Washington Insider -- Wednesday

Monetary Policy Shift in China

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

Next Round of TTP Talks Seen Slipping into September, Perhaps Later

The 12 nations currently negotiating the Trans-Pacific Partnership (TPP) free trade agreement now appear unlikely to get together again until after Labor Day, according to trade analysts. U.S. Chamber of Commerce Asia Director Tami Overby recently told participants at a National Foreign Trade Council briefing: "I've heard the next meeting would be on the margins of the ASEAN economic ministers [meeting]. Then I hear it was going to be in mid-September. I've been assured that both of those are wrong." She added that "a date has not yet been set," largely because "all countries, but in particular the United States, have to come back [to their home countries] and do some more consultations."

Meanwhile, NFTC Chairman Alan Wolff provided a somewhat disheartening list of TPP issues that remain unresolved. These include: dairy, sugar and rice market access; intellectual property protections for biological medicines; rules of origin for automobiles; public health exemptions for tobacco; investor-state disputes; labor; exemptions for state-owned enterprises; Internet service provider liability; and a currency side agreement.

If Wolff is correct and this is the actual list of unresolved issues, it is difficult to see how the TPP agreement can be completed this year, much less by the end of September.

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Senate Bill Would Nearly Double Federal Gasoline Tax

Sen. Tom Carper, D-Del., believes he has hit on a way to provide money for the depleted Highway Trust Fund. He has introduced legislation that would slowly raise federal gasoline and diesel taxes by 16 cents per gallon over the next four years. If enacted, the proposal would nearly double the current 18.4 cents-per-gallon tax that has not been raised since 1993.

The measure faces stiff opposition from Senate Republicans. Last month, Senate Majority Leader Mitch McConnell, R-Ky., blocked an attempt by Carper to offer the bill as an amendment to the six-year highway and transit bill that passed the Senate July 30. It therefore is unlikely that Carper's bill will gain much traction when Congress returns from recess in the fall.

The two chambers are expected to conference on multiyear surface transportation reauthorization legislation in the fall once the House passes its own highway bill. But Republican leaders in Congress have generally opposed raising the gas tax to fund a long-term bill. Raising the gas tax to pay for road and bridge maintenance seems like a logical step, and likely would be in a legislative branch that is less politicized than is the current one.

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Washington Insider: Monetary Policy Shift in China

China sent an economic shockwave through global markets yesterday by devaluing its currency nearly 2%. While many experts say they were surprised by the timing of the move, others argue that China had relatively little choice in light of its recent disappointing economic performance.

In addition, the People's Bank said it will move to a new valuation scheme for the yuan, based on recent market closes. The bank noted that China's trade in goods continues to post relatively large surpluses so the real effective exchange rate is still strong versus various global currencies and has been deviating from market expectations. "Therefore, it is necessary to further improve the yuan's midpoint pricing to meet the needs of the market," the bank said.

The press in East Asia has been reporting an internal debate about the appropriateness of China's monetary policy for some time. For example, the East Asian Forum noted in mid-July that China's monetary policy was excessively tight in 2014 but started loosening more meaningfully late that year in an attempt to cushion slowing growth, facilitate rebalancing, support reform and mitigate financial risk. It saw the shift in policy as warranted, desirable and likely to serve the economy well in the short and long term.

Now, analysts are scurrying to understand and estimate the consequences of the change and observers suggest that while a more market-oriented approach is positive, the move to devalue was clearly intended to help make Chinese exports more competitive. And it will, they say.

However, a key question is the extent to which it pushes other competitors to do the same thing. Press reports suggest that most trading partners have not retaliated at this point but they also note that many had been devaluing their currencies already, ahead of China's move.

In a more competitive Chinese market, commodity imports will be more expensive and market positions of competitors could shift significantly as global prices adjust. This could mean weaker U.S. soybean markets, analysts suggest.

An additional key aspect of China's policy shift is its effect on U.S.-Chinese geopolitical relations. Chinese President Xi Jinping is set to visit the United States next month and monetary policies are certain to be on the agenda, especially since they played such an important role in the political fight over Trade Promotion Authority for the U.S. president only a few weeks ago.

Over the longer term, additional reverberations from the change in Chinese monetary policy could be wide ranging, observers note, possibly even accelerating outflows of Chinese capital if investors see the possibility of additional devaluations, or pushing Chinese companies to default on their dollar-denominated debts.

Closer to home, the devaluation certainly puts additional upward pressure on the U.S. dollar, and could possibly affect U.S. Federal Reserve policies. Press reports suggest that U.S. officials have continued to minimize any potential harm that economic developments outside the United States will have on U.S. monetary policy.

Clearly, China's action means more uncertain markets and more intense political debate in the United States. And, it certainly could affect already tense trade discussions that the administration had hoped would lead to eased tensions. Whether the change was expected or not, the upcoming discussions regarding China and our likely response will present an even higher hurdle for the administration as it attempts to push for better market access and stronger relationships globally, Washington Insider believes.


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(GH/CZ)