Washington Insider -- Wednesday

Trade Outlook Uncertainty Persists

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

House Ag Panel Chair Urges Changes to USDA Trade Aid Efforts

House Ag Committee Chairman Collin Peterson, D-Minn., is asking USDA to address several issues with the latest Market Facilitation Program (MFP 2) trade mitigation package, including crops that are not eligible for aid and the formula for determining payments to dairy producers. That follows questions raised by dairy farmers as to why their payments are based on historical – and not actual – production.

“The current program has created winners and losers among neighbors who find themselves facing the same market situations, meaning that some producers may remain viable while others may be forced out of business,” Peterson said in a letter to USDA Secretary Sonny Perdue.

He also pointed out that the MFP 2 payments do not account for “the impact on basis that have resulted from disruptions in trade flows.”

He called on Perdue to “strongly consider rectifying these situations as you contemplate the next rounds of assistance under the MFP program.”

US-China Said To Be Mulling Rollback of Tariffs In Quest For Phase One Trade Deal

The U.S. is debating whether to roll back tariffs deployed on around $112 billion of Chinese imports, according to the Financial Times, with the Wall Street Journal reporting that both countries are considering tariff reductions as they work finalizing Phase One of the trade deal.

The initial focus was on the U.S. not imposing tariffs on Chinese goods on December 15, but the reports now suggest that duties put in place by the U.S. on September 1 may also be in play.

Should the U.S. agree to do more than just not impose tariffs on December 15, the Financial Times said the U.S. would likely seek something in response from China, “including beefed up provisions on the protection of intellectual property for U.S. companies, greater certainty on the scale of Chinese purchases of U.S. farm products, and a signing ceremony for the agreement on American soil.”

There has been no confirmation of the tariff discussions from the Chinese side. "Trade consultations have made progress and are advancing in accordance to plan," Chinese Foreign Ministry spokesman Geng Shuang told reporters in a briefing. Asked about the tariff situation, Geng said he could only speak in “principle” on the topic. “Adding tariffs is not the correct way to resolve trade issues,” he observed.

Washington Insider: Trade Outlook Uncertainty Persists

There is lots of media interest in trade negotiations this week, amid continuing deep uncertainty, Bloomberg is reporting. It notes that President Xi Jinping stressed China’s commitment to the global trading order as his trade negotiators “wrangle with the U.S. over rolling back punitive tariffs” ahead of a phase one deal.

As Xi spoke in Shanghai, the nation’s central bank acted in Beijing to stem a sell-off in the debt market. The People’s Bank of China reduced the cost of 1-year funds to banks for the first time since 2016 after a week in which investors had dumped debt amid fears of tightening liquidity.

At the opening of the second annual China International Import Expo, Xi said the country would “open its doors only wider” to the world. He refrained from taking a swipe at his U.S. counterpart Donald Trump, as he’d done the previous year, and didn’t refer to the prospective deal to defuse the tariff war.

“We must all put the common good of humanity first rather than place one’s own interests above the common interests of all,” Xi said.

Amid the current trade standoff, China has sought to stabilize its economy without flooding it with liquidity for fear of worsening its debt problems. It has retaliated against the administration’s tariff barrage but been careful not to escalate a conflict that’s sapped confidence and weighed on manufacturers.

“It is obvious that deep conflicts of interest still exist between China and the U.S.,” Li Yang, a member of the government think tank the Chinese Academy of Social Sciences, said in an interview in Shanghai after Xi’s address. “But China and the U.S. have now embarked on a path seeking practical solutions. I feel the likelihood for a major clash or start of a new cold war has disappeared.”

The central bank has been similarly restrained this year, defying many economists’ expectations of major stimulus. Tuesday’s 5 basis-point reduction in the 1-year medium term lending facility was greeted as largely symbolic in economic terms, though it did stop the “rot in bonds” for now.

The offshore yuan on Tuesday strengthened past 7 per dollar for first time since falling below that key level in August. China’s benchmark 10-year yield dropped the most since August, while the cost on 12-month interest-rate swaps fell the most in a month.

China’s economic growth has slowed to the weakest pace in almost three decades, with economists forecasting that the expansion will slip further to below 6% next year. Rather than embark on a short-term stimulus boost, Xi’s government has instead focused on defusing the nation’s ticking debt bomb and promoting structural changes such as the shift to a more consumption-led economy.

“China will give greater importance to imports,” Xi said Tuesday. “We will continue to lower tariffs and institutional transaction costs,” he added, repeating earlier pledges. China’s imports have contracted this year.

“Xi’s speech endorsed the trade optimism as he indicated that he sees negotiations as the right way to solve disputes,” said Gai Xinzhe, a senior analyst at Sino-Ocean Capital in Beijing. But Xi also warned against “intellectual blockages” and “the widening technology gap,” highlighting China’s worry over the technology decoupling some U.S. politicians are advocating, he said.

However, Chinese negotiators “continue to chip away at the wall of U.S. tariffs imposed on their exports since last year,” Bloomberg said. They are wary of conceding too much for fear of a political backlash at home, the report noted.

Negotiators asked the Trump administration to eliminate tariffs on about $110 billion in goods that were imposed in September and lower the 25% tariff rate on about $250 billion that began in 2018, Bloomberg said.

China has also previously demanded that the U.S. administration cancel plans to impose duties on roughly $160 billion in imports, scheduled for Dec. 15, which would hit consumer favorites like smart-phones and laptops. At the very least, those tariffs have to be taken off the table for Xi to get on a plane to meet Trump, Bloomberg said.

The prospective deal for agreement this month would not address most of the major structural complaints that the U.S. has made, with thornier topics like state industrial subsidies or intellectual property theft left for later rounds, according to U.S. Commerce Secretary Wilbur Ross.

Speaking in Bangkok Tuesday, Ross said he was “hopeful that phase one will be precursor for a much more robust set of agreements. I’m reasonably optimistic we can get something done,” he said.

So, we will see. Clearly, plenty of potential for breakdowns in the talks remain — but also optimists seem to be finding a good bit to talk about. These are debates producers should follow very closely as they proceed, Washington Insider believes.

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