Washington Insider -- Thursday

The Auto Tariffs Question

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

US Must Hold Out For ‘Significant’ Concessions in China Dispute: Report

Persistent pressure on China is likely needed to achieve "truly meaningful" concessions in U.S.-China trade negotiations but the US should not rush to get a quick deal, according to a new report from the nonprofit National Bureau of Asian Research (NBR).

The report was co-authored by former Rep. Charles Boustany, R., La., now a counselor at NBR, and Aaron Friedberg, professor of politics and international affairs at Princeton University. The two serve as co-chairs and principal investigators for NBR’s Taskforce on Transforming the Economic Dimension of U.S. China Strategy.

"The Trump administration deserves considerable credit for challenging China on trade and beginning a process that may yet yield substantial benefits," the authors noted.

The combination of continued pressure on China and cooperation from U.S. trade allies like the European Union (EU) and Japan “improve the odds” of persuading China to undertake “deep and far-reaching structural reforms," the report said. While such an approach does not guarantee a successful outcome, the report warns any deal secured through the present strategy of unilateral U.S. pressure would likely be “an unstable one, and the gains, transient.”

Convening a summit with advanced industrial nations to build on the joint statement by U.S., EU and Japan trade officials in September 2018 would be a "first step" toward getting a common position developed, the report said. But the U.S. also needs to work on building a "stronger and more closely integrated grouping of market-oriented liberal democracies," the report said.

The U.S. should “keep up the pressure” on China by not lifting current tariffs “prematurely” in a bid to ink a quick, watered-down agreement. The authors warn that bowing to pressure to lift the tariffs would only serve to bolster the views of some Chinese leaders that the US and other democracies lack the resolve to hold firm for meaningful, long-term concessions from China.

“The Trump administration should therefore resist demands that it lift tariffs in return for anything less than significant, verifiable progress on structural issues,” the report argued. “An agreement in which both sides ratchet back duties on each other’s imports, even if accompanied by Chinese promises to buy more U.S. goods and services, would not achieve this end."

Grassley: Democrats using tax incentives for leverage on biodiesel

Senate Finance Committee Chairman Chuck Grassley, R-Iowa, said House Democrats are using the biodiesel tax credit and other expired tax incentives as leverage on other tax issues.

The extenders are “tied up with Democrats in the House, not to the extent that I can accuse them of not being for alternative energy, but to the point they are using tax extenders to negotiate with Republicans on other tax provisions,” he told reporters.

Grassley acknowledged some Senate Republicans are opposed to alternative energy provisions, but said they are not the real obstacle to reinstating the tax incentives.

The vast majority of the Senate Finance Committee supports the extenders, he said.

Washington Insider: The Auto Tariffs Question

There are important new trade worries now, according to both economic analysts and media experts. For example, Bloomberg said that a report by the U.S. Department of Commerce on its investigation into “whether imported cars could pose a national security threat” was received by Trump on Sunday, and is already causing a global stir.

Ahead of any administration announcement, the European Union and Japan pushed back against higher levies. And, also this week, China reported yet another monthly slump in car sales as the world’s largest auto market joins other regions including Europe and the US starting the year on a weak note. Bloomberg said the situation fuels “anxiety over an industry already grappling with falling profits amid record spending to finance the shift to electric and self-driving cars.”

The persistent gloom in China, who Bloomberg called “the engine room for growth over the past decade,” leaves automakers with few places to go. Japan is sputtering too, while volumes in other smaller markets aren’t enough to offset the declines in the bigger sales regions.

“Downward pressure is still there,” Gu Yatao, a Beijing-based auto analyst with Roland Berger, said of China. “The government isn’t adopting stimulating policies to give the market a shot in the arm.”

The global slowdown has hit earnings of almost everyone from Ford Motor Co. to Volkswagen AG and Toyota Motor Corp. to pile on the pressure as they spend on electrified and autonomous vehicles. In addition, trade woes, political upheaval and diesel’s demise are hurting consumer sentiment, while the increasing availability of ride-hailing and car-sharing services makes it less necessary to own a car.

Even with an expected recovery in China in the second half, the global car market will stall this year or grow just 1%, said Janet Lewis, an analyst at Macquarie Group Ltd. in Tokyo. The US and European markets will be little changed, she predicts.

“You can’t expect mature markets to grow significantly,” said Zhou Jincheng, an analyst at research firm Fourin Corp. in Nagoya, Japan. “The complexity of global trade environment is not helpful either.”

Trump has threatened a tariff of as much as 25% on imported autos, risking a further hit to vehicle demand and carmakers’ bottom lines. The probe covers imports of vehicles including SUVs, vans and light trucks, as well as auto parts. American and foreign-based auto manufacturers have been lobbying against higher tariffs and Trump now has 90 days to decide whether to act on the Department of Commerce findings.

The EU vowed prompt retaliation if the U.S. goes ahead with the vehicle tariffs. The 28-nation bloc is considering tariffs on a total of 20 billion euros ($23 billion) in U.S. goods should Trump follow through on his threat, which would chiefly hit Germany.

If European exports are hit by U.S. actions, the EU will “react in a swift and adequate manner,” Margaritis Schinas, a spokesman for the European Commission, told reporters in Brussels.

Those comments were echoed by Japan, although Economy Minister Toshimitsu Motegi opined that the U.S. won’t apply higher tariffs on imports of Japanese cars and auto parts so long as negotiations toward a trade deal continue. Motegi said Tuesday he had previously confirmed the matter with U.S. Trade Representative Robert Lighthizer.

In China, sales to dealers plummeted 17.7% last month as the world’s second-largest economy slowed and negotiations with the U.S. for a trade-war truce dragged on. Consumers stayed away from showrooms even with discounting by dealerships ahead of the Chinese New Year Holiday. Last year, the market contracted for the first time since the early 1990s.

That’s leaving manufacturers who’ve spent billions of dollars adding plants and production lines in China over recent decades uncertain if and when growth will return. Geely Automobile Holdings Ltd. targets sales of 1.51 million cars this year, an increase of just 0.7% from 2018. Volkswagen, the No. 1 foreign manufacturer on the mainland, is expecting further growth for the company this year, but has predicted the overall Chinese market to shrink in the first half.

Jaguar Land Rover Automotive Plc’s problems in China forced its parent to take a $3.9 billion writedown this month. Daimler AG and BMW AG reduced profit forecasts last year amid pressures from the U.S.-China trade war that’s hit auto demand, while Hyundai Motor Co. said last month it’s letting workers go as it reviews production plans in the country.

What’s happening in China is a reflection of the situation worldwide, Bloomberg thinks. In Europe, car sales declined for a fifth straight month in January. In the U.S., the top four premium car brands all posted sales declines last month to deepen a slump that began taking hold near the end of 2018.

So, we will see. With political tensions abnormally high across the US economy and government, it would seem unlikely that new trade interventions would be imposed just now—but the administration seems determined to rely increasingly on tariffs to achieve political objectives. Still, the trade debate is very difficult to anticipate and has become a fight producers should watch closely as it intensifies, Washington Insider believes.

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