Washington Insider-Wednesday

The New Administration, Mexico and China

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

Trump Expected to Soften Trade Policy Tone

President-elect Donald Trump has vowed to get tougher with trading partners, particularly China and Mexico. He campaigned against the Trans-Pacific Partnership (TPP), which he called a bad deal. It is unclear if he will seek concessions from the nations that are part of the pact.

Trump also promised to renegotiate the North American Free Trade Agreement (NAFTA), or get out of it completely, in his first 100 days in office. He has threatened to impose tariffs on countries to get concessions in trade deals.

Regarding NAFTA, leaders from both Canada and Mexico in recent weeks have said they would discuss ways to "modernize" the agreement to bring it up to date from the original pact agreed to 22 years ago. Trade policy contacts see this as the eventual conclusion of keeping NAFTA in place — with changes, perhaps major ones, ahead.

As for tariffs on goods from China and Mexico, experts tell us they would be deemed unilateral violations of international trade agreements. While that does not rule out a President Trump taking such action, talks with both countries are the more likely route, with clarifications and perhaps trade memorandum of understandings the possible result.

Malaysia to Defer Implementation Of Higher Biodiesel Mandate

Malaysia will defer implementation of its higher biodiesel mandate to a later date, without specifying when, the country's Minister of Plantation Industries and Commodities Mah Siew Keong said in a statement.

Mah said after taking into consideration the difference between crude palm oil and diesel prices in the current volatile market, the implementation of the biodiesel mandate will be deferred to a later date. "Although significant effort has been put in for its implementation, the government is committed to ensure that there is no burden of extra cost to the Rakyat (people) at this time," the statement said.

The program would require a minimum bio content of 10 percent in biodiesel for the transport sector, and 7 percent for the industrial sector. Palm oil is the typical bio content for biodiesel and the higher mandate would have increased demand for the oil.

Malaysia has twice delayed the implementation of higher biodiesel mandates this year.

Washington Insider: The New Administration, Mexico and China

As is usually the case in the really early days of a new administration, the press is reading and re-reading tea leaves about "who" and "what" regarding each policy area. With regard to trade policy, Bloomberg is reporting that the news is worse for Mexico than it is for China.

While on the campaign trail, the president-elect threatened to impose a 35% tariff on some products imported from Mexico into the US, Bloomberg says. And, it also intends to renegotiate more favorable terms in the North American Free Trade Agreement (NAFTA), a free trade pact among the U.S., Canada and Mexico.

In recent days, Mexico's economic minister declined to speculate on whether the U.S. might follow through on imposing 35% tariffs on the country. "We can't anticipate anything because we'd be anticipating something that wouldn't suit anybody, which is a trade war," the minister, Ildefonso Guajardo, said. Yet Guajardo also said that Mexico would be willing to discuss NAFTA with the U.S. president and explain the pact's strategic importance to him.

The administration's tone seems far more conciliatory toward China. Trump has threatened to label the country a currency manipulator in his first day in his office and impose a 45 percent tariff on products imported from the country. Many in the press are still reacting to that rhetoric, but there also is some pushback. In an editorial on Sunday, a state-run Chinese newspaper argued that "Making things difficult for China politically will do [Trump] no good."

The editorial vowed tit-for-tat countermeasures to the broad range of American businesses that count China as one of their largest export markets. "A batch of Boeing orders will be replaced by Airbus," the state-run Global Times said. "U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S."

It makes sense that China might take a tougher stand against Trump than Mexico because it is less dependent on the U.S. market. The U.S. accounts 73% of Mexico's exports and 51% of its imports in 2014, while Mexico accounted for only about 13% of U.S. exports and imports.

For China, in comparison, the U.S. accounted for 18% of the country's exports and 8.8% of its imports in 2014. China accounted for 9.2% of U.