Washington Insider -- Monday

By DTN's Washington Insider

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

US Dairy Groups Take Aim at Canada 'Class 7' Pricing Policy

Sales of ultrafiltered U.S. milk to Canada are being negatively impacted by a shift in Canadian dairy policy and U.S. dairy lobby groups are calling on the Trump administration to take action to address the situation.

The National Milk Producers Federation (NMPF), the U.S. Dairy Export Council (USDEC) and the International Dairy Foods Association (IDFA) are calling for the Trump administration and northern border states to take immediate action for the policy shift that they maintain is a violation of Canada's trade commitments to the U.S.

Specifically, the groups are taking issue with Canada's "Class 7" pricing policy put into place in February. The groups said multiple dairy companies in Wisconsin and New York have told dairy farmers that the market in Canada for their product has essentially dried up and as of May they will not be able to ship product to Canada due to Canada's National Ingredients Strategy and new Class 7 milk pricing program.

Imports of U.S. ultrafiltered milk have caused an estimated C$231 ($172 million) in losses for Canadian companies, according to Ottawa-based Dairy Farmers of Canada spokeswoman Isabelle Bouchard. She noted, according to Bloomberg, that other factors like the stronger U.S. dollar may also be at play.

“No new tariffs have been created that would restrict USA access to the Canadian market," Bouchard said in an email to Bloomberg. “The problem is not Canada’s dairy system, the problem is that there is too much milk produced in the USA, which is not Canada’s fault.”

But that doesn't hold up well with U.S. dairy industry groups. “Canada’s protectionist dairy policies are having precisely the effect Canada intended: cutting off U.S. dairy exports of ultra-filtered milk to Canada despite long-standing contracts with American companies,” said Jim Mulhern, president and CEO of NMPF. “American companies have invested in new equipment and asked dairy farmers to supply the milk to meet demand in the Canadian dairy market. This export access has suddenly disappeared, not because the market is gone, but because the Canadian government has reneged on its commitments.”

Calling it a "disregard" for trade commitments, USDEC President and CEO former USDA Secretary Tom Vilsack said it is little more than an "intentional decision to pursue policies that are choking off sales of American-made milk to the detriment of US dairy farmers. It is deeply concerning that Canada has chosen to continue down a ‘beggar thy neighbor’ path of addressing its internal issues by forcing the US dairy industry to bear the harmful consequences.”

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US Pork Group Continues to Have Trade Policy Concerns

The National Pork Producers Council (NPPC) recently outlined their focus on trade issues and outlined their concerns:

U.S. pork processing expansion. When plans were first drawn to begin construction on five new pork processing plants in Iowa, Michigan, Minnesota and Missouri, potentially creating nearly 2,000 new jobs, talks were well underway on the Trans-Pacific Partnership (TPP), which promised to reduce tariffs and generate big new trade-related sales in Asia for the industry. But now, as those plants begin to come online, the industry is starting to confront a potential pork glut.

“Nobody built a plant, nobody expanded solely on that, but it was one of those things that was another positive for the industry, assuming that we were going to get [TPP] passed,” Ken Maschhoff, the president of the NPPC and a pork producer in Illinois, said. “We had a president who said he would sign it. We basically were sitting on a Congress that we thought was going to adopt this, and we are where we are now.” However, that assessment appears to some observers as an overstatement as many veteran congressional sources predicted last year that had President Obama pushed a vote in Congress on TPP, it would have failed.

U.S. pork producers support a bilateral deal with Japan, where Vice President Mike Pence and Commerce Secretary Wilbur Ross will visit. The European Union has been talking about an FTA with Japan since 2013. Japan has suggested it would leave agriculture out of its first economic dialogue with the US, hoping that this will give it more leeway in parallel talks with the EU. “That’s a religious issue with us. ...Make no mistake, we will lose market share in Japan if we do not quickly initiate bilateral FTA negotiations with them,” said Nick Giordano, NPPC’s vice president of global affairs, who added the EU reached an agreement with Vietnam (in late 2015) and is also pursuing a deal with Mexico. “We want more export markets and that is the basis on which we are going to judge this administration and this Congress.”

China is important, too. The U.S. pork industry also wants a trade deal with China, the world’s largest producer and consumer of pork. Regarding President Trump’s meeting today with China’s president, Giordano said, “We hope something positive comes out, but I think the expectation all of us share is it’s early, it’s the first meeting. I think it’s more likely that, if there is a breakthrough, it’s on something other than pork.” China currently imports just 10% of the pork it consumes, but even a 1% pork import increase could be worth nearly a million dollars to U.S. pork producers, the group noted in a position paper. “China is Mecca to pork. They need pork. It is the biggest pork consuming nation in the world, and they came here because they realize that,” said Giordano, referring to the 2013 purchase by China’s Shuanghui of Smithfield Foods. “... Over time, in spite of whatever barriers we have, the simple economics are we have to sell more pork there.”

