1. Damaging Government Shutdown Ends, through February 15
Federal employees at critical government agencies, including the U.S. Department of State, Department of Justice, Department of Homeland Security, Department of Agriculture, and Department of Treasury, will return to work today, after President Donald Trump agreed to fund government operations for 21 days, while negotiations on border security (the topic that prompted the shutdown) continue. Congress swiftly and unanimously passed a bill on Friday to fund government operations through February 15, and President Donald Trump signed it immediately — despite the fact that it contains no dedicated funding for a southern border wall.
Congress has now appointed a House-Senate conference committee to prepare compromise legislation to fund government from February 15 through September 30 (the end of the fiscal year). The 17 Senators and Representatives appointed to the conference committee are all members of the House and Senate Appropriations Committees. This suggests that the compromise legislation will focus narrowly on spending for border security — and not include immigration reforms, which is the province of the House and Senate Judiciary Committees.
Although one cannot rule out the possibility of another shutdown on February 15, we believe that the chances of another impasse are now much more remote. President Trump caused the shutdown on December 22 when he spontaneously withdrew support for a “clean” spending bill that did not contain wall funding, and which the Senate had already passed unanimously. Polling suggests that the public recognizes this, as it blames Trump more than it does Congress for the shutdown (by a margin of 50 percent to 37 percent). Senate Republicans, who closely followed Trump’s lead during this shutdown, will be much more likely in the coming weeks to seek a compromise with Democrats and force the President to sign it.
2. Failed Votes on Rusal Portend Wider Foray into Russia in 2019
The new Congress has tried and failed to block the Trump Administration from lifting punishing sanctions on Oleg Deripaska’s business empire, giving a win in Washington to European and German commercial interests. Yet Trump’s decision to lift sanctions on Rusal, En+, and ESE — all companies owned or controlled by Deripaska — has sparked a bipartisan uproar among lawmakers, suggesting that Congress will target Deripaska’s companies in a legislative broadside against Russia later this year.
The U.S. Treasury Office of Financial Asset Control (OFAC) notified Congress in December that it had reached a settlement with Deripaska to lift the sanctions on three of his companies in exchange for divestitures and other restructuring. Many lawmakers fear that the restructuring deal is too weak, and allows Deripaska to maintain effective control of his businesses. The House voted overwhelmingly on Jan. 17 to prevent OFAC from lifting sanctions on the three companies. The same bill, however, fell short in the Senate the day before (by only 3 votes), leaving OFAC free to lift the sanctions, for now.
Germany and the E.U. had asked Congress not to block the OFAC’s deal with Deripaska. Rusal, the world’s second largest aluminum producer, employs thousands in Germany and other EU-countries, and plays a role in many German manufacturing supply chains, including Daimler AG and BMW AG. Deripaska also controls Gaz Group, an automotive company with ties to Volkswagen AG. During floor debate in the House, House Majority Leader Steny Hoyer (D-Maryland), who authored the bill, acknowledged the impact of U.S. sanctions on Europe, stating: “I am also sensitive to the economic concerns of our European partners, who are dependent on aluminum manufactured by Rusal.”
The bill also garnered significant Republican support, laying bare the divide within the party on Russia, and demonstrating the appetite for legislative action later this year. Notably, several of Trump’s strongest Republican allies in the House, (e.g. Reps. Kevin McCarthy and Devin Nunes of California, Rep. Steve Scalise of Louisiana, and Rep. Mark Meadows of North Carolina) all voted with the Democrats to prevent the loosening of sanctions. In the Senate, 11 Republicans, including Trump ally Sen. Tom Cotton (R-Arkansas), also broke ranks with the White House.
