Washington Insider-- Tuesday

Next Steps in US-China Trade Spat

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

US, China Both Talk Phase One Trade Agreement

China is importing U.S. ag and other goods a bit slower than originally hoped for, but the phase-one trade pact is still being successfully implemented, National Economic Council (NEC) Director Larry Kudlow said Thursday.

“I guess the Chinese purchases are a little behind, but I think that’s more because of poor economic and market conditions … and China has every intent of implementing (phase one),” Kudlow told the Washington Post.

Kudlow said China is not currently looking to renegotiate the trade pact, saying that’s not happening. “At the present time … there’s no renegotiating at all,” he said. “We’re looking for steady implementation and we’ll be monitoring it very closely.”

USDA and the U.S. Trade Representative said in an update that Beijing is making progress "despite difficult times for both our countries" with agricultural purchases, exemptions on retaliatory tariffs and approvals of more U.S. exports of farm products.

USDA Secretary Sonny Perdue was also upbeat about recent steps China has taken to open its market to U.S. avocados, blueberries, barley, meat, dairy and forage products. The White House released a document on Thursday on the administration’s “strategic approach” toward China, which called the Phase One agreement a sign of “critical progress toward a more balanced trade relationship.”

Both sides continue to emphasize that the phase-one agreement continues even as some continue to counter that China is not expected to meet the terms of the agreement.

Lawmakers Continue to Push EPA On RFS Waiver Requests

More than a dozen Republican senators, including Senate Environment Committee Chairman John Barrasso, R-Wyo., say the EPA has a clear case to waive or significantly reduce the Renewable Fuel Standard’s (RFS) biofuels mandate. In a letter to EPA Administrator Andrew Wheeler on Tuesday, the senators say the cost of complying with the RFS has tripled since the beginning of this year.

Republican attorneys general recently urged the EPA to grant petitions from six governors, including one Democrat, to waive the 2020 RFS requirements amid the pandemic. “A failure to grant, in part or in whole, the governors’ petitions would render this provision of the Clean Air Act utterly meaningless,” the senators wrote. “It would be a gross example of a federal agency nullifying an act of Congress.”

But biofuel backers led by Sens. Joni Ernst, R-Iowa, and Tina Smith, D-Minn., have written President Trump noting the conditions to waive the RFS have not been met.

EPA must be able to demonstrate there is “severe economic harm” from the RFS itself to waive the requirements, a feat the corn state senators said it would not be able to do given the ongoing, widespread economic damage from the pandemic.

Washington Insider: Next Steps in US China Trade Spat

A major item in the urban press this week is speculation about the next steps in the trade fight with China over Hong Kong. The Trump administration is promising “strong action” against China’s new national security law in Hong Kong, but faces limited options because any harsh penalties could likely also harm both Hong Kong and the U.S., Bloomberg says.

While Secretary of State Mike Pompeo indicated Friday that the U.S. could reconsider Hong Kong’s special trade status, such broad actions risk significant harm to U.S. interests. As a result, the administration may consider sanctioning individuals or businesses involved in curtailing Hong Kong’s democracy or by maintaining special treatment of the territory for sensitive technologies, Bloomberg says.

Businesses and investors are anxiously watching developments, which could have far-reaching implications for the U.S.-China relationship. Earlier this week, China reiterated a pledge to implement the first phase of its trade deal with the U.S. despite setbacks from the coronavirus outbreak.

“Beijing’s decision puts the U.S. government in a difficult position, because any policy response against Hong Kong will largely punish the wrong actors,” said Leland Miller, chief executive officer of China Beige Book, a firm that researches China’s economy. “Pulling back its special status will mostly hurt Hong Kongers who overwhelmingly oppose this move as well as U.S. and other foreign companies based there. Visa restrictions or tariff hikes would be similarly counterproductive.”

Miller said he expects the Trump administration to apply targeted sanctions but in order to turn up the heat the U.S. would have to target Beijing’s interests, not Hong Kong’s.

“And with the phase-one deal still technically a go, the administration doesn’t appear to have much appetite for that right now,” he added. However, one administration spokesman told reporters at the White House that “Hong Kong has been the financial center of Asia for a very, very long time. I don’t think it will continue to be and so the costs for China and are very, very large” if the government moves forward, he added.

With China as the world's second-largest economy, Hong Kong isn’t as important to mainland China’s economy as it once was. Yet the territory has remained a “crucial asset” for China, “as a starting point for mainland firms investing overseas, a source of equity and bond finance, and a channel for capital account opening,” Bloomberg said in a report last year.

The Hong Kong Human Rights and Democracy Act, signed into law last fall, requires the secretary of State to certify, no less than annually, whether Hong Kong continues to warrant special treatment, as defined in the Hong Kong Policy Act.

Pompeo was to submit a report to Congress weeks ago but held off until after China’s National People’s Congress met. Senator Marco Rubio, R-Fla., who sponsored the human-rights bill, said the administration had no choice but to certify that Hong Kong is no longer autonomous if the Chinese government implements the proposed national security law. He also said he expected the executive branch to meet its statutory deadlines.

“Beijing’s exploitation of U.S. capital markets in furtherance of the Communist Party’s efforts to undermine U.S. national and economic security -- including facilitating egregious human rights abuses and a range of military activities -- demands a serious response, and I will continue to work with my colleagues to do just that,” Rubio said in a statement.

But a negative determination with respect to the territory’s independence doesn’t mean the U.S. has to revoke the special status entirely. People familiar with the administration’s discussions on its options said officials actually have a lot of flexibility and a spectrum of options, rather than a binary choice to treat Hong Kong exactly like mainland China.

The U.S. treats Hong Kong differently from mainland China on tariffs, technology curbs – or export control laws – and on visas.

As one potential option, the administration could impose all tariffs it’s levied against Chinese imports on exports from Hong Kong but maintain special treatment of the territory when it comes to sensitive technologies. The U.S. has enacted license requirements for American companies that want to do business with Chinese technology firms, including Huawei Technologies Co.

The White House could also sanction individuals involved in curtailing Hong Kong’s democracy, or businesses associated with such actions, before it partly revokes the region’s preferential trade status.

The administration has regularly blamed China for failing to prevent the coronavirus from spreading beyond its borders after it was first discovered in the city of Wuhan. The American Chamber of Commerce in Hong Kong said Friday that China’s proposed legislation could lead to a tit-for-tat between Washington and Beijing that eventually curtails Hong Kong’s special treatment.

“Hong Kong today stands as a model of free trade, strong governance, free flow of information and efficiency,” said Robert Grieves, the group’s chairman. “No one wins if the foundation for Hong Kong’s role as a prime international business and financial center is eroded.”

So, we will see what happens. Both sides in this fight seem to be increasingly dug in, so it will be difficult to disengage, especially as election-year fever makes controversies increasingly difficult. The Hong Kong issue is certainly important and should be watched closely by producers as the season progresses, Washington Insider believes.

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