Washington Insider -- Thursday

The Basis for the US, China Trade Fight

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

USDA Sends Final Rule on Dairy Margin Coverage To OMB

USDA has forwarded the final rule for the Dairy Margin Coverage (DMC) program to the Office of Management and Budget (OMB) for their review.

USDA has previously announced they will start enrollment for the DMC program June 17 and publishing of the final rule for the program is key for that effort. USDA has already been announcing the income over feed cost margin levels that are used to trigger payments under the DMC.

The program is retroactive to January 1 and USDA has been under pressure to get the program operational as the US dairy industry has economically struggled.

Already, USDA has announced that those producers who elect a DMC coverage level of $9 and $9.50 per cwt. will be eligible for a payment for January, February and March.

EPA Sends RFS Reset Plan to OMB For Review

EPA has sent its proposed plan for a reset of the Renewable Fuel Standard (RFS) to the Office of Management and Budget (OMB), one of the final stages before the plan will be released.

There are no indications regarding levels EPA is proposing at this stage for 2020, 2021 and 2022 renewable fuel levels (2021 and 2022 for biomass based biodiesel) – the final three years of RFS authorization. However, expectations are that the conventional ethanol component will remain at 15 billion gallons, the level specified in the 2007 energy law.

The EPA plan will "propose modifying the applicable volumes targets for cellulosic biofuel, advanced biofuel, and total renewable fuel for the years 2020-2022," according to the notice posted by OMB. "Since the timetable for this rulemaking overlaps that for annual standard-setting rulemakings, this rulemaking will also include the applicable percentage standards for 2020."

EPA also noted that the reset plan also includes "several regulatory amendments designed to provide clarity and increase opportunities for renewable fuel production." However, it is not clear what those other amendments are.

Washington Insider: The Basis for the US, China Trade Fight

There is a lot of ink going into analyses of basic causes and implications of the U.S.-China trade fight these days. For example, the New York Times has a long opinion piece about the conflict and Bloomberg tracks back to the War of 1812 in its search for parallels. It cites Dartmouth professor Douglas Irwin’s book, “Clashing Over Commerce: A History of U.S. Trade Policy,” and says that the situation is complicated and dangerous.

Irwin argues that the most accurate comparison from an American perspective is the War of 1812, which came out of a trade war (a British embargo of France) and was fought at least partly as a trade war (a British blockade of America) but which famously led to pressure for decoupling from the British economy. And like the current calls related to China, that was based on a bigger existential question for the U.S.

In response, Washington began imposing higher tariffs on British goods that grew into a feature of political debate through the 19th century.

In Thomas Friedman’s analysis in the Times he agrees with President Trump’s instinct that America needs to rebalance its trade relationship with Beijing—before China gets too big to compromise—but worries that both countries need to recognize the stakes involved.

When China was admitted to the World Trade Organization in 2001, “the rules gave it lots of concessions as a developing economy,” he says. Now, we are working to define how the U.S. and China can compete for the same 21st-century industries at a time when our markets are totally intertwined.

For it to end well, the administration will need to quietly forge the best rebalancing deal we can get and probably can’t fix everything at once. And, we must move on, without stumbling unthinkingly into a “forever tariff war,” Friedman says.

At the same time, China’s president, Xi Jinping, will have to recognize that “China can no longer enjoy the trading privileges it has had over the last 40 years — and that it can’t afford America and others shifting their manufacturing to “ABC,” Anywhere-But-China, supply chains.

He notes that China has become as the world’s largest manufacturer by far.

More recently have come “some changes too big to ignore,” Friedman thinks. China now has a modernization plan that would use heavy subsidies to make China’s private and state-owned companies world leaders in supercomputing, A.I., new materials, 3-D printing, facial-recognition software, robotics, electric cars, autonomous vehicles, 5G wireless and advanced microchips — industries that compete directly with “America’s best.”

As a result, its subsidies, protectionism, cheating on trade rules, forced technology transfers and stealing of intellectual property have become much greater threats. So, the administration is seen as right about the competitive threat—but probably wrong “that trade is like war.” Friedman worries that neither side understands the difference.

He thinks we need to let China win fair and square where its companies are better — but that it also must be ready to lose fair and square, too. On this basis, Friedman argues that trade can be mutually beneficial — but the shares can be distorted when one side is working hard and cheating at the same time.

He also says the west could look the other way when trade was just about toys and solar panels, “but when it’s about F-35s and 5G telecommunications, that’s not smart.”

There’s more, he says. We now live in the age of “dual use,” where “everything that makes us powerful and prosperous also makes us vulnerable.” He cites a naval strategist who uses the example of 5G equipment like that made by China’s Huawei can transfer data and voices at hyperspeed and can also serve as an espionage platform if China’s intelligence services exercise their right under Chinese law to demand access.

But China has curbed competition against Huawei in China to enable it to grow bigger, more quickly and cheaply. Huawei then uses that clout and pricing power to undercut western telecoms and also uses its rising global market dominance to set the next generation of global 5G telecom standards around its own technologies.

Moreover, in a dual-use world, you have to worry that if you have a Huawei chatbot in your home, an equivalent of Amazon’s Echo, you could also be talking to Chinese military intelligence, Friedman says. And, he agrees that when Huawei is competing on the next generation of 5G telecom with Qualcomm, AT&T and Verizon and becomes the new backbone of digital commerce, communication, health care, transportation and education—values matter, differences in values matters, a modicum of trust matters and the rule of law matters. And, that gap is widening.

Either the U.S. and China find a way to build greater trust or they won’t, in which case, globalization will start to fracture, and we’ll both be poorer for it.

It has long been clear that the stakes are high in these talks and that an agreement likely will be difficult. Thus, the current “deeper dives” by well-regarded analysts suggest they may be both more important and more difficult than previously understood and that they clearly should be watched closely by producers as they proceed, Washington Insider believes.

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