Washington Insider -- Monday

Trade Policy Frictions and Evolution

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

Commerce’s Ross Sees High Probability of Phase One Deal With China

Commerce Secretary Wilbur Ross was interviewed on Fox Business News this morning and stated he felt there were high odds of a Phase One trade deal between the U.S. and China.

“You do not really have a deal on anything until you have a deal on everything, so it is not surprising that at the very last minutes pieces of bouncing around occur,” Ross stated. “But I think the main thing is what the President said at the rally last night: China wants to make a deal. We think we would like to make a deal if it is the right deal. This will get done in all likelihood.”

He also observed that the Phase One deal is “relatively limited in scope” and the debate now is on the level of that limitation. “What is really being debated is how much limitation will there be on the scope of Phase One relative to Phase Two or maybe Phase Three. So, let's see what comes out. The devil is always in the details. And we are down to the last details now.”

Ross was asked if China will stop stealing intellectual property and will President Trump remove the tariffs. Ross replied, “The president has not agreed to move the time so I think he made that pretty clear the other day, but let's just see what comes. I think the important thing is, it looks as though there will be this first giant step toward peace and quiet today with the Chinese, that is the important thing to focus on. We will see the details as they come through, and they are going to be good details or else the President will not go along with this.”

USDA’s McKinney Says Deputy-Level Talks Ongoing With China

USDA Undersecretary Ted McKinney told Todd Gleason of the University of Illinois that there have been deputy level talks via video conference that have been ongoing.

McKinney puts odds at “better than 50%” that there will be a signed agreement. “The warming trend continues,” he noted. However, in his remarks at the National Association of Farm Broadcasting, he said, “Maybe we can get to an eventual signing of a phase one agreement. There were a lot of negotiations going on and then they withdrew, backslid on a number of things.”

But things are in “a warming trend,” he observed. “We’ve got a number of things lined to sell if they agree to it,” McKinney said. “But we also have to have some structural changes. We have been led down this path before only to see promises fizzle.”

As for the deal, McKinney said, “So unless there is some enforcement opportunity, and unless there are some changes, even modest changes, in structural… how they apply things like please approve biotech traits at a time sooner than eight years, those kinds of things are very, very important and must haves. So we will see, but I am very optimistic.”

Washington Insider: Trade Policy Frictions and Evolution

A major effort is underway now to build some form of agreement with China over trade policy, Bloomberg reported last week, but there also is a new cottage industry in Washington trying to predict what the next steps in these talks actually will be.

Amid all that speculation, Bloomberg notes that although the administration began the fight with a carefully “calibrated trade weapon,” intended to rebalance the relationship between the world’s two biggest economies and to achieve a goal of forcing wholesale changes in China’s economic architecture while limiting the pain to businesses and consumers at home.”

The original list of Chinese-made products was valued at $34 billion, matched an estimate of the annual cost to U.S. businesses of Chinese intellectual-property theft and forced technology transfers.

“The items on the list were selected for their potential to inflict pain on industries Beijing has designated as strategically important while taking into account the potential disruption to U.S. supply chains. The task also was intended to throttle back China’s imports without endangering the president’s promised economic boom.

However, that list was equal to 7% of the $505 billion in goods the U.S. imported from China in 2017 — and was seen as “almost as an affront” by the President who decreed it was “too low and demanded it be rounded up to at least $50 billion.”

The result is what began as methodical, calculated penalties quickly became “a tit-for-tat tariff war” that includes more than 70% of bilateral trade in goods and threatens to decouple two economies that once seemed destined to become progressively more intertwined.

In addition, if the two countries can’t resolve at least some of their differences quickly the White House will on Dec. 15 add 15% punitive tariffs on a further $160 billion—a move Bloomberg thinks “could jeopardize America’s record-long expansion.”

These disruptions may yet be averted. President Trump and China’s president, Xi Jinping, appear intent on reaching at least a partial truce by mid-December and in mid-Nov President Trump again signaled he would refrain from a new tariff assault if Beijing agrees to a “phase one” deal that hinges largely on it stepping up U.S. agricultural purchases to as much as $50 billion within two years and curtailing intellectual-property theft.

President Donald Trump sees this first step as the start of a more comprehensive agreement but Chinese officials quietly say they see any future successful phases as unlikely and that commodity purchases will at first simply be at the level they were before the Trump tariffs. Skeptics in the Trump administration also question whether Beijing is willing to close a larger transformative deal with a president running for reelection amid a slowing economy.

Politicians and businesses across the board agree that the administration was right to take on China but many disagree with the approach used. At the same time, the issues being tackled in a first phase of the trade deal are much narrower than the ambitious goals the White House once claimed for itself.

Douglas Irwin, an economic historian at Dartmouth, cautions that while Trump created an opportunity, he risks squandering it as well.

“Are we going to look back and say, ‘This was all a failure’? I don’t think so,” says Wendy Cutler, a former U.S. trade negotiator who leads the Asia Society Policy Institute. “But if we end up comparing what they’re able to accomplish vs. their initial objectives, their accomplishments are going to fall way short. But wow, they certainly raised the stakes and certainly allowed U.S. interests to suffer through the tariffs in this effort.”

Bloomberg argues that the picture that emerges from the administration’s policy moves focuses on its “impetuousness that confounded attempts at strategy.”

Fears of an economic slowdown in the U.S. that coalesced in August appear to have changed the equation. Despite the diminished expectations, Trump and his allies are quick to defend his handling of the trade war.

Critics, on the other hand, point to a U.S. trade deficit that’s on track to end 2019 some $150 billion larger than at the end of 2016 when the administration took office.

A U.S. business community that wants both a short-term end to the uncertainty and longer-term fundamental changes in China’s economic governance is also wondering if it was all worth it. “What we all need now is a trade truce,” says Myron Brilliant, who heads the international division at the U.S. Chamber of Commerce. Whether the fight will prove worth it “will depend on what comes next.”

Irwin, the Dartmouth professor, says that during the War of 1812, one slogan was “on to Canada!” — a promise to annex new territories. When the war ended it was, ‘Not one inch of territory ceded!’ ”

The president “launched the trade war against China and promised to remake the economy.” Irwin says. “We are ending it by saying, ‘They are buying just as much stuff as they did before.’”

So, we will see. This is certainly a political tense moment in Washington and both sides have extremely complicated perspectives. Certainly, the trade dialogue should be watched very closely as it unfolds over the coming weeks, Washington Insider believes.

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