Washington Insider -- Tuesday

Breaking Ties With China

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

Rescinding Prior Small Refiner Exemptions Now Not Expected

President Donald Trump and Cabinet officials decided to retain the biofuel blending waivers granted to small refineries but take steps to make up for lost biofuel volumes, according to contacts.

The plan under development would encourage the use of gasoline that contains 15% ethanol and would increase by 500 million gallons the amount of conventional renewable fuels that have to be used in mandates, presumably for 2020.

A separate quota for biodiesel, typically made from soybeans, would get a 250 million gallon increase for 2021.

Additionally, the administration will enhance a program meant to expand U.S. fueling infrastructure and get more ethanol into the system. EPA will adopt a USDA assessment of the greenhouse gas emissions associated with renewable fuel and will expand environmental credits encouraging automakers to produce “flex-fuel” vehicles that can run on high-ethanol gasoline.

However, details could still change as the plan has not yet been finalized.

USDA Food Price Forecasts Hold Mostly Steady

USDA made few changes to its food price forecasts for 2019 and 2020, keeping the overall food price inflation outlook for both years at 1.5% to 2.5%.

They also still see food away from home (restaurant) prices rising two percent to three percent for both years and grocery store food at home) costs are seen rising 0.5% to 1.5% both in 2019 and 2020. The grocery price increase outlook remains well below the 20-year average and comes after prices at the store rose just 0.4% compared with 2017 when they declined 0.2%.

Compared to their prior outlooks, USDA edged down expectations in 2019 for poultry, fresh fruits and cereals and bakery products. While food prices are currently forecast to rise more than the increases for 2018, grocery store costs in particular remain below trend.

Washington Insider: Breaking Ties With China

Trade issues continue to have top billing in the media this week and there is a new wrinkle — whether or not the president has the authority to force American companies to cut ties with China. He claims that he can do that and at least a couple of White House aides agree, Bloomberg says, but notes that numerous trade experts and others question such a policy.

And, the more important question is whether or not he seriously plans to assert such powers.

Treasury Secretary Steven Mnuchin, speaking on a Sunday talk show said the president would have the ability under the International Emergency Economic Powers Act but that he would first need to define and declare “an emergency.” White House economic director Larry Kudlow agreed — but went further to argue that “there’s nothing right now in the cards” to do so.”

The president cited the 1977 measure late Friday, saying it gave him the power and declaring, “Case closed!” In addition, Bloomberg noted “some China hardliners in the administration have been urging the president to invoke the law on a number of fronts over the past two years.”

Bloomberg called the approach “extreme,” but opined that it could be a way to take aim at operations of American businesses ranging from automakers General Motors Co. and Tesla Inc., to industrial companies such as Caterpillar Inc. and retail giants including Walmart Inc.

Bloomberg also said that applying the IEEPA in this fashion was never the intent of the legislation — but that this wouldn’t be the first time the administration has looked into it. The president cited the law when he threatened in May to place levies on Mexican goods as a way to force curbs on the flow of undocumented immigrants across the U.S.-Mexican border.

The intensifying trade battle between the world’s two largest economies and the potential for pushing the limits of presidential authority earlier roiled markets with the Dow Jones Industrial falling 623 points on Friday before strengthening somewhat on Monday.

Mnuchin and Kudlow fielded questions Sunday after the president said he “hereby ordered” American companies to seek alternatives to business in China, including moving operations “home and making your products in the USA.”

The president’s comments were followed hours later by tweets declaring that the U.S. would increase the rate of existing and impending tariffs on Chinese goods in response to China’s earlier announcement that it was planning to retaliate against earlier U.S. tariffs.

Trump’s Friday warning reflected the possibility of a long trade war, Mnuchin said.

Kudlow echoed the point, while emphasizing that the president wasn’t currently issuing such an order. “There’s no emergency powers being invoked right now,” Kudlow said. “Ultimately, we do have such authority, but it is not going to be exercised presently. What he is suggesting to American businesses — and it’s something he has said to many companies, in many different forms, on many different occasions — you ought to think about--to the companies — you ought to think about moving your operations and your supply chains away from China.”

Trade experts have previously questioned the president’s authority to impose tariffs under IEEPA, which has been used primarily to sanction countries in national security threats, such as Iran during the hostage crisis in 1979-1981.

“I’m not saying it’s an easy case to make, but I don’t think it’s laughable,” said Raj Bhala, a specialist in international trade law at the University of Kansas. If the president did invoke IEEPA, he would have to craft a remedy that’s proportional to the threat, Bhala said. Thus, a complete ban on doing business in China probably wouldn’t stand but restrictions on companies dealing with sensitive intellectual property might, he said.

The Information Technology Industry Council, which represents companies such as Amazon.com Inc. and Facebook Inc., responded Saturday with alarm about the prospect of invoking the law.

In Trump’s announcement Friday of another wave of higher tariffs, he said existing 25% tariffs on some $250 billion in imports from China would rise to 30% come Oct. 1, the 70th anniversary of the founding of the People’s Republic of China. Planned 10% tariffs on a further $300 billion in Chinese goods will be taxed at 15% instead of 10% starting with the first tranche on Sept. 1.

Bloomberg said that China is “seriously making” preparations for relations with the U.S. to deteriorate, according to Global Times’ editor-in-chief Hu Xijin. The Global Times is a Chinese tabloid run by the People’s Daily, which is the flagship newspaper of the Communist Party. Hu has said the paper voices opinions that official sources can’t.

So, we will see. This increase in trade tensions with China, especially if it continues to worsen, seems to imply a diminishing chance of a new China trade deal and a growing need to cultivate markets elsewhere, as Mnuchin said. The recent especially tough talk all around is not good news for ag producers and suggests that the negotiations should be watched more closely than ever as they proceed, Washington Insider believes.

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