Washington Insider-- Tuesday

The Trade Concept

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

CBO Projects Fiscal 2016 Deficit at $590 Billion

The nonpartisan Congressional Budget Office (CBO) projects a deficit of $590 billion for Fiscal 2016, a 10.5% hike up from the $534 billion projection in March and up by more than a third over the $439.1 billion shortfall in 2015 and the first time the deficit would increase as a share of the economy since 2009.

CBO, the official scorekeeper of all budget matters, said lower-than-expected revenues drove the deficit higher. CBO did not provide further details on projections for the full fiscal year, which ends Sept. 30, but the agency said it would publish more detailed estimates later this month. In one troubling sign, however, the report said corporate income taxes for the first 10 months of the current fiscal year were 14% lower than they were in the same period last year.

The revised deficit numbers bring the CBO forecast closer to the $600 billion estimate from the White House Office of Management and Budget, issued last month. The two forecasts now stand just $10 billion apart, after the White House revised its estimate downward by $16 billion since its February budget release.

The deficit fell to a recent low of $438 billion in Fiscal 2015, after hitting a peak of $1.4 trillion in Fiscal 2009 at the height of the 2007-09 recession. Unless current laws are changed, the deficit is on course to resume climbing, reaching $1 trillion again by 2022, mostly because of soaring health care and Social Security costs, according to the CBO.

As the deficit grows, look for spending battles to get uglier as the election season showdown on appropriations nears.

Quarantined Wheat in Washington State Tests Negative for GMOs: USDA

No genetically modified (GMO) wheat was found in a Washington state farm's crop tested after an unapproved biotech variety was discovered growing there in June, USDA said on Friday. The quarantined grain will be allowed to enter the marketplace, USDA added.

Background. USDA's Animal and Plant Health Inspection Service has launched an investigation into how an unapproved GMO wheat variety developed by Monsanto Co. but never approved by federal regulators came to be growing in Washington. It was the third such finding since 2013. There are no commercially approved varieties of GMO wheat. The discovery, announced last week, prompted importers such as Japan and South Korea to suspend purchases of some US wheat.

Meanwhile, South Korea's Ministry of Food and Drug Safety said on Friday that it has not found any GMO wheat in tests on imported wheat and flour from Washington state after receiving testing supplies on Aug. 1. The fifth-largest buyer of U.S. wheat said it will continue testing incoming US wheat and reject loads containing any rogue wheat.

Washington Insider: The Trade Concept

One concern shared by many observers of this year's election debates is the extent to which many of the "facts" offered are simply not true. Much of the press has been obsessed with the horserace aspect of the debates but some are beginning to suggest that the lack of "objectivity" is a cause for concern, as well. One of the key concerns is that both sides are to blame.

Robert J. Samuelson, who writes on economics for the Washington Post, commented this week that, in the public imagination, no industry better symbolizes the "downfall" of U.S. manufacturing than steel. Since 1973, steel employment has dropped 76%, and the culprit seems clear—trade. Manufacturing as a whole lost about 5 million jobs from 2000 to 2015. "No wonder both Hillary Clinton and Donald Trump have jumped on the anti-globalization bandwagon," he says.

The problem, Samuelson says, is that the popular indictment is wildly misleading. He attempts to work through several of the layers of nuance that affect the issue.

Though trade has helped reshape U.S. manufacturing, it is only one force of many, he thinks. "We can blame manufacturing's problems on foreigners and disloyal American multinational firms," he suggests. If they behaved better, the U.S. economy would improve." However, this is "hardly the whole truth."

Despite plummeting industry employment, U.S. steel production is roughly where it's been for decades, between 90 million and 120 million tons a year. Imports generally account for 20% to 25% of domestic consumption. While dozens of steel plants have closed, dozens of more efficient plants have opened. Productivity has increased dramatically.

The industry's largest change of the past half-century include the rise of so-called "mini-mills" which do not start from iron ore, limestone and coal as traditional plants do. Their raw material is scrap steel, which is melted in electric arc furnaces. This approach has a big cost advantage over the older, vertically integrated mills, Samuelson says and from 1970 to 2015, their share of total U.S. steel production went from 15% to 63%.

He cites a number of economists who have concluded that the spread of mini-mills explained most of the industry's job loss. "If there were no foreign trade in steel, most of those jobs would have vanished anyway," Samuelson says. The least efficient vertically integrated plants were forced to close. "The decisive competition has been domestic, not foreign."

The confusing fact, he says, is the current global steel glut that comes mainly from China's overinvestment in its industry expansion "on the unrealistic assumption of continued strong economic growth." Since 2005, global steelmaking capacity has increased sharply and China now represents 50% of world production, up from 31% in 2005.

The consequences have been predictable, Samuelson says with prices down sharply as China and others attempt to export some of their surplus capacity. He thinks that what is needed is a global agreement that reduces the worst concentrations of excess capacity and helps control government interventions, starting with China.

And, we shouldn't lose sight of the larger picture, he says. The standard story about the fate of U.S. manufacturing is incomplete because it blames the loss of U.S. factory jobs mainly on foreign imports and the shift of American firms abroad. In fact, the larger cause is the "rapid productivity growth," according to Harvard University economist Robert Lawrence. "That means that fewer workers can produce the same output."

This is a good thing, even if it initially involves fewer jobs, because higher productivity promotes higher living standards. From 1990 through 2014, the only high-income countries with faster growth [were] a handful of smaller economies, including Finland, Israel and Sweden.

Samuelson calls the current narrative on globalization "largely false." All dynamic economies experience constant disruptions from changing technologies, shifting consumer tastes and inevitable business cycles, he says. Some come from abroad but for the U.S., most originate at home. "What matters is the economy's ability to offset the losses with new jobs and opportunities."

The key problem with "false narratives," of course, is the likelihood that they will lead to ineffective policies. For example, China's overinvestment in steel should face negotiated rules on government intervention—the very thing trade agreements like the Trans Pacific Partnership hope to develop at some future point, rather than the isolation now being proposed by trade critics.

Certainly, trade is especially important to agriculture and this intense national debate is crucial to continued growth of large developing markets which need the products of U.S. technology. This is a debate producers should watch closely as it progresses, Washington Insider believes.

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