China Ponders Ethanol Tariff Waivers, Gimmicks To Meet Trump’s Impossible Farm Ask

China is working behind the scenes to figure out how to meet Donald Trump’s lofty targets for farm product purchases, sources said Tuesday.

For the past two months, Trump and his surrogates have insisted publicly that China would buy between $40 and $50 billion in US agricultural goods as part of a “Phase One” trade accord between the world’s two largest economies. That range was seen as wholly unrealistic to many observers. Indeed, some speculated the administration surely meant over two years, not annually.

After all, getting to the upper-end of that range (denoted “extra” in the visual) on an annual basis would mean China nearly doubling (or more than doubling) its pre-trade war purchases, depending on whose numbers you go by.

You can see why some folks are skeptical.

Well, according to the ubiquitous “people familiar with the matter” who spoke to Bloomberg, China intends to lift waivers on ethanol purchases as part of a plan to help boost buying. “Importing corn-based ethanol from the US would help China make up for a slowdown in domestic production and meet a goal of expanding the blending of the cleaner fuel into gasoline in the world’s largest car market”, Bloomberg notes.

Three years ago, China imported some 200 million gallons of the fuel from the US. However, last year, China hiked taxes on those imports to a lofty 70% thanks to the trade war.

In addition to lifting some of those tariffs, China is also considering more waivers on soybeans and pork, which Beijing has been allowing local buyers to purchase in recent months as part of an effort to foster goodwill amid the trade talks.

Finally, China is said to be pondering re-routing goods that pass through Hong Kong so that those products arrive at ports on the mainland. That would boost imports by around $10 billion. There are two potential problems with that. One is that it risks undercutting Hong Kong’s already fragile economy. The other is that it’s just left-to-right-pocket accounting.

Goldman’s estimates show that under the bank’s baseline policy scenario (which is broadly similar to the terms of the interim agreement), the trade war drag on the domestic economy in the US “is likely to fade over the course of 2020”. That assumption informs the bank’s above-consensus outlook for the US in the new year.

(Goldman)

On Friday, Bob Lighthizer attempted to walk reporters through the math around the prospective farm purchases amid rampant skepticism following a press conference in Beijing, during which Chinese officials stubbornly refused to commit to any specific targets.

There is still no definitive word on when the new accord will be signed.

Read more: Lighthizer, Kudlow Talk Up Trade Deal As Skeptical Market Questions Farm Math

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One thought on “China Ponders Ethanol Tariff Waivers, Gimmicks To Meet Trump’s Impossible Farm Ask

  1. The Goldman chart is QOQ impact. As long as tariffs cease rising, the negative QOQ impact will necessarily fade to zero, even if a quasi-permanent level of tariffs remain. To repair the trade war damage, you need the QOQ impact to go significantly positive.

    Also, the assumption of no additional trade uncertainty is a very big assumption.

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