Washington Insider --Wednesday

By DTN's Washington Insider

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

Pompeo Talks Positive on US-China Talks In Iowa Appearances

U.S. Secretary of State talked China trade at several stops in Iowa on Monday, saying he was “hopeful” a deal could be reached and that “lots of progress has certainly been made.” But he remained cautious.

“I have been involved in a lot of negotiations. They can fall apart at the last minute for sure,” he warned in a radio interview.

"Help is on the way. American producers and Chinese consumers will both be better off," Pompeo said at an evening meeting at the World Food Prize headquarters in Des Moines. "The outcome of President Trump's trade negotiations currently underway will pay dividends in each of our two countries. The president is taking a very hard line of stopping the theft of intellectual property."

Meanwhile, Chinese officials also continue to talk positively about trade prospects. Banking and insurance regulatory chief Guo Shuqing said China and the U.S. will reach an agreement on the opening up of China's financial sector.

Working teams from the U.S. and China are continuing their negotiations toward reaching a trade deal, according to Chinese Commerce Minister Zhong Shan. The talks so far have been "difficult," Zhong said at the sidelines of the National People's Congress, but said there had been a breakthrough in some areas and called on both sides to meet halfway if they wanted a deal.

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Two More Farm Bill Listening Sessions Set

Animal health provisions in the 2018 Farm Bill that are linked to the Animal and Plant Health Inspection Service (APHIS) will be the subject of a listening session the agency has scheduled for March 21.

The agency said the session will focus on provisions including animal disease prevention and management, veterinary training, biological agents and toxins.

USDA will also hold a listening session focused on regulations for industrial hemp production. The second public meeting on implementation of the 2018 Farm Bill is scheduled for March 13.

USDA Secretary Sonny Perdue last week said the agency expects to have rules in place for the 2020 growing season for the crop and said that the pilot program rules put in place for the 2014 Farm Bill are the current guidelines.

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Washington Insider: Tariffs, Impacts and Winning

The urban media is almost crowded with analyses of trade prospects these days along with guesses about what sort of a China trade deal might emerge. Overall, many of those readings are trending toward skeptical — not so much that there won’t be any deal, but whether or not the fight was “worth it.”

The New York Times, which during the presidential campaign and afterward carried numerous articles that casually accused recent trade policies of “shipping” U.S. jobs overseas, is now much more critical of the new protectionism. To that point, last weekend it carried several articles and an Op-Ed piece suggesting with regard to trade, President Trump “provided us with many iconic quotations, which will surely be repeated in histories and textbooks for decades if not generations to come. Unfortunately, they’ll be repeated because they are extremely clear examples of bad ideas.”

The Op-Ed notes that the line you hear most is the declaration that “trade wars are good and easy to win.” Coming in second is the president’s assertion that “I am a Tariff Man,” coupled with the claim that foreigners pay the tariffs he has been imposing.

Now, that last claim, the Times asserts, “is something you can test”. Over the course of 2018 the administration imposed tariffs on about 12% of total U.S. imports and many of those tariffs have been in effect long enough that a first read on their consequences can be examined.

It cites a new report, released last week by economists from Columbia, Princeton, and the New York Federal Reserve called “The impact of the 2018 trade war on U.S. prices and welfare.” It used detailed import data to assess impacts of the tariffs’ impact — and concludes that “foreigners paid none of the bill, U.S. companies and consumers paid all of it. And the losses to U.S. consumers exceeded the revenue from the new tariffs, so the tariffs made America poorer overall.”

The study compares data on the prices and quantities of several categories of imports, including those that faced new tariffs and those that didn’t — and found “no visible effect of the tariffs on import prices but substantial changes in behavior.”

Imports of the tariffed items fell sharply, partly because consumers turned to domestic products, but also because importers shifted their sourcing to countries that aren’t currently facing U.S. tariffs like Vietnam or Mexico.

The Times presents an example: a good from China that formerly cost $100. Then the administration imposes a 25% tariff, raising the price to consumers to $125. If we just keep importing that good from China, consumers lose $25 per unit purchased–but the government raises an extra $25 in taxes, leaving overall national income unchanged.

However, the study asks, “what if importers shift to a more expensive source that isn’t subject to the tariff; for example, from Vietnam for $115? Then consumers only lose $15 – but there is no tariff revenue, so that $15 is a loss for the nation as a whole.

But what if they turn to a domestic supplier, perhaps a U.S. company that will sell the product for $120 — but, the Times notes, producing that good domestically has an “opportunity cost” that must be considered.

Since the U.S. is near full employment, the $120 in resources used to produce the good could and would have been employed producing something else. Diverting those resources into producing what we used to import means a net loss of $20, with no revenue offset.

The Times also thinks that any manufacturing jobs the tariffs create are probably offset by losses of other manufacturing jobs. In part, that’s because most of the tariffs are on intermediate goods–inputs into production — so that job gains in, say, steel are offset by losses in autos and other downstream sectors. Beyond that, the tariffs likely have contributed to a rising dollar, which makes U.S. exports less competitive.

Putting it all together, the new study concludes that the administration’s tariffs have raised consumer prices rather than depressing foreign earnings. Some revenue has been gained, but there also has been what amounts to tax avoidance as consumers turn to other, untaxed sources of what we used to import. But this tax avoidance itself comes at a cost, so the U.S. as a whole is left poorer.

The Times concedes that the numbers aren’t that big—the net welfare loss is pegged at $1.4 billion a month, or $17 billion a year, less than 0.1% of U.S. GDP. But “winning it isn’t.” And the numbers could get a lot bigger if the trade war expands, say with a “national security” tariff on European cars.

One of the major concerns about the expected deal is the possibility that whatever agreement emerges will not include the hoped-for structural changes in China’s trade policy and its interventions on behalf of its state-owned enterprises. If the tariff benefits are negative and the potential benefits for U.S. markets fall short, new criticism of administration trade policies — already emerging — can be expected to intensify sharply, Washington Insider believes.

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(GH\SK)

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