Regarding a U.S.-EC trade agreement, Giordano said: “NGOs (non-governmental organizations) call the shots in the EU. That’s not the way it is in the US and we don’t want it to become that way.”

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Washington Insider: Congressional Questions on Spending and Taxes

Well, Congress has a lot on its plate these days, as everybody knows. First of all, it is struggling to find funds to keep the government open for the second half of FY 2017 – and could face the possibility of a partial government shutdown if lawmakers fail to reach an agreement by April 28.

President Trump has asked for about $30 billion in emergency spending for defense, along with $18 billion in cuts to non-defense spending. However, Rep. Tom Cole, R-Okla., told Bloomberg that appropriations will ignore the proposal for $18 billion in cuts. Gridlock on this effort could “slow pro-business reforms so much that markets would “effectively price them out.”

In addition, details of administration’s expected tax reform proposals are eagerly awaited. Eight weeks ago, President Trump said he would be releasing a “phenomenal” tax plan within two or three weeks—but he hasn’t done so. The “mixed signals from the White House are imperiling Republican promises of speedy action,” Bloomberg says.

In fact, the administration hasn’t yet publicly answered the most basic questions about what such a reform plan would look like. For example, will it pay for itself with offsets or add to the deficit? White House Press Secretary Sean Spicer has emphasized that job creation and economic growth are priorities – an indication that controlling costs may not be the primary concern. “That could render any tax cuts temporary, meaning they’d expire after 10 years under Senate budget rules, Bloomberg says.

If the plan must pay for itself, where will that money come from? That too is unclear.

There’s also broad disagreement among Republicans and within the White House over whether to move forward with a border-adjusted tax on companies’ domestic sales and imported goods. House Speaker Paul Ryan, R-Wis., strongly favors such a tax because it would encourage domestic manufacturing, he says, and help pay for lower rates for companies and individuals. It has the backing of Trump’s senior adviser Steve Bannon but the president himself hasn’t weighed in, and other senior advisers, including Treasury Secretary Steven Mnuchin and National Economic Council head Gary Cohn, are said to oppose it.

Initial market euphoria that Trump’s election would lead to a once-in-a-generation opportunity to completely rewrite the tax code has begun to give way to more sober assessments, Blooomberg says, especially following GOP divisions that thwarted the Obamacare repeal effort. Kevin Brady, R-Texas, head of the tax-writing House Ways and Means Committee, said in November that Congress would be ready to act on tax legislation in the first 100 days of the new administration.

Now, Brady is saying that while his committee still intends to introduce legislation in the spring, there isn’t a specific deadline for action.

Spicer has tried to manage tax timing expectations during recent press conferences. “We’re at the first stages of the process” and “beginning to engage with Congress,” he said late last month, adding that the timeline could be “several months.”

There also are suggestions that the President’s delay on a tax proposal is hurting Ryan’s ability to get support for his plan among his party members. Representative Mark Meadows, R-N.C., who chairs the House Freedom Caucus, said his bloc of three-dozen ultraconservatives is waiting to hear about the administration’s tax plan before endorsing anything. Meadows’s group most recently scuttled Trump and Ryan’s efforts to shepherd an Obamacare replacement bill through the House, arguing that it didn’t hew to conservative principles.

“I think a lot of people are waiting to see which way the president wants to go,” the North Carolina Republican said in an interview Tuesday. “I think on the border-adjustment tax issue, they’re just waiting to see which way he wants to go and how compelling of a case he wants to make on that.”

The White House is also said to be in the early stages of gauging Democratic support for a tax overhaul in case it can’t get House Republicans on board. Cohn indicated that the White House wants to write a tax plan that Democrats can support, but didn’t offer specifics other than to suggest that Trump wants no absolute tax cut for upper earners, as Mnuchin has indicated, the person said.

If the White House does pursue a tax plan with bipartisan support, it would mean a radically different approach than the Ryan-backed blueprint, which includes tax cuts for the highest earners -- a non-starter for Democrats.

By crafting their tax blueprint last year, “House Republicans came to consensus on tax policy issues, which gives them a head start on everybody else,” said Michael Steel, a managing director at lobbying firm Hamilton Place Strategies and a former spokesman for Republicans on the Ways and Means committee.

“The House has a plan, but the Senate doesn’t quite have one yet,” he said. “They’re working on one. The White House hasn’t nailed it down, so even the three entities aren’t on the same page yet on tax reform.”

Well, it doesn’t look like there is any significant group working to shut the government down just now, but there are long wish-lists in Congress and the administration, and the list of political scores to be settled seems to be growing rather than shrinking. Spending and budget fights are always volatile, and need to the watched closely—and this year is no exception, Washington Insider believes.

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