Washington Insider -- Thursday

Tracking Trade Policy Impacts

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

Key Questions Remain On Trump Tariff Aid Plan

The $12 billion aid package announced by USDA to help farmers impacted by retaliatory tariffs includes direct payments to farmers of soybeans, sorghum, corn, wheat, cotton, dairy and pork. USDA will also purchase fruits, nuts, rice, beef, pork and dairy for distribution to food banks and other nutrition programs. A third component will be to assist the private second with developing new markets for ag products overseas.

Key questions on the plan, however, remain, including the actual mix within the $12 billion. Some suggest the direct payment effort will be $9 billion to $9.5 billion, another $2.5 billion to go to food purchases for donation to food/feeding efforts and $200 million for export promotion.

The payment levels by commodity are expected to be known in September, which will answer questions such as what the multiplier will be for the payments and how much growers can expect. Another key will be how much USDA has assumed is price pressure on corn and soybeans in particular from ample crops ahead vs the tariff actions. It is unclear if USDA will make their analysis available on how they determined the aid levels.

Will the aid be viewed WTO compliant is another potential issue even as USDA officials insisted it will be and the U.S. will not exceed its commitments on trade-distorting subsidies.

Former USDA Chief Economist and trade negotiator Joe Glauber told CNBC that the aid will likely be viewed as "producer support" and appears to be targeted toward a drop in the market price of certain commodities. That could mean it will count toward the US WTO commitment. "We have run pretty low levels of [producer] support in recent years, but it will certainly raise a lot of eyebrows and will make people look at those calculations very, very carefully," said Glauber. "It also will look at the way we formulate those programs very, very carefully."

The U.S. committed to limit "Amber box" subsidies to $19.1 billion.

NAFTA Optimism Continues

USDA Secretary Sonny Perdue told reporters on Wednesday that an agreement with Mexico could be wrapped up next month. “Then, Canada will hopefully follow suit quickly and we can assemble that trifecta there,” Perdue said. He added that the administration "certainly hopes" talks are wrapped up sometime this year.

Commerce Secretary Wilbur Ross said negotiations for a new deal are coming along “very, very well” and the U.S. hopes it can be wrapped up within the next couple of months.

Mexican Economy Minister Ildefonso Guajardo will meet with U.S. Trade Representative Robert Lighthizer for the first time since the Mexican presidential election on July 1. Both have expressed a willingness to reach the NAFTA 2.0 end zone by the end of August. Mexico’s negotiating team — led by Guajardo, Mexican Foreign Trade Undersecretary Juan Carlos Baker and chief NAFTA negotiator Kenneth Smith Ramos — will be joined by Jesus Seade, a former WTO official and President-elect Andrés Manuel Lopez Obrador’s pick for chief NAFTA negotiator. The current and incoming team have said they will work in tandem in the coming months until Lopez Obrador takes office on December 1.

Mexico and Canada on Wednesday stressed NAFTA is a three-country accord, despite President Trump’s repeated comments that the U.S. may reach a deal with Mexico first. “The essence of this deal is trilateral, and it will remain trilateral,” Guajardo said after meeting with Canadian Foreign Minister Chrystia Freeland in Mexico City. Freeland added that “Canada very much believes in NAFTA as a trilateral agreement and that is simply a statement of reality.”


Washington Insider: Tracking Trade Policy Impacts

Well, it seems if no one really knows just what the state of play on trade policy is just now. The New York Times that treated trade platform planks very casually during the campaign has now begun to take the issue much more seriously, as the White House recently admitted that one of its favored groups, farmers, is on the frontline of the expanding tariff war and that it needs to do something about that.

So, it announced a plan for a $12 billion farmer aid package this week, and immediately got a mixed reaction for its pains.

The Times says it’s a mistake to assume that difficulties of individual companies and industries are forces powerful enough to bend the overall trajectory of the United States economy. “The direct effects on the U.S. economy are small, because the economy is really big and it is mostly domestically driven,” said Beth Ann Bovino, chief United States economist at Standard & Poor’s Ratings Services. “Still, tariffs hurt, and we’re starting to see some precursors of an impact already.”

