Washington Insider -- Thursday

Estimated Cost of Trade War

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

USMCA action by the end of this year expected by key Democrat

Members of a working group appointed by House Speaker Nancy Pelosi, D-Calif., met Tuesday afternoon with U.S. Trade Representative Bob Lighthizer to discuss drug pricing provisions in the U.S.-Mexico-Canada Agreement (USMCA), Ways and Means Trade Chairman Earl Blumenauer, D-Ore., said. Blumenauer said Congress should be able to ratify USMCA by the end of the year.

While issues important to Democrats must be addressed, the lawmaker said he recognizes that Mexico’s newly elected president and the country will suffer if the U.S. takes too long to approve the agreement.

Meanwhile a group of Democratic lawmakers laid out their demands for supporting USMCA, including the reinstatement of Mandatory Country of Origin Labeling (COOL), something that few expect will happen.


Another Small Refiner Exemption From RFS Obligations Withdrawn/Ineligible

Data from EPA now shows there are 38 small refiner exemption (SRE) requests pending for the 2018 compliance year as of June 24.

There were 40 SRE requests received by EPA and the data now shows that two have been declared ineligible or have been withdrawn from consideration.

SREs continue to be a major focus with US biofuel interests, with the White House ordering a review of the SRE process after President Donald Trump was hit with criticism at an Iowa event. Farmers told Trump that while they appreciated the administration’s efforts to approve year-round sales of E15, the SREs were effectively more than offsetting the benefit from the potential expanded ethanol sales.

Washington Insider: Estimated Cost of Trade War

The urban press sees the threats of an intensifying global trade war as big news and spends considerable effort trying to describe how big that threat may be. For example, this week Bloomberg is reporting that the world economy runs the risk of having to foot a $1.2 trillion bill if the U.S.-China trade war escalates.

Bloomberg Economics says it is aiming directly at the challenge confronting U.S. President Trump and his Chinese counterpart Xi Jinping as they meet at the two-day Group of 20 summit in Osaka which begins on June 28.

One outcome of the talks, Bloomberg says, would be a replay of the Trump-Xi meeting at the G-20 in Buenos Aires in 2018 and could mean an easing of tensions. Tariffs could stay on hold and Chinese tech-giant Huawei could gain some breathing space from U.S. sanctions.

By contrast, a misstep could trigger 25% tariffs on all trade between the world’s two largest economies. Such an event, coupled with a major market drop, could take a $1.2 trillion bite out of global GDP by the end of 2021, Bloomberg economist Dan Hanson says. Numerous companies agree.

Even if the talks lead to tariffs at existing levels, the damage to Chinese, U.S. and global growth is already significant. An earlier Bloomberg report showed for the thousands of categories of Chinese goods that saw tariffs imposed from July 2018, U.S. imports from China were down 26% year-on-year in the first quarter of 2019.

Besides putting pressure on China, tariffs may also be reducing the appeal of locating production in China.

In the first quarter of 2019, sales of product categories where China faces tariffs were up by 30% in Taiwan, more than 20% in Vietnam, and by 17% in South Korea relative to the same period last year—a sharp acceleration from the growth rates recorded in the few quarters before the tariffs were introduced.

For example, Giant Manufacturing Co. saw the writing on the wall early on. The world’s biggest bicycle maker started moving production of U.S.-bound orders out of its China facilities to its home base in Taiwan as soon as it heard the U.S. threats of tariff action in September.

There’s also evidence of other “dodges and diversions.” Imports of TVs from China, which are not subject to tariffs, have soared, while imports of tariffed TV parts have plummeted. A similar trend is evident in imports of tariffed and non-tariffed categories of liquid crystal displays—evidence of tariff dodging by reclassification of products, or buyers looking for near-substitutes to keep costs down.

And while Bloomberg sees “lots of workarounds,” U.S. imports from other countries are up, but not by nearly enough to offset the drop in Chinese supply.

Also, third countries’ exports of the tariffed categories are being reduced by both the disruptions of the market and from weakened Chinese and U.S. demand.

The OECD says China tops that list, with 3.9% of GDP tied up in trade with the U.S. The U.S., with a larger economy and smaller role for exports, is less exposed. Still, trade with China is equal to 1.3% of GDP. China’s nearby neighbors—economies like Taiwan, Korea, and Malaysia—face significant exposure through integration into Asia’s electronics supply chain.

In addition, countries with high exposure to the trade war haven’t just seen exports drop, they’ve also seen capital spending and manufacturing employment suffer. Eight of the 10 most exposed economies have seen drops in capital-spending growth since the third quarter of 2018. Lower capital spending doesn’t just dent growth today, it dents growth in the future as well.

Still, Bloomberg thinks that if Trump and Xi stay focused on commercial interests “a deal remains there for the taking.” China and the U.S. would both benefit from a more open Chinese market with stronger protections for intellectual property. Chinese reformers would see the short-term costs as a price worth paying for a long-term increase in efficiency.

If the negotiations are expanded to consider the larger geopolitical issues, a deal looks harder to do. The incentives for President Trump to stand tough on China are rising. The lesson of past presidential elections is that “bashing Beijing” is a vote-winning strategy with few downsides. For Xi, too, domestic politics matter. A deal that looks like a one-sided win for the U.S. would not be acceptable in Beijing.

Bloomberg says it has surveyed U.S. economists and that many see a 50% probability of an extended truce, with existing tariffs remaining in place while talks resume. A partial deal that actually winds down tariffs has a 20% probability.

That compares to a one-in-four chance of no progress, leading to more U.S. tariffs applied and retaliatory China measures.

Clearly, concerns about an economic slowdown are growing and could affect the upcoming elections. These are important possibilities producers should watch closely in the weeks and months ahead, Washington Insider believes.

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