Washington Insider -- Wednesday

Trade Rule Confusion

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

USMCA Deal Reached, Shifting Focus To Ratification

Months of negotiations between several parties involved finally reached the conclusion that some did not expect would happen – an agreement on altering provisions in the U.S.-Mexico-Canada Agreement (USMCA).

Signed by leaders from the U.S., Canada and Mexico in November 2018, the USMCA pact already won approval in Mexico. But Democrats in the U.S. House of Representatives complained the pact did not do enough to address labor issues that they said had to be adjusted before winning their support.

And perhaps more importantly, the deal has come together despite the global tensions on trade and areas like the WTO that have seen parties remain at odds.

U.S. House Democrats on Tuesday claimed victory in negotiating changes to a U.S.-Mexico-Canada trade agreement to ensure better protection for workers, the environment and remove key provisions that they said would have benefited big pharmaceutical companies.

But the year-long negotiations between a Democratic working group and U.S. Trade Representative Robert Lighthizer produced an agreement all parties could accept.

Expectations are the pact can still come up for approval in the House yet this year, with Senate approval also expected. However, the latter could spill into the early part of 2020.

Sen. Grassley Still Says He Has Again Been Assured On The RFS Plan

EPA will finalize its plan for 2020 biofuel and 2021 biodiesel levels under the Renewable Fuel Standard (RFS) in line with the September agreement between President Donald Trump and biofuel backers and corn producers, Sen. Chuck Grassley, R-Iowa, told reporters Tuesday.

Grassley indicated he had been assured about the mandates when he spoke with Office of Management and Budget (OMB) acting director Russell Vought, and he also had conversations recently with White House adviser Larry Kudlow. Contacts have indicated Kudlow has been formulating the plan.

“I believe Kudlow understands why the market reacted negatively to the proposed rule,” Grassley said. “I also called OMB acting director Vought on Friday and he assured me that he would work to make sure the rule is finalized according to the agreement that was made on September 12.”

The final EPA plan is currently at OMB for review with the agency planning to issue the final rule yet this month.

Washington Insider: Trade Rule Confusion

Washington has hardly ever been as divided as it is today, and the debate is unusually toxic including new and old trade fights, Bloomberg says this week. In addition, this fight appears to focus on how trade disputes may be settled in the future.

The background is that the United States has been systematically undercutting the WTO’s trade dispute settlement mechanism, Bloomberg reports. It has blocked new appointments to the WTO appellate body, a policy that will “effectively paralyze it on Dec. 11,” Bloomberg says. That panel is responsible for “final trade rulings” that can affect billions of dollars in commerce.

Now, Bloomberg thinks, the U.S. policy has forced governments to select among four options if a dispute is to be settled:

Option 1: Trade wars with tit-for-tat tariffs and other anti-trade policies;

Option 2: File a WTO claim “with the knowledge that the losing party may appeal it into legal limbo;”

Option 3: Launch a dispute with an understanding that neither party will appeal a WTO’s dispute ruling;

Option 4: Engage in an appeal-arbitration system that replicates the work of the WTO appellate body.

The U.S. administration has shown a preference for option one – unilateral tariffs instead of waiting for a WTO dispute settlement award, Bloomberg says

Now, however. China is in preliminary talks to support the European Union’s backup plan for settling international trade disputes as the U.S. administration gets closer to “scuttling” the current WTO role in refereeing cross-border commerce.

On Tuesday, China’s Ambassador to the WTO Zhang Xiangchen told Bloomberg that Beijing is actively working to support the EU’s vision of an appeal-arbitration model, which essentially replicates the work of the WTO’s soon-to-be defunct appellate body. Until now, only Canada and Norway have endorsed the EU’s plan.

“This is not the best option” but “this is an interim solution that can help countries to deal with their disputes,” Zhang said in the interview.

While the conversations are still preliminary, the plan has drawn serious interest from various other WTO members such as Australia, Argentina, Brazil, Chile, Japan and Turkey, Bloomberg said.

“There has been a gradual support for this as a very unfortunate Plan B,” former appellate body member James Bacchus told Bloomberg. “Now it seems to be the best option, given all the lousy options we have left.”

Trade officials concede that the second option is basically a waste of time and money and the third option isn’t much better because there’s little incentive for a defending nation to participate if they know they’re going to lose. This is why a growing number of WTO members -- except for the U.S. – are beginning to take a hard look at the appeal-arbitration approach, Bloomberg says.

The model is rooted on an existing WTO rule – Article 25 of the Dispute Settlement Understanding – that permits nations to agree to a voluntary form of arbitration to settle their disputes.

Under this approach, the WTO Director-General can select a panel of previously vetted former appellate body members who apply the same procedures of the appellate body to reach a final judgment. As a practical matter, WTO members who sign on to such an approach will basically undergo the same process as the current appellate body.

“If enough other countries sign up to the EU proposal, it could work as a stop-gap measure that would temporarily allow the WTO to arbitrate disputes between the other 163 members,” said Chad Bown, a senior fellow at the Washington-based Peterson Institute for International Economics.

“But there are downsides,” he said. “The biggest is obviously that the U.S. is unlikely to sign up, so it will not work to solve any disputes that countries have with America.”

But the EU has a plan for that, too, Bloomberg says.

The EU is due as soon as this week to move toward strengthening its trade-policy arsenal by allowing for penalties against nations that undermine WTO rulings by appealing them into a legal void.

The plan has backing from European Commission President Ursula von der Leyen, who instructed European Trade Commissioner Phil Hogan to bolster the EU’s toolkit in international commerce.

In September, EU leadership moved to upgrade its enforcement regulation “to allow us to use sanctions when others adopt illegal measures and simultaneously block the WTO dispute settlement process.”

“It proposed an interim appeal arrangement for those partners who are willing to continue to resolve disputes in a binding way in respect of the WTO rules,” Hogan said in a statement. “The European Commission will soon unveil further proposals to make sure that the EU can continue to enforce its rights in international trade matters should others block the system.”

So, we will see. At the current moment, the U.S. administration is claiming progress toward a trade deal with Mexico and Canada--but is facing high hurdles in talks with China and others, including the EU. In addition, it no longer has its familiar leadership role in expanding access to growing markets in several key areas, including agriculture.

Still, the economic impacts of current trade policies seem less threatening to economic growth than they did only a few weeks ago. However, a number of important, well established overseas markets are involved in critical discussion that should be watched closely by producers as they continue, Washington Insider believes.

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