To assess how the trade war could affect growth, NYT focuses on what it calls “certain indicators” likely to provide early signs of trouble: data that offers a bigger picture than individual anecdotes--but more timely than things like GDP and the unemployment rate.

If you want a dashboard for evidence of economic damage from the trade war, here’s what should be on it, NYT says.

First, capital spending surveys track the ways trade tensions can slow a nation’s overall growth. However, the hard data on business investment tends to be released with long delays. If executives become gloomier about the future, the earliest evidence will probably come from frequent surveys of them.

For example, the Federal Reserve Bank of Philadelphia surveys manufacturers about their plans for capital spending, a measure has fallen in the last few months. Other surveys, like the one of small businesses by the National Federation of Independent Businesses, suggests more stable capital spending plans.

“I am watching business sentiment very closely,” said Nathan Sheets, chief economist of PGIM Fixed Income. “If we started to see business sentiment turn, that would be an indication that key constituencies in the business community are getting nervous.”

The Times also notes that the closest thing to a real-time indicator of the trade war’s possible effect on corporate profits is the stocks of household-name companies with deep exposure to global commerce, like Boeing, Caterpillar and John Deere, which have become bellwethers for the trade war.

But to understand whether trade tensions are affecting the overall economy, it’s worth watching whether dips in the stock market remain limited to those companies with direct exposure to global commerce or start to encompass even service industries and those with mainly domestic business.

“While a few small companies have been hit very hard by the tit-for-tat tariff war, in general, smaller companies are less impacted than big multinationals with global supply chains and worldwide sales,” said Blu Putnam, chief economist of the CME Group. “Hence, the Russell 2000 has been outperforming the S&P 500 as the trade war has intensified.”

If that changes, it will be evidence that the trade war is translating into gloomier prospects for the United States economy as a whole.

An additional likely effect of a trade war is on prices—in most cases, increasing them for American consumers. This will eventually show up in overall inflation numbers, but that could take time, especially since most of the early rounds of tariffs are aimed not at finished consumer goods but at raw materials and industrial products.

You can get some sense of what’s coming by looking at commodity futures markets for items that are affected. The inverse of higher prices for metals is evident in lower prices for soybeans and other agriculture products — caused by retaliatory tariffs that depress international demand.

The price of soybeans had fallen sharply. But futures markets currently are rebounding. November soybeans were at over $8.93 to start Thursday morning.

For both goods, the market prices suggest the trade distortions will be temporary. If that changes, it will be a bigger deal for both overall price inflation facing consumers and for the incomes of farmers and other producers of commodities.

It’s also worth keeping an eye on the producer price index. If the trade war is going to feed into broader consumer inflation, it is likely to show up there first.

Watch jobs data. The trade war could arrive amid the healthiest labor market in at least 18 years, with the unemployment rate around 4 percent. But how will we tell if it’s starting to cause pain?

The earliest sign would probably be in the portions of business confidence surveys that ask about hiring intentions. The Institute for Supply Management’s employment index, a subcomponent of its survey of manufacturers, pulled back a bit in June, but was still at a level indicating healthy job creation.

If indicators like that one started to fall, it would be a sign that the trade war was making companies more reluctant to hire.

Similarly, if job losses from tariffs became widespread, you would expect to see the number of people filing new claims for unemployment benefits spike upward.

How do things look if you put it all together? As of mid-July, the evidence that the trade war is doing meaningful economic damage is scarce. But by keeping an eye on the right tools, it’s possible to get early warning signs if that starts to change.

So, we will see. Right now, the debate is what the impacts of the “get tough” policy may be for the economy. Soon, the question will be what if anything should be done about whatever trends are developing—a fight that likely will be a very tough one, and one that will involve producers fully as it proceeds, Washington Insider believes.

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