Washington Insider -- Tuesday

US-China Trade Summit

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

Mexican Officials, Analysts Welcome Trump Draft NAFTA Notice

A draft notice of North American Free Trade Agreement (NAFTA) modernization objectives provided by the Trump administration gives Mexico the negotiating room needed to move forward, according to trade analysts and those close to Mexico's trade team.

The notice was leaked March 30 and includes many of the issues Mexican trade officials and experts have cited as potential negotiating points – including rules of origin, intellectual property rights, and labor and environmental issues.

"I see this draft notice as a serious document with a very positive tone,” said Beatriz Leycegui, former undersecretary for foreign trade in the Calderon administration (2006-2012) and partner at SAI Consulting. "It opens windows more than closes doors, and demonstrates that there is a willingness to have an agreement that will modernize NAFTA."

A move away from the rhetoric once coming from the Trump administration – like the possibility that NAFTA might be completely abandoned – was evident in the draft notice. Further, it lays out specific issues on trade in goods and services, customs, government procurement, digital trade and other issues that the US would like to modify in the current agreement. Such a modification has met with support from top Mexican officials, who agree that issues such as electronic commerce and the full incorporation of labor and environmental chapters into the agreement would serve Mexico, the US and Canada.

"We do not shy away from modernizing NAFTA and making it better," said Luis Videgaray, the foreign minister, speaking at the Mexican Embassy in Washington April 6. "The world has changed in the last 20 years, and we have learned a lot about trade between the three countries."

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Tax Reform May be Limited to Republican Vote and Focus

Senate Majority Leader Mitch McConnell, R-Ky., during a Friday news conference, made clear why Republicans feel they must rely on the budget reconciliation process that avoids a Senate filibuster threat to rewrite the tax code. Democrats, he said, just are not willing to cooperate.

“Today’s Democratic Party, seems to me, believes that tax reform is about income redistribution, how much can we get out of successful people in order to push down to those who have been less successful,” McConnell said. “That’s not about growing the economy. And so I would love to be able to do tax reform on a bipartisan basis, but I think most of the Democrats today believe tax reform is a tax hike.”

While Democrats have said they are open to a tax rewrite, they have pushed for tax cuts that would benefit the middle class. Republicans have aimed for broader rate cuts at all income levels in hopes of spurring greater economic growth. “I’d love for the Democrats to be a part of that,” McConnell said. “I don’t think they look at this the same way we do, as a jobs issue, and so I am not anticipating their cooperation.”

Using reconciliation would allow a tax code overhaul to pass in the Senate with a simple majority vote, which Republicans would have without any Democratic support. But that process is possible only if Congress first passes a Fiscal 2018 budget resolution that includes reconciliation instructions.

Republicans on the Senate Budget Committee plan to start work on a budget resolution aimed at a tax overhaul after the recess. Meanwhile, President Trump has his sights set on a tax overhaul fight. Gary Cohn, Director of the National Economic Council, and Treasury Secretary Steven Mnuchin are the point men on taxes for the Trump administration, as the first sweeping rewrite of the tax code not seen since Ronald Reagan was in the White House.


Washington Insider: US-China Trade Summit

Press reports indicate that President Trump and Chinese President Xi Jinping both emphasized progress in their relationship following their brief meeting last week in Florida. Informa Economics is reporting that there was “an initial give” by China on trade regarding U.S. beef and financial products – but no consensus on other trade issues or North Korea. There was also speculation that the U.S. air strike on Syria impacted the talks, but no indication of what that impact might have been.

U.S. cabinet officials, including the secretaries of State, Treasury and Commerce told the press that they had not reached specific agreements on curbing North Korea’s nuclear program or cutting the U.S. trade deficit with China—but claimed that they had established “strong chemistry over candid conversations.”

The Financial Times said that China’s offer of better market access for financial sector investments and several ag products was intended to help avert a trade war. FT also suggested that these concessions “are relatively easy for Beijing to make as it seeks to reduce tensions stemming from the $347 billion annual trade surplus in goods that it enjoys with its biggest trading partner.”

Commerce Secretary Wilbur Ross reported that the two leaders opted to instigate a “100-day plan” on trade between the two countries that he characterized as unusually speedy, and to include “way-stations of accomplishment.” A primary goal for the U.S. would be to increase exports to China and reduce the US trade deficit, Ross said.

Ross also said he was struck that China expressed interest in reducing its trade surplus with the U.S. because of the negative impacts it was having on its money supply and inflation. That was the first time he had heard Chinese officials say that in a bilateral context, he said.

Regarding currency, Steven Mnuchin, the U.S. Treasury Secretary, said no decision on Chinese intervention in currency setting was reached.

Xinhua news agency said President Trump had accepted Xi’s invitation to pay a state visit this year and that the two sides had established four mechanisms for dialogue and cooperation in areas including security, the economy, law enforcement and cybersecurity. Secretary of State Rex Tillerson confirmed that Trump had accepted the visit to China and would work with the Chinese on the date.

“We made very clear that our primary objectives are twofold,” Ross told Fox News. “One is to reduce the trade deficit quite noticeably between the US and China, and two, to increase total trade between the two.” However, he also seemed to offer a somewhat veiled threat that “words are easy, discussions are easy, endless meetings are easy. What’s hard is tangible results, and if we don’t get some tangible results within the first 100 days, I think we’ll have to re-examine whether it’s worthwhile continuing it.” He did not elaborate on his characterization.

Official Chinese accounts did not mention the 100-day action plan on trade, nor did they indicate any lack of progress on North Korea. These reports placed greater emphasis on Trump’s acceptance of Xi’s invitation to visit China and for the U.S. to participate in China’s “Belt and Road” initiative to build trade and transport infrastructure between East and West.

So, it seems that the administration was able to engage in detailed discussions on several topics while avoiding confrontations on others, as diplomats frequently do—although that diplomatic tone has often been missing in recent political trade discussions, observers note. It also may be significant that the U.S. team went to some lengths to recognize the Chinese interest in reducing their trade surplus for reasons of their own.

So, the new Chinese concessions on beef and even the modestly successful completion of the talks themselves are important accomplishments. In addition, it will be important to examine the results of Secretary Ross’ 100 day plan—a process with both geopolitical and trade policy implications that should be watched closely by producers as it unfolds, Washington Insider believes.


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