Washington Insider -- Friday

Relief from Car Tariffs May be Short Lived

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

US-Canada Close to Deal to End Section 232 Tariffs

The Trump administration is close to negotiating a solution to the steel and aluminum tariffs it imposed on NAFTA partners Canada and Mexico, a development that is seen as a must-have for any congressional vote on the U.S.-Mexico-Canada Agreement (USMCA).

Treasury Secretary Mnuchin said during a Senate subcommittee hearing Wednesday that U.S. officials are "close to an understanding with Mexico and Canada,” on the tariffs, which have been in place for nearly a year. “It is a priority of ours.”

However, it is not yet clear what any compromise would entail.

Mexican Economy Minister Graciela Marquez said after meeting with Canadian Foreign Minister Chrystia Freeland, that the two sides were close on the tariffs. “We are, I think, close to negotiating the lifting of the tariffs," Marquez told reporters after a session in Canada. "We are having very fruitful conversations on lifting the tariffs not only in the U.S. but also here in Toronto.”

However, Mnuchin indicated in his congressional remarks that he did not signal that the tariffs would be lifted, but that the three countries are "trying to resolve the tariff issues as part of the agreement with USMCA. That’s something we are focused on.”

Reuters: EPA Shifted Small Refiner Waiver Actions Before Court Ruling

EPA took action to grant more small refiner exemptions (SREs) under the Renewable Fuel Standard (RFS) even before a court ruling was issued that the agency has cited in defense of the broader use of the SREs, according to a report from Reuters based on court documents and an interview with a former EPA official.

The Advanced Biofuels Association filed documents in court that show EPA changed its policy prior to May 4, 2017, telling a refinery in a letter "we are changing our approach" to the SREs, allowing exemptions even if they were not "significantly impaired" by compliance.

The U.S. Court of Appeals ruled in August 2017 that the agency had been too strict in its process of SREs, a ruling that officials have cited as a reason for the increased use of SREs – EPA granted 35 for the 2017 compliance year and there are currently 40 pending for the 2018 compliance year.

Mandy Gunasekara, who retired as principal deputy assistant administrator at the EPA’s Office of Air and Radiation this year, told the news service former EPA administrator Scott Pruitt opted to put the SRE effort back in play to help the refining industry. The August court case, she noted, was viewed as a "vindication" of EPA's changes, she said.

Biofuel backers have complained that the stepped-up use of the SREs has negatively impacted the ethanol industry.

Washington Insider: Relief from Car Tariffs May be Short Lived

This week, after the Trump Administration pushed back hard against China’s pullback on parts of a trade deal, the U.S. appeared to back away from threats to impose car tariffs on the EU and Japan. However, The Hill says this week that “The sighs of relief for European and Japanese carmakers after Donald Trump’s expected decision to delay imposing punitive tariffs may prove premature.”

President Trump is poised to give the EU and Japan 180 days to agree to a deal that would “limit or restrict” imports into the U.S. of automobiles and their parts, according to a draft executive order reported by Bloomberg.

The problem is that Trump’s plan concludes that car imports do in fact constitute a national-security threat and what he’s seeking in return for a tariff reprieve may not fly, The Hill said.

World Trade Organization rules prohibit any voluntary export restraints. The European Union, and especially countries like France, says it opposes any deal with the U.S. that would violate WTO rules and the international rules-based order.

The European Commission declined to comment until the administration decision is made public, The Hill said.

Optimists may hope that European powers which are most keen to avoid car tariffs, such as Germany, could convince the bloc to turn a blind eye to potential WTO violations with export restrictions. However, the bloc was ready to accept a fudged deal of this kind last year, when Trump threatened the EU with punitive tariffs on steel and aluminum.

In a last-ditch attempt to avoid the levies, the EU signaled it was willing to tolerate quotas, meaning that the bloc wouldn’t legally challenge or retaliate against potential tariffs on steel and aluminum, as long as these were imposed after a certain volume of exports.

In practice, what Trump was demanding and what the EU was willing to tolerate proved impossible to reconcile. U.S. tariffs on steel and aluminum were eventually imposed, and the EU retaliated with duties on a long list of U.S. goods ranging from motorcycles to bourbon.

The difference with last year’s trade brawl is that this time around the EU and the U.S. are engaged in the formal process of negotiating a trade accord to cut tariffs on industrial goods and they have said they won’t impose additional levies while talks are moving.

But ongoing negotiations with Beijing didn’t stop the administration from hitting China with new duties and judging from the president’s previous comments comparing the EU and China, there’s no guarantee he’ll treat his western allies any differently, The Hill said, although the EU has made it clear that it would abandon negotiations if any new tariffs are levied.

In the past, Japan struck a similar agreement with the U.S. with regard to not escalating trade tensions. Japanese Chief Cabinet Secretary Yoshihide Suga noted Thursday that when Japan and the U.S. agreed last year to open bilateral trade talks, the U.S. pledged not to impose auto tariffs while talks were under way.

“Prime Minister Abe confirmed directly with President Trump that while trade talks are going on no actions will be taken against the spirit of the joint statement, and additional tariffs will not be imposed under Section 232 on cars or car parts,” Suga said.

The stakes in the fight over U.S. levies on car imports and Europe’s anticipated retaliation couldn’t be higher, The Hill thinks. "U.S.-China trade is about 3% of the global total. Automobile trade globally is about 8% of global trade,” WTO’s Chief Economist Robert Koopman said in March. “So you can imagine that the impact of automobile tariffs are going to be bigger than the impact of the U.S.-China trade conflict."

The U.S. imported $191.7 billion in passenger vehicles and light trucks in 2018 with more than $90 billion of those imports coming from Canada and Mexico, which are duty-free under NAFTA. Passenger cars are now subject to a 2.5% U.S. tariff but the administration has threatened to raise that to 25%, arguing that the EU and other countries have higher barriers to U.S. auto exports.

European carmakers Thursday gave up gains following the decision to delay tariffs. Volkswagen AG, maker of the Porsche and Audi brands, fell 1% after rising as much as 5.7% Wednesday. Daimler AG and BMW AG also declined, 1.1% and 0.2% respectively after rising by a similar amount the day before.

While there was deep angst in markets in both the U.S. and China earlier this week, “calming statements” from various officials seem to have worked at least a little to reduce tensions—and questions of restrictions on auto imports into the U.S. are being watched closely.

At the same time, the issue of whether the administration sees tariffs as short-term tactical weapons or long-term policies to be used to manage markets is being discussed increasingly in the press and among politicians--and seems to suggest a deeper than expected rift among and between political and economic interests. This is certainly a debate producers should watch closely as it intensifies, Washington Insider believes.

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