Washington Insider -- Monday

Criticism of Phase One Deal

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

RFS Waiver Requests At 21

The level of small refiner exemptions (SREs) requested relative to the Renewable Fuel Standard (RFS) have increased again.

The EPA data shows that, as of January 16, there are now 21 pending requests for SREs. This comes as EPA has indicated they would shift the way they address the SREs in the final rule for the RFS levels for 2020 biofuels and 2021 biodiesel.

EPA’s final RFS plan, however, has yet to be published in the Federal Register. The EPA is pledging it will follow the recommendations of the Department of Energy (DOE) when it makes the decisions.

EPA said it would account for SREs under the RFS by using a three-year average of what DOE had recommended over 2016-2018.

USMCA Cleared By Senate Easily

The Senate, as was expected, easily cleared the U.S.-Mexico-Canada Agreement (USMCA) via an 89-to-10 vote. The no votes were cast by eight Democrats, one Independent and one Republican. They Democrats were Sens. Cory Booker of New Jersey, Kamala Harris of California, Kirsten Gillibrand of New York, Ed Markey of Massachusetts, Jack Reed of Rhode Island, Brian Schatz of Hawaii, Chuck Schumer of New York and Sheldon Whitehouse of Rhode Island. Sen. Bernie Sanders, I-Vermont, also voted no.

Sen. Pat Toomey, R-Pa., was the lone Republican and Sen. Jim Inhofe, R-Okla., missed the vote due to a medical procedure.

President Donald Trump is expected to sign it Tuesday.

Next up is Canada’s consideration of the pact which is expected to come after their parliament comes back January 27.

Washington Insider: Criticism of Phase One Deal

There has been a good bit of back and forth about the winners and losers in the phase-one trade deal with China, with most of the applause coming from administration insiders. However, Politico Magazine contributing editor Zachary Karabell has gone even further, concluding that this pseudo-deal deserves calling out.

The Politico piece says that the deal simply restores the U.S.-China relationship to where it was pre-President Donald Trump, declares victory in areas that don’t matter as much as they did and has cost the U.S. billions in the meantime.

White House praise is not surprising, Politico thinks, and notes that few outside the White House saw the agreement as transformative – although its reception “has been amicably positive,” because it appears to arrest the destructive slide to more and more confrontation, higher tariffs and greater disruption and uncertainty.

However, Politico charges that the fight “began with impulse and barely any strategy on the part of the administration and that an even better pseudo-deal, with more agricultural purchases, could have been struck this spring without more escalation of tariffs—so the new deal “should be regarded critically.”

Politico charges that the agreement “modestly” revises the status quo before President Trump came into office. And, it also says that nothing that China has agreed to departs markedly from what it agreed to during the Obama administration.

In 2015, President Obama and Premier Xi Jinping announced an end to cyber-intellectual property theft and embarked on a next round of negotiations over market access. By 2016, many experts believed that China was indeed upholding its commitments, more or less, and the two countries were meeting regularly to hash out issues.

That was insufficient for many China hawks, both Republican and Democrat, Politico says. The President saw trade deficits as a sign of weakness and of the United States being ripped off and helped those voices “rise to the fore” although they had been in danger of being marginalized as the two countries continued to negotiate and increase the amount of reciprocal trade.

Now, after two years of tariffs and mounting hostility the current agreement struck has cost the United States more than $30 billion to subsidize American farmers to compensate for Beijing’s retaliatory refusal to buy American agricultural goods.

In addition, it has cost American consumers tens of billions in tariffs and forced U.S. companies to diversify their supply chains out of China at an additional cost of many billions. Many of those companies were beginning to consider China alternatives before 2017—China is no longer the lowest-cost producer – but having to shift those supply chains under duress added vast unnecessary expenses, Politico said.

Politico further charges that the Phase one deal “barely restores China’s agricultural purchases to where they were before 2017, even as that is presented as a victory.”

Similarly, China agreed to do what it had already agreed to do in 2015 on intellectual property, except now in 2020, it is spending far more money domestically on its own intellectual property, on 5G telecommunications, artificial intelligence and cybersecurity.

Agreeing to honor U.S. intellectual property in 2015 meant some real trade-offs for Chinese companies; in 2020 that’s like agreeing to “stop manufacturing biplanes in a jet engine age.” Chinese companies, fueled by government priorities, are plunging ahead with their own innovation in order not to be as linked or dependent on the United States going forward. China conceded on intellectual property because it now cares far more about developing its own than stealing from the United States.

And that gets to the core failure, Politico says. The United States has “fundamentally misread the relative strengths of both itself and China.” It has acted as if Chinese exports to the United States are the key driver of the Chinese economy and hence tariffs are a potent weapon. In fact, China has been aggressively, purposefully and successfully shifting from an export-driven economy to a consumer-driven one.

The U.S. Tariffs certainly stung, but their greatest impact was not economic but rather as a signal to Beijing that the United States was no longer a reliable economic partner.

The conviction that the United States should decouple from China has support across a broad swath of American society, from the Trump White House to Democrats such as Sens. Chuck Schumer and Sherrod Brown.

But for all the focus on how much China has taken advantage of the United States, there has been less willingness to acknowledge the ways that China’s economic rise has benefited the United States in terms of lower-cost goods (a partial offset to fewer manufacturing jobs), increased (until now) Chinese investment in the United States, and American companies and farmers selling into the rapidly growing China market.

Now, Beijing has taken the measure of the United States and concluded that less economic engagement with America is in its self-interest, Politico says. The Chinese in turn have diversified their investments globally and have redoubled their efforts to build a domestic economy and military that are immune from the coercive whims of the United States.

And while that too may have happened no matter what Washington did, the United States could have continued to benefit from China’s economic rise and also constrained Beijing by a tighter relationship rather than by an adversarial one.

The trade war and the paper-thin truce codify a new order that will see ever less American leverage going forward. By focusing on past abuses, the United States has failed to meet the challenges of China going forward. It is not just a hollow victory—it’s no victory at all, Politico says.

So, we will see. Certainly, many more questions regarding U.S. trade policy are being asked these days – a debate that producers should watch extremely closely as it intensifies, Washington Insider believes.

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