Washington Insider -- Wednesday

Punitive Tariffs for Monetary Policy

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

USTR Says No Request from China For Negotiations On Ag Purchases

Bloomberg reported early Monday that China was requesting flexibility from the U.S. on its purchases of ag products under the Phase One trade deal between the two countries.

However, the Office of the U.S. Trade Representative (USTR) said it has received no request from China on the matter.

"USTR has not received any requests from China’s government to discuss changes in China’s purchase commitments due to the coronavirus outbreak," a USTR spokesperson said in a statement.

The Global Times said that purchases of goods by Chinese firms was likely to be delayed in the first quarter but that purchases could increase later this year given that the purchase comments are on an annual basis, citing Gao Lingyun, researcher at the Chinese Academy of Social Sciences.

Meanwhile, some suggest that USDA may release some additional information on the USDA forecasts regarding Chinese purchases of U.S. ag goods under the phase-one agreement ahead of the February 11 WASDE report.

Commerce Announces Tomato Inspection Program

The Department of Commerce has announced a new inspection program for imports of certain fresh tomatoes from Mexico, according to a notice in the Federal Register, an inspection program called for under the provisions of a new tomato suspension agreement the U.S. and Mexico agreed to last year.

All fresh tomato imports from Mexico will be subject to inspection except tomatoes on the vine, specialty tomatoes and grape tomatoes in retail packages of two pounds or less.

USDA will conduct the inspections and the effort will start 60 days from now.

As part of the agreement, the U.S. will not put antidumping and countervailing duties on imports of fresh tomatoes from Mexico as long as the suspension agreement remains in effect.

Washington Insider: Punitive Tariffs for Monetary Policy

Lest you think that the phase-one deal with China might mean more tranquil international markets this year, Bloomberg is reporting that the administration is going ahead with controversial new rules that would clear the way for the U.S. to apply punitive tariffs on goods from countries accused of having undervalued currencies.

The move would give new muscle to U.S. complaints about currency manipulation that have in the past targeted economies like China and Japan. In the process, it could “turn the more than $6 trillion-a-day global currency market into a new battlefield in the administration’s trade wars,” Bloomberg says.

The rule would allow the U.S. to impose countervailing duties on goods from countries accused of manipulating their currencies--even in cases where they were not officially found to be guilty of that by the U.S. Treasury. Past administrations have resisted calls to take such action from Congress and some industries for fear it would lead to more tit-for-tat currency wars.

In the wake of the global financial crisis a decade ago, policy makers in countries such as Brazil accused the U.S. and the Federal Reserve of using monetary policy to weaken the dollar to help spur a quicker recovery in the U.S.

President Donald Trump has long accused China and other countries of doing the same. Commerce Department officials on Monday presented the recent decision as simply follow-through on a 2016 campaign promise to tackle currency manipulation around the world.

“This currency rule is an important step in ensuring that unfair trade practices are properly remedied,” Secretary of Commerce Wilbur Ross said. “While successive administrations have balked at countervailing foreign currency subsidies, this administration is taking action to level the playing field for American businesses and workers.”

The new rule, which the Treasury Department opposed when it was first proposed in 2019, would allow U.S. companies to file complaints with the Commerce Department over specific imported products by treating undervalued currencies as a form of unfair subsidy. It would also give the administration the power to self-initiate cases should it so choose, however, potentially making the U.S. government plaintiff, judge, jury and executioner in currency fights.

The Commerce Department put some caveats on its powers, saying it would “not normally include monetary and related credit policy of an independent central bank or monetary authority” in determining whether foreign governments had acted inappropriately to weaken currencies. “Commerce will seek and generally defer to Treasury’s expertise in currency matters,” it said.

Still, its statement left room for unilateral action by Commerce--even if Treasury, which issues a twice-yearly report identifying currencies that are artificially weak or the subject of government manipulation, determines that a currency is not undervalued.

“This appears intended as a broad signal to U.S. trading partner countries that any significant weakening of their currencies relative to the dollar could invite retaliatory actions,” said Eswar Prasad, a Cornell University economist and the author of books on the rise of the dollar and Chinese renminbi.

The new rule appeared to go against guidance from a Treasury official, who said last June that the framework of any currency assessments by Commerce would be consistent with its semi-annual foreign-exchange report to Congress.

The Commerce Department also indicated that said it would preserve the final power to make any determination about whether a currency’s value presented an unfair subsidy for that country’s exporters — and that the new rule would allow it to “specifically impose currency-related tariffs against China even if Treasury did not label it a currency manipulator.”

The Treasury last month lifted a designation of China as a manipulator just days before President Trump signed a “Phase One” trade deal with China that includes language on currencies, though the new rule appears to give the U.S. powers to act that go beyond that included in last month’s deal. Bloomberg noted that the final rule announced Monday drew “concern from some former U.S. officials.”

“This is a unilateral policy which will alienate countries around the world,” said Mark Sobel, a former Treasury official. It may also violate U.S. World Trade Organization commitments, Sobel said, although the Commerce Department insisted in its statement that “there is no WTO rule that bars the imposition of countervailing duties on subsidies conferred through currency practices.”

It also prompted warnings that the rule marked another administration effort to weaponize the dollar after the president previously set out to talk down its value while blaming the Federal Reserve for causing it to strengthen to the detriment of U.S. manufacturers and other exporters.

So, we will see. In general, currencies tend to be volatile and “mechanical” regulatory efforts are frequently accused of amplifying that volatility and uncertainty — a reason sometimes given by Treasury for not intervening more often. In general, it appears that the administration has ideas of additional market interventions that could threaten Fed independence, and which should be watched closely by producers as these fights continue, Washington Insider believes.

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