Washington Insider - Friday

Worries About Global Trade Rules

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

Clovis Withdraws Nomination for USDA Post

Former Trump campaign adviser Sam Clovis has withdrawn his nomination to be the USDA undersecretary for research, education and economics.

In a letter to President Donald Trump, Clovis said he was withdrawing from consideration for the post as he did "not want to be a distraction or a negative influence" on the administration. Clovis also referenced "relentless assaults on you and your team" that "seem to be a blood sport."

The White House confirmed the development, with White House spokeswoman Sarah Huckabee Sanders saying, "We respect Mr. Clovis’ decision to withdraw his nomination."

Clovis' nomination had been easily the most contentious at USDA as many charged he lacked the research background to be USDA's chief researcher. Plus, recent revelations that he had met with special counsel Robert Mueller and his team and testified before Mueller's grand jury had prompted still-more questions to be raised about Clovis, including by Senate Ag Committee Ranking Member Debbie Stabenow, D-Mich.

Trump Comments on US Trade Policy And Negotiations

Before a Wednesday Cabinet meeting took place, President Donald Trump talked about past and future trade agreements, saying the U.S. is “negotiating right now. We have my full team here. Tremendously different trade deals. Our [prior] trade deals are horrible. They were made by people that honestly, it’s sad. It’s very sad for our country. Every trade deal we have is disastrous. We’re renegotiating our trade deals. If we have support from Congress, we’ll make trade deals that are horror shows into very good and respectable trade deals and trade deals that are good for both countries and in fact many countries."

But he also cautioned that the NAFTA talks were key. “But very important is that we renegotiate our trade deals with Mexico... we have a trade deficit of $71 billion. That’s NAFTA. We have trade deficits with China that are through the roof," Trump stated. "They are so big and so bad that it’s embarrassing saying what the number is. You know what the number is. I don’t want to embarrass anybody four days before I land in China. It’s horrible. You look all over the world, no matter where we do trade, we have bad trade deals. We’re renegotiating those deals as I said I would during the campaign. That’s a big factor in our growth.”

Washington Insider: Worries About Global Trade Rules

Amid the tidal wave of economic discussions of tax reform proposals, there is a continued drumbeat of talk about the outlook for NAFTA and trade. Earlier in the week, the New York Times—which has had considerable difficulty with its treatment of trade issues during the campaign—carried a long story on a fundamental issue. It raised the question of the administration’s ultimate trade goal and whether it is really aiming to kill the WTO. It turns out, the story is complex.

When Robert Lighthizer, the president's top trade negotiator, cut his teeth on trade diplomacy. Back during the presidency of Ronald Reagan, the United States used an “idiosyncratic” way of solving its grievances over trade: asking its trading partners to curb their exports, or else, the Times says.

For example, in the early 1980s, Japan signed on to “voluntary export restraints” to curb the exports of cars that were causing so much heartburn in Detroit. This led to voluntary restraints including those with 15 countries that accounted for 80% of American steel imports.

These were voluntary in the sense that foreign exporters preferred them over the threat of more punitive duties and in Washington they were especially popular. Economist Douglas Irwin notes in “Clashing Over Commerce: A History of U.S. Trade Policy,” the share of American imports covered by some form of trade restriction rose to 21% in 1984, from only 8% in 1975.

Today, trade grievances are adjudicated differently. Since 1995, the United States has agreed, like other countries, to take its complaints to the WTO’s dispute settlement system. It has lost some cases, especially those against Washington’s unique way of measuring dumping. But it tends to win when it brings a charge against some unfair practice abroad.

Now, as U.S. trade negotiators talk tough to their Mexican and Canadian counterparts discussing NAFTA, some diplomats and trade experts say they are beginning to wonder whether the administration’s ultimate goal is to blow up the entire legal framework governing world trade, the Times says. What Washington truly seems to want is the kind of free hand it had in the 1980s to coerce one country after another into bringing its surplus with the United States down to zero.

The Times cites “trade diplomats” who say the U.S. has warned Mexicans and Canadians that if the United States leaves NAFTA, they shouldn’t expect trade relations to simply snap back to WTO rules, which include a tariff ceiling of 3.5%, on average, for Mexican exports to the United States and 7.1% for American exports to Mexico. The United States, they argue, won’t be bound by these constraints.

And, in the meantime, the USTR has not been shy about expressing gripes about the organization and the U.S. has been chipping away at its judicial apparatus, blocking appointments to the seven-member appellate body that rules on trade disputes.

In addition, the Times says that trade experts warn that blowing up international trade law may be the only way the Trump administration could pursue its “quixotic” goal of eliminating the bilateral trade deficits that it has with most countries.

For the world, that presents a sort of Catch-22. The American current account deficit is the mirror image of the gap between the U.S. national savings and its national investment. Because it invests more than it saves, it draws money from abroad and spends it on foreign goods and services. Until it closes the savings gap, no amount of diplomacy, bullying or cajoling will close the gap in trade, NYT says.

However, even if the administration’s NAFTA gambit worked and bilateral trade came into balance, it might not change the balance of American trade over all.

For example, after Canada, Japan and the European Community agreed in the early 1980s to voluntary restraint agreements limiting exports of steel to the United States, producers in countries like South Korea and South Africa simply picked up the slack.

Dartmouth economist Robert Staiger told the Times that unless the American savings-investment imbalance corrects itself, too, the former deficit with Mexico would simply pop up elsewhere. And if the “proposed smorgasbord of tax cuts is passed, the mushrooming budget deficit will push the savings-investment imbalance in exactly the wrong direction,” Staiger said.

It was easy to bully Japan in the 1980s, the Times says. Its security depended on the United States but it is unlikely that Washington could pull off the same thing with China today. Though the WTO would suffer a blow if the United States left, it might survive. Today the United States accounts for only about 13% of world trade, down from almost a quarter in the 1980s.

So, the Times is raising the question of how the administration conceives the endgame of NAFTA talks if it is willing to bring down a legal system the United States spent so much time and effort to build and that now has so many important stakeholders.

As almost everyone knows, access to NAFTA markets is extremely important to U.S. producers, so the administration’s attitude and posture during these talks are very important. The negotiations deserve especially close attention as they proceed, Washington Insider believes.

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