After the votes took place, the New York Times reported new details about OFAC’s deal with Deripaska, which suggest that Congress’s fears may be well-founded. This report prompted at least one Senator to express willingness to reconsider his vote. The Times report merely reinforces a prevailing sentiment in Congress, however; Rep. Richard Neal (D-Massachusetts), for example, stated during the Jan. 17 floor debate that Congress “intends to proceed even in the aftermath of this decision today.” Congress will likely look to bills filed in 2018 (the ESCAPE Act, the DETER Act, and the DASKA Act) as a framework for a 2019 package. On a separate track, Sen. Bob Menendez (D-New Jersey) is also pressuring the Trump Administration to sanction Russian actors for the use of chemical weapons in the United Kingdom.
3. U.S.-China Trade Talks Continue This Week; March 2 Deadline Could Slip
A Chinese delegation will come to Washington this Wednesday to meet U.S. Trade Representative Robert Lighthizer for a second round of trade talks since the two sides agreed to a 90-day detente in December. The parties remain far from a deal — which is unsurprising given the magnitude of the American demands that China restructure significant aspects of its economic and industrial policy. Absent an agreement by March 2, the United States is set to increase tariffs on some $200 billion of Chinese imports — from 10 percent to 25 percent.
The first round of trade talks, held in early January in Beijing, were less successful than some reports had first suggested; reports of a breakthrough (e.g. here) continue to create confusion and distract from the reality that the Lighthizer-led trade team will not relent until China makes significant concessions on big structural issues, including intellectual property theft, forced technology transfer, and subsidies. China’s offer to accelerate purchases of American goods, while significant, will not alone be enough to reach a deal to prevent the imposition of higher tariffs, much less remove the current tariffs on some $250 billion in Chinese imports.
With a deal before March 2 all but impossible, we believe that the most likely scenario is an agreement to postpone the deadline and continue negotiating — assuming that China can demonstrate that is is making a good-faith effort to make changes, such as banning forced technology transfer. White House advisor Larry Kudlow said after the first round that “the technology stuff has not been dealt with, the enforcement stuff has not been dealt with.” Many experts believe that China will never yield to American demands, and that the United States and China will ultimately untie themselves from one another — potentially at the expense of Germany, which “wishes to keep strong commercial ties to both the U.S. and China.” Germany’s current debate about whether to ban Huawei could foreshadow more such decisions, if tensions between the U.S. and China expand.
4. U.S.-E.U. Trade Talks Will Likely Remain Stuck in First Gear
The Trump Administration and the European Union have now both published their respective outlines for a free-trade agreement on goods. The Trump Administration will seek to include agriculture in the deal, while the European mandate explicitly rules out agriculture. While this division is not a surprise, it is noteworthy that both positions are now staked out in writing. A final agreement will need to be approved by Congress. Notably, Senator Grassley has stated that he “expects the agreement with the European Union to address agriculture,” and said that explicitly to E.U. trade Commissioner Cecilia Malmstrom during her recent visit to Washington.
Access to European markets for American farmers is particularly important to Trump at this juncture, in order to prevent further trade-related harm to American farming — one of his key bases of support. Soybean farmers have been particularly hard hit; China cut its soybean purchases of U.S. soybeans in 2018 in half — from 32.9 million to 17 million tons — the lowest volume in 10 years. Many farmers continue to back Trump, however, despite their economic struggles. Trump spoke at the American Farm Bureau Federation on January 15, where Farm Bureau president Zippy Duvall said that farmers are “hanging tough” with Trump, and that “if anything, [support for Trump] seems to be stronger.”
On a separate track, the long-anticipated (and feared) national-security investigation into cars and auto parts is due on or before February 17. We continue to believe, however, that the White House will not impose automotive tariffs — even if the Department of Commerce recommends them. And even if Trump were to impose the tariffs, the new Congress would be under tremendous pressure to block them. Senator Grassley has stated that he “intends to review the President’s use of power under Section 232,” and Senator Lamar Alexander (R-Tennessee) has now introduced his bill that would delay automotive tariffs. The global automotive industry is united against the tariffs. Ultimately, we continue to believe that the automotive tariffs will be used as a threat, rather than being implemented.