Washington Insider -- Wednesday

Impacts of Tariffs

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

US Responds To China 'White Paper' On Trade Situation

U.S. officials released a statement countering the claims made by China in a "white paper" issued Monday, which laid the blame for the breakdown in U.S.-China trade talks on the U.S. side for making changes to the potential agreement, the same contention levied by the U.S. side.

The China action, a statement from the Office of the U.S. Trade Representative and U.S. Treasury Department said the allegations raised by China represent and effort to "pursue a blame game misrepresenting the nature and history of trade negotiations between the two countries." The statement outlined the actions that led up to recent negotiations, noting that after "months hard work and candid and constructive discussions, the parties had reached agreement on a number of important matters," the statement said. "In wrapping up the final important issues, however, the Chinese moved away from previously agreed-upon provisions."

The statement pointed out that the negotiations were prompted in part by "China’s long history of unfair trade practices." The U.S. negotiating positions during the months of talks has been "consistent," with China being the party who "back-pedaled on important elements of what the parties had agreed to," the statement said, with a key one being "the need for enforceability, a position necessitated by China’s history of making commitments that it fails to keep."

The U.S. insisting on "detailed and enforceable commitments from the Chinese in no way constitutes a threat to Chinese sovereignty," the statement said. "Rather, the issues discussed are common to trade agreements and are necessary to address the systemic issues that have contributed to persistent and unsustainable trade deficits."

China has again responded to the U.S. comments, with the Commerce Ministry saying that it is "common" for there to be revisions and suggestions during trade negotiations and are insisting that "dialogue and negotiations" be used to resolve frictions and differences between the two sides.

Ag Provisions In Disaster Aid Package

The $19.1 billion disaster aid plan does contain specific portions that address agriculture.

The bill provides just over $3 billion to farmers whose crops and livestock were destroyed by storms and flooding. Most of the farmer disaster aid will be administered through the Wildfires and Hurricanes Indemnity Program (WHIP) – used in response to 2017 hurricane losses.

However, the bill includes some important enhancements to WHIP and although murky, the language includes assistance for prevented planted acres.

Farmers and ranchers would get $558 million for conservation programs to rehabilitate damaged farmlands, while $480 million would go towards forest restoration efforts. Rural communities would receive $150 million for facilities offering health care, education and other services, and Puerto Rico would get $600 million in nutrition benefits.

The legislation also allows producers making more than $900,000 per year to receive trade aid payments from USDA if 75 percent of their income comes from farming, ranching or forestry.

Washington Insider: Impacts of Tariffs

There is growing concern about the administration’s “get tough” trade policies, the New York Times says — and that the tariffs the administration has become “so fond of” could more than wipe out gains from the recent $1.5 trillion tax cut for low- and middle-income earners.”

Investors, bond markets and Wall Street analysts appear “increasingly alarmed” by the potential slowdown in growth that could result from the administration’s trade escalations, including the plan to impose tariffs of up to 25% on Mexican goods and to tax everything that China imports into the United States. In addition, the White House is mulling tariffs on imported automobiles from Europe and Japan, the Times says.

Analysts have abruptly changed their forecasts for Federal Reserve policy this year as the trade fight begins to affect “everything from South Korean washing machines to Japanese steel rebars to Chinese semiconductors,” the Times says.

In addition, Mexican officials argued on Monday that tariffs aimed at immigration were “likely to backfire” on the United States as their financial cost leads to more economic trouble and job loss in Mexico, increasing the wave of migrants headed north.

Jesus Seade, the deputy foreign minister for North America, noted that auto parts often cross the border as many as eight times as they travel through the supply chain, meaning a 5% tariff on each crossing could quickly compound and exact a much higher economic toll on both countries.

The president insists that his tariffs are not hurting Americans and that his trade policy will help create jobs and investment in the United States. Others are not convinced, and lawmakers and economists are starting to worry openly about the economic toll of the trade war the Times said.

For example, Sen. John Thune of South Dakota, the No. 2 Senate Republican, said his colleagues were clearly uneasy with the new plan to impose tariffs on Mexico. “I think the president has done a lot of really good things for the economy,” he said. “We’ve seen growth and jobs and wages all moving in the right direction. And I don’t know why we would want to step on that.”

Economists say the tariffs already amount to a significant tax increase on Americans by raising the prices of goods they buy, according to new studies from the Tax Foundation in Washington and the Penn Wharton Budget Model at the University of Pennsylvania. The damage is concentrated, as a percent of income, at the lowest rungs of American income earners, who spend a larger share of their salaries on imports than the upper middle class and the rich.

Additional tariffs on Mexico and China would wipe out all or most of the benefits of the 2017 tax cuts for low- and middle-income Americans, the analyses found. Higher-income Americans would still be net winners from the new policies, but their benefits would be diminished as well.

“Once you start adding in the tariffs and start talking about what the administration wants to do at the end of the day,” said Kyle Pomerleau, the chief economist at the Tax Foundation, which produced its analysis at the request of The New York Times, “it gets harder and harder for the administration to claim that they are cutting taxes for the middle class.”

The Tax Foundation projects widespread benefits from the tax cuts with the largest gains concentrated among high earners. However, its new analysis of the distributional effects of the imposed and threatened tariffs finds widespread harm to most Americans, who would pay higher prices on imported goods.

Accounting for both the tax cuts and the full range of tariffs, the Tax Foundation model also finds that the tariffs would almost entirely offset the federal revenue losses from the tax cuts, raising about $200 billion next year against a $230 billion loss from the cuts.

The findings are echoed by projections from the Penn Wharton Budget Model, which forecast more modest benefits from the new tax law than the Tax Foundation did.

The Penn Wharton researchers found increased costs of consumer goods would more than offset the benefits of tax cuts for the lowest-earning Americans next year assuming all the China and Mexico tariffs but not those on autos. Workers earning median incomes would see most, but not all, of their benefits wiped out. A typical middle-class taxpayer would expect to receive about $471 in 2020 from the tax cuts, the researchers found, but tariffs would reduce that benefit to $159.

“Ultimately, the tariffs make all consumers worse off,” said Richard Prisinzano, a senior economist at the Penn Wharton Budget Model. “The question is how much worse off.”

So, the administration appears to be finding that its argument that tariffs do not affect U.S. consumers is a difficult sell, even when there is agreement that trade reforms are needed. Still, a number of officials are deeply dug in on the strong and far-reaching tariff proposals aimed at reducing pressure on the southern border, a debate producers should watch closely as it proceeds, Washington Insider believes.

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