Washington Insider-- Thursday

Brexit Costs

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

Obama Admin. Gathering Info on Chinese Domestic Support for Corn, Rice, & Wheat

U.S.-China trade and economic issues are mounting, with potential conflicts including farm products and possible US trade complaints later this year that some sources say could bring Chinese retaliation.

Beijing’s push for market economy status is one issue. The U.S. disagrees on China being considered a market economy. The spat, some sources say, could prompt China to launch a World Trade Organization (WTO) dispute against the U.S., risking worsening trade relations.

Should China garner market economy status, the U.S., Canada, EU and Japan would lose the ability to protect domestic firms with higher dumping margins based on comparable market prices.

A South China Sea ruling is boosting shipping and trade concerns. The ruling by an international tribunal against China’s claims over most of the South China Sea could, contacts signal, embolden smaller Asian countries to be assertive in protecting their rights in these waters. If so, that would hike potential run-ins with China, impacting freedom of navigation, including energy supplies. Thousands of ships transit those waters daily, with a third of the world’s liquefied natural gas passing via the Straits of Malacca to the South China Sea.

Even if shipping is not disputed, companies may face higher costs if the standoff escalates, since insurance companies would likely drive up rates, observers noted.

China is currently flexing its muscles in defending its steel policies at the WTO, accusing the U.S. of “deliberately” misinterpreting WTO rules in a steel imports case. China is stressing it is not providing preferential tax treatment to domestic iron or steel producers. The U.S. Commerce Dept. recently issued a preliminary decision against China steel subsidies.

If China launches a trade dispute against the US, it would further strain relations amid a growing overcapacity issue in the global steel sector.

Now, the Obama administration and USTR are gathering information on Chinese domestic supports for its corn, wheat and rice industries, tapping outside university trade specialists to aid in the information needed, administration sources inform.

No WTO ag trade complaints are expected until late this year. While the White House would likely deny any such linkage, sources signal the eventual post-election push for Congress to approve the pending Trans-Pacific Partnership (TPP) accord could be part of the reason to have the US “look tough” in trade enforcement issues with China.

Odds of China retaliating against some U.S. farm products would rise if the WTO challenges come, some contacts believe. China currently purchases a lot of U.S. soybeans and is expected to continue buying U.S. pork.

US-India Poultry Trade Clash Continues

The India poultry trade dispute will move to WTO arbitration. The WTO ruled that the matter needs to go to an arbitration panel after India objected to a U.S. trade retaliation request during a July 19 WTO meeting.

The U.S. asked the dispute settlement body, following a 2015 WTO dispute victory, to allow $450 million in annual retaliatory trade measures against India until New Delhi complied with the WTO ruling.

The two countries agreed previously that India would modify its trade restrictions on U.S. poultry imports by June 19, but the U.S. said India had not brought its measures into conformity with WTO rules. India objected to the level of U.S. retaliation, and the measure was automatically referred to arbitration. India said it was “deeply disappointed” and argued that New Delhi finalized a new measure on July 8 that brought India into compliance with the WTO decision.

Indian officials said the measure permits U.S. imports of poultry and poultry products from areas that are free from avian influenza, according to international sanitary and phytosanitary standards. Since 2007, India has banned U.S. imports of poultry meat, eggs and live pigs to protect its citizens from the spread of avian influenza.

Last year, a WTO panel confirmed an earlier ruling that India's ban was not based on international scientific standards, was more trade restrictive than necessary and unfairly discriminated against US imports.

The Indian delegation July 19 asked the U.S. to suspend its retaliation to first determine whether New Delhi complied with the WTO ruling. India said it is common practice for members to enter into a “sequencing” agreement to ensure that a compliance investigation concludes before parties may seek retaliatory trade tariffs.

The U.S. delegation said it would discuss procedural approaches and other ways to ensure the efficient resolution of the dispute while at the same time protecting U.S. rights. The U.S. will also study the Indian measure and hold a bilateral discussion today to address any remaining concerns.

Meanwhile, the Indian gov’t has come under fire from its domestic poultry industry because the price of imported chicken is significantly lower than domestic chicken. The domestic industry might lose 20% to 25% of the market to U.S. poultry, according to some estimates.

Washington Insider: Brexit Costs

As both major British parties have are restructured following the Brexit vote. Global markets have calmed somewhat. Still, the New York Times noted on Wednesday that it was always clear that Britain’s divorce from the European Union would be painful and costly. “Now, though, nearly a month after the country’s ill-advised vote, the Times thinks, “it is becoming clear just how bad it will be.”

The editorial cites a number of learned sources, including the International Monetary Fund and the European Commission who have reported the “bad news.” The IMF says it now expects 1.7% growth for 2016, down from its April forecast of 1.9%. And it expects a drop to 1.3% for 2017, almost a full point below its earlier forecast of 2.2%. The chief economist of the fund, Maurice Obstfeld, said that growth could be much lower if negotiations between Britain and its European partners drag on or become contentious.

The European Commission is even more pessimistic. It thinks Britain’s economy could shrink 0.3% next year under its “severe” scenario and that the uncertainty caused by Brexit will slow growth in the rest of Europe. The IMF reduced its forecasts modestly for global growth in 2016 and 2017.

These are forecasts British and European leaders need to take “seriously,” the Times opines, as the nation negotiates how to remove Britain from the union and structure a new economic relationship. It cites experts who say “a disruptive breakup would be bad for everybody, leading to job losses and a spike in the prices in Britain of basic necessities like imported foods.

The Times also observes that the “pound has already fallen about 11 percent against the dollar and 9% against the euro since the referendum.” This means higher prices in Britain for imports of goods and services and has sharply reduced value of British wealth evaluated in it currency.

The Times then goes on to lament the fact that “British politicians,” especially those who campaigned the loudest for Brexit, did not prepare for this eventuality. “That means that it is now up to Prime Minister Theresa May, who took office just last week to develop a strategy to minimize the economic damage. The Norway model might be a good one, it says.” That country is not a member of the union but has access to the European common market and abides by its regulations including free movement of Europeans across its borders.

A key problem with the Norway model, experts suggest, is that it does not deal with some of the major reasons for the Brexit vote—for example, the EU’s free movement requirement likely will continue to fester politically.

In the end, the Times concludes, “What is clear is that Britain now finds itself in a no-win position.”

That seems to fall into the category of not very helpful advice—and, even suggests that there is very little real help to be offered. The first thing, of course, is to sort out the likely costs of reversing Britain’s long commitment to global trade and its recent move toward isolationism. Then, it must make real peace with the EU somehow, especially if it is to protect its current position as a global financial capital.

In addition, Britain will need to deal with its recent addiction to economic nonsense about its economic, social and political policies. Not only were many voters surprised by the Brexit vote, but they appeared to believe the frequent assertions that it would bring major benefits and few costs. Now that images of consequences of Brexit are taking on increasingly sharp edges--and the paths open to EU markets becoming increasingly uncertain--many aspects of Britain’s future will depend on introducing real clarity to this debate sooner rather than later.

That is true of all such debates, of course, including the one now underway in the United States which has taken a strangely anti-trade turn in recent months. Since trade is vital for U.S. agriculture, that debate will be especially important and should be watched closely as it proceeds, Washington Insider believes.

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