Washington Insider -- Thursday

Even Tougher Trade Talk Outlook

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

US to Post Notice on Increasing Tariffs on Chinese Goods

The Office of the U.S. Trade Representative (USTR) will publish a notice today in the Federal Register that would officially raise the level of tariffs on $200 billion in Chinese goods to 25% from a current 10%.

USTR said it was modifying the action relative to its Section 301 investigation on China "by increasing the rate of additional duty from 10% to 25% for the products of China covered by the September 2018 action in this investigation." USTR said there would also be a process to request things be excluded from the additional duties.

"Effective with respect to goods ... entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on May 10, 2019, and ... exported to the United States on or after May 10, 2019," USTR said.

The duties of 10% on $200 billion in Chinese goods took effect September 24, 2018, and the action to take effect May 10 expands the duties to 25%. That increase was originally to take effect January 1, but was modified December 19 by postponing the increase until March 1. USTR then on March 5 postponed the increase in tariffs "until further notice."

"The United States is engaging with China with the goal of obtaining the elimination of the acts, policies, and practices covered in the investigation," USTR said in the pre-publication notice. "In the most recent negotiations, China has chosen to retreat from specific commitments agreed to in earlier rounds. In light of the lack of progress in discussions with China, the President has directed the Trade Representative to increase the rate of additional duty to 25 percent."

USTR will publish a separate notice describing the product exclusion process, including the procedures for submitting exclusion requests, and an opportunity for interested persons to submit oppositions to a request.

US Imposes Duties on Mexican Tomatoes

The Department of Commerce (DOC) announced late Tuesday the termination of the 2013 Suspension Agreement on Fresh Tomatoes from Mexico.

"Negotiations will continue regarding a possible revised agreement acceptable to the Mexican signatories which also addresses the concerns of the U.S. industry to the extent permissible by U.S. trade law," DOC said in a statement.

Commerce also said that during the negotiations, it will continue with the investigation and instruct Customs and Border Protection (CBP) to collect cash deposits or bonds based on the preliminary determination by Commerce, which was issued in 1996.

Any deposits collected will be refunded if a revised agreement is reached, or the U.S. International Trade Commission (ITC) determines there is no injury based on its own independent investigation.

The Mexican government said the country’s tomato growers face more than $350 million a year in losses from U.S. anti-dumping duties on their exports. The Mexican Economy Ministry said it was “disappointed and concerned” about the U.S. decision to terminate the suspension agreement, which had set minimum prices for tomato imports and kept Mexican tomato exports to the U.S. tariff-free for decades.

Washington Insider: Even Tougher Trade Talk Outlook

Well, there’s a very great deal of guessing about where the U.S.-China talks are just now and where they may go in the future.

Reuters said yesterday that the “diplomatic cable from Beijing arrived in Washington late last Friday night with systematic edits to a nearly 150-page draft trade agreement that would blow up months of negotiations between the world's two largest economies.”

The document was riddled with reversals by China that undermined core U.S. demands, Reuters said.

In each of the seven chapters of the draft trade deal, China had deleted its commitments to change laws to resolve core complaints that caused the United States to launch a trade war: theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation.

President Donald Trump responded in a tweet on Sunday vowing to raise tariffs on $200 billion worth of Chinese goods from 10 to 25 percent on Friday – timed to land in the middle of a scheduled visit by China's Vice Premier Liu He to Washington to continue the talks.

The stripping of binding legal language from the draft struck directly at the highest priority of U.S. Trade Representative Robert Lighthizer – who views changes to Chinese laws as essential to verifying compliance after years of what U.S. officials have called empty reform promises.

Lighthizer has pushed hard for an enforcement regime more like those used for punitive economic sanctions – such as those imposed on North Korea or Iran — rather than a typical trade deal. “This undermines the core architecture of the deal,” Reuters said.

Chinese Foreign Ministry spokesman Geng Shuang told a briefing on Wednesday that working out disagreements over trade was a "process of negotiation" and that China was not "avoiding problems".

Geng referred specific questions on the trade talks to the Commerce Ministry, which did not respond, Reuters said.

Lighthizer and U.S. Treasury Secretary Steven Mnuchin were taken aback at the extent of the changes in the draft. The two cabinet officials on Monday told reporters that Chinese backtracking had prompted Trump's tariff order but did not provide details on the depth and breadth of the revisions.

Liu last week told Lighthizer and Mnuchin that they needed to trust China to fulfil its pledges through administrative and regulatory changes, two “informed” sources said. Both Mnuchin and Lighthizer considered that unacceptable given China's history of failing to fulfil reform pledges.

One private-sector source briefed on the talks said the last round of negotiations had gone very poorly because "China got greedy".

"China reneged on a dozen things, if not more ... The talks were so bad that the real surprise is that it took Trump until Sunday to blow up," the source said.

The rapid deterioration of negotiations rattled global stock markets, bonds and commodities this week. Until Sunday, markets had priced in the expectation that officials from the two countries were close to striking a deal.

Investors and analysts initially questioned whether Trump's tweet was a negotiating ploy to wring more concessions from China, but experts are now suggesting that “the extent of the setbacks in the revised text are serious and that Trump's response was not merely a negotiating strategy.”

Chinese negotiators said they couldn't touch the laws, said one of the government sources, calling the changes "major."

Changing any law in China requires a unique set of processes that can't be navigated quickly, a Chinese official told Reuters. The official disputed the assertion that China was backtracking on its promises, adding that U.S. demands were becoming more "harsh" and the path to a deal more "narrow" as the negotiations drag on.

Liu is set to arrive in Washington today for two days of talks that just last week were widely seen as pivotal – a possible last round before a historic trade deal. Now, U.S. officials say they are skeptical that Liu will come bearing any offer that can get talks back on track, Reuters said.

To avert escalation, it appears that Liu would have to scrap China's proposed text changes and agree to make new laws. China would also have to move further towards the U.S. position on other sticking points, such as demands for curbs on Chinese industrial subsidies and a streamlined approval process for genetically engineered U.S. crops.

The administration said the latest tariff escalation would take effect at 12:01 a.m. Friday, hiking levees on Chinese products such as internet modems and routers, printed circuit boards, vacuum cleaners and furniture.

Secretary Mnuchin – who has been more open to a deal with improved market access and at times clashed with Lighthizer – appeared in sync with Lighthizer in describing the changes to reporters on the current state of play – while still leaving open the possibility that new tariffs could be averted with a deal.

President Trump's tweets on the matter left no room for backing down, however, and Lighthizer emphasized that, despite continuing talks, "come Friday, there will be tariffs in place," Reuters concluded.

The administration is now scrambling to put the best face on the rift and is still suggesting that it can be repaired. This is clearly an important fight, and one producers should watch closely as it proceeds, Washington Insider believes.

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