Washington Insider-- Monday

DTN's Washington Insider

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

China’s Purchases of US Ag Products Expected to Rise Shortly

China plans to accelerate purchases of U.S. farm goods to comply with the Phase One trade deal with the U.S. following talks this week between Secretary of State Mike Pompeo and his Chinese counterpart.

“During my meeting with CCP Politburo Member Yang Jiechi, he recommitted to completing and honoring all of the obligations of Phase One of the trade deal between our two countries,” Pompeo said in a tweet Thursday.

China intends to step up buying of everything from soybeans to corn and ethanol after purchases fell behind due to COVID-19 disruptions, said two people familiar with the matter cited by Bloomberg.

This would confirm the expectation cited by U.S. Trade Representative Robert Lighthizer in congressional testimony that he expected China to live up to their commitments in the Phase One deal and that their purchases of U.S. ag products – and other goods – would be rising soon.

Bloomberg reported that through the first four months of 2020, China purchases of U.S. ag goods were at $4.65 billion, well shy of the total of $36.5 billion in U.S. ag products China committed to purchase in 2020.

Another source cited in the Bloomberg report indicated that Chinese state buyers were being urged to make all efforts possible to meet the Phase One agreement terms. U.S. officials and trade sources have continued to maintain they fully expect the purchase commitments by China to be met and they also have reminded that China has also taken many actions on other trade issues that were covered in the Phase One agreement.

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EPA Now Shows 52 New Petitions Pending For Small Refinery Exemptions From RFS

EPA’s dashboard showing the number of small refinery exemption (SRE) requests increased by 52 as of June 18, with those new requests for compliance years 2011 through 2018.

The updated data now provides a level of petitions filed for prior compliance years under the Renewable Fuel Standard (RFS) in what ethanol backers say is an attempt by refiners to become eligible for SREs ahead based on the 10th Circuit Court ruling that determined for the a refiner to be eligible for SREs they had to be extensions of prior requests.

“Petition counts include submissions from small refineries that are seeking reconsideration of petitions that were previously denied,” EPA said. “Accordingly, the count for any compliance year may include petitions from the same small refinery being represented as both a denial and still pending.”

There also are 27 requests pending for the 2019 compliance year and one for the 2020 compliance year.

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Washington Insider: Problems With US Trade Policy

The Hill this week is carrying an article by Robert Scott, who is a senior economist with the Economic Policy Institute. He notes that U.S. Trade Representative Robert Lighthizer once again reported to Congress that “the era of U.S. offshoring is over.” This is essentially the same message President Trump’s new "American Comeback" campaign ads carry, the article said.

Scott charges that the Trump administration often touts returning trends in industries and jobs. In actuality, its policies are “actually failing to curb most of this offshoring.” They simply haven’t addressed the root causes of America’s growing trade deficits,” he said.

The article pointed to “the reality” in which COVID-19 has wiped out much of the job gains seen in recent years. And, he warns that unless steps are taken now to curb dollar overvaluation, which makes imports artificially cheap in the U.S. market, along with tax incentives for offshoring, there won’t be a comeback.

Scott also says that the administration has ignored the linkage between its policies and the rising trade deficit as it continues its “rosy pronouncements.”

In his testimony last week, Lighthizer praised several companies that have scrapped offshoring efforts or have “announced” plans to move production to the U.S. And he praised both the U.S.-Mexico-Canada Agreement (USMCA), which takes effect July 1, and the current "phase one” China trade deal.

Scott argues that increased domestic purchasing spurred by tax cuts and an expanded federal budget pushed average employment per manufacturing plant up between 2016 and 2019 -- but that offshoring continued throughout. Overall, the U.S. has lost more than 91,000 manufacturing plants and nearly 5 million manufacturing jobs since 1997 -- including nearly 1,800 factories that disappeared under the current administration between 2016 and 2018, Scott says. And, he thinks that any recent manufacturing gains were abruptly wiped out by the COVID-19 lockdown -- with a staggering 1.2 million manufacturing jobs lost this year.

But U.S. manufacturing was struggling even before COVID-19, Scott says. Starting in 2014, the U.S. dollar has appreciated in fits and starts, climbing nearly 28 percent. “More than half of that rise has come since the administration’s tariffs were first imposed in March 2018.”

Equally problematic, the 2017 Trump tax cuts on corporate profits incentivized offshoring for certain types of production while also raising after-tax profits, he says. This has attracted foreign capital to U.S. stock markets, spurring the dollar even higher.

If the administration’s trade policy really encouraged “reshoring,” America’s trade balance would have improved. But the U.S. trade deficit in manufactured goods rose significantly between 2016 and 2019. “In fact, the real U.S. trade deficit has increased every year since 2016, reducing GDP growth by roughly one-quarter of one percent annually over the past three years,” Scott says.

As for the USMCA, it is unlikely to resolve longstanding U.S.-Mexico trade issues, Scott charges. And, the “Phase One” China trade deal is a bust, too, Scott charges. China promised to increase purchases of U.S. goods and services by $200 billion over 2017 imports but is unlikely to meet these targets.

Beijing has also strategically adjusted to the Trump tariffs. China is simply exporting more goods elsewhere, and the U.S. trade deficit with China’s trading partners rose rapidly in 2019. In fact, China’s overall trade surplus with the world climbed significantly in 2019. China also reduced the value of its currency by 11.4% against the U.S. dollar since March 2018, helping to offset the tariffs.

The tariffs are a signature element of the administration trade agenda, and have helped sectors like steel and aluminum. But “increasing tariffs without taking steps to prevent the dollar’s appreciation, the overall benefits are simply neutralized,” Scott says.

These problems have been compounded by mistakes on tax policy, Scott thinks. U.S. multinationals continually engage in massive, international tax avoidance, with some paying no income tax. The pharmaceuticals industry has reaped major rewards, and moved plants to countries with the lowest possible corporate tax rate. As a result, the U.S. now has a massive trade deficit in pharmaceuticals.

The U.S. trade deficit is likely to shrink during COVID-19. But unless steps are taken to address dollar overvaluation and tax incentives for offshoring, these deficits will simply reemerge when recovery occurs. Washington must embark on major investments in infrastructure, R&D, training, renewable energy and other industrial policies.

In 2016, President Donald Trump campaigned against globalization and failed trade deals that have hurt U.S. manufacturing. That strategy worked, Scott says, but the administration has since failed to deliver for working Americans. “Now the wheels are coming off,” Scott says and it is time for a meaningful rewrite of failed U.S. trade and economic policies.

So, we will see. It is true that trade policy pressures abound, but also seems likely that since the administration and the Congress are tightly focused on alleviating impact of the virus concerns about trade deficits are unlikely to command new priorities. However, these are high stakes debates that should be watched closely as the election season advances, Washington Insider believes.

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