Washington Insider -- Wednesday

China's Slowdown Seen as Economic Nightmare

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

Trump Talks August for Potential US-Japan Trade Announcement

President Donald Trump met with Japanese Prime Minister Shinzo Abe and local business leaders while in Japan.

Trump said he may announce something on a U.S.-Japan trade agreement in August, hinting he will push for results well in advance of the six-month deadline he laid out earlier this month.

“Trade-wise, I think we will be announcing some things probably in August that will be very good for both countries,” Trump said. “We have to do a little catching up with Japan because they have been doing much more business with us. We would like to do a little more business in the reverse.”

Via Twitter, Trump said that "agriculture and beef heavily in play" in the talks. However, he noted, "Much will wait until after their July elections where I anticipate big numbers!"

Japan is currently expected to hold elections for the upper house in July and many have signaled the government will take the opportunity to dissolve the lower house at the same time. Given that, expectations are it will be difficult for Abe to concede anything, particularly on agriculture, ahead of the vote.

Japan's Deputy Chief Cabinet Secretary Yasutoshi Nishimura later told reporters there had been "absolutely no" agreement on getting the trade deal done by August.

Japan Economy Minister Toshimitsu Motegi held nearly three hours of talks with U.S. Trade Representative Robert Lighthizer Saturday. "We agreed to work to get a deal done quickly," Motegi said.

Attention Focused On E15 As June 1 Draws Closer

EPA officials have continued to pledge they will finalize their plan to allow E15 fuel to be sold in the U.S. year-round by June 1.

That is increasing expectations there will be some announcement from EPA on the matter yet this week.

However, it is not clear if the agency's proposed reforms to the market for Renewable Identification Numbers (RINs) will remain linked with the E15 plan as it has been so far. Both biofuel backers and refiner interests have cited issues with the EPA proposal on reforming the RIN market, upping expectations that portion could be separated from the year-round E15 plan.

The expectation also is that the E15 action will be challenged in court, and that will likely delay the implementation.

Washington Insider: China’s Slowdown Seen as Economic Nightmare

In this “run-up period” ahead of the next U.S. election, there is lingering concern about global growth, Bloomberg says this week. It is reporting that “beyond trade-war risks and an uncertain monetary policy outlook, looming large for the global economy is the threat that China’s slowdown could be worse than currently seen,” citing Harvard economist Carmen Reinhart.

“If you were to ask me what would be really bad global news, it’s that the slowdown in China is deeper and longer-lasting, because that carries over to so many things,” Reinhart, who specializes in international finance, said on the sidelines of an Asia investment conference hosted by Nomura Holdings Inc. in Singapore this week.

The U.S.-China trade war shows no signs of letting up, with the global economy in for a $600 billion hit if the conflict worsens, she says and notes that “even before the latest escalation, China’s economy was losing momentum, as reflected by weaker-than-expected data in April.”

Reinhart, who’s particularly well-known for her work with Harvard colleague Kenneth Rogoff on the last financial crisis, said central banks like the Federal Reserve and European Central Bank are likely to be “patient,” as signs point to a possible U.S. slowdown in the second half, yet still robust labor markets.

As a result, she said it’s “premature to say that central banks’ attitudes toward inflation have shifted in any dramatic way.” While much of the trade-war focus has been on supply chain shifts, how uncertainty will impact investment and the modest price effects of the tariffs, “the trade shock is like an adverse supply shock,” and “it could mean there’s more upside risk on the inflation side than has been really dismissed.”

“I have been a huge advocate of macro-prudential tools,” she continued. “I don’t view [such policies] as a substitute, I view them as a complement to the toolkit. Open economies are subject to the vagaries of international capital flows.”

She also notes that “Macro-pru,” in the last decade, has been on the rise. Not just in Asia, but in Latin America, you’ve seen a lot more emphasis on macro-pru measures to limit foreign exchange risk, to limit undue exposure to short maturities, to try to skew the maturity of capital flows and therefore the stability of what’s coming into the banks.” “Macro-pru has been used more widely and more intensively in the [recent] past, and I think one can say that so far, it’s served them well,” she said.

“Central banks [now] have to worry about what kind of ammunition they have for the next downturn. I’m not saying the next downturn and the next recession are imminent. Certainly, I think the signs are there that in the context of the U.S. there’s a slowdown unfolding or very likely in the second half of the year,” though the U.S. retains more ammunition than the European Central Bank or the Bank of Japan whose interest rates are lower. “That has to loom very large.”

A big question for major central banks, and one the ECB has been mulling, is "how do you fine-tune policy so the negative rates don’t hurt the banks?"

Another big question for policy makers: "What can central banks really do to guide inflation expectations? Perhaps not be so subtle. What are perhaps blunter instruments? Of course there’s a big question of whether those instruments end up being central bank instruments or fiscal instruments," she said.

"The fact that monetary policy has played a critical role during the past decade and in effect will also make up for the shortcomings in fiscal policy, I don’t think has escaped anyone. Does that mean that central banks are less independent? There, I would say one has to distinguish between independence in the political sense: Are they doing what the government wants to do, or are they doing this because they’re sort of the only game in town? My interpretation so far is the latter."

"But it can always change. Certainly, President Trump’s continued advice to the Fed is new and it is unwelcome. It is inappropriate. But that doesn’t say anything about whether, at this stage, there’s any reason to believe the rules of the game changed," she said.

Clearly, the administration is expected to continue to support policies available to support robust growth. Whether or not this conflicts with Fed’s policy approaches may be increasingly important and should be watched closely by producers in the coming months, Washington Insider believes.

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