in China and, as of September, subject to a 10% tariff that’s due to rise to 25% in January appear.

Last year, Omron’s sales of “TENS” units in the U.S. were worth $10 million to $12 million and represented just a tenth of its global sales of the product.

The tariffs have created a bitter irony for Omron, Bloomberg says. The units are increasingly popular among blue-collar workers with injuries as an alternative to the opioids that have caused a crisis in many parts of the country. It helps ordinary people who “go to work every day and lift stuff and hurt their back,” Bloomberg says.

So, we will see. The argument that the administration is pushing a trade fight that is not fully understood by some of its advocates is not new and is unlikely to gain traction among administration officials. However, it is increasingly supported across business communities and in some quarters in the Congress and should be watched closely by producers as the fight intensifies, Washington Insider believes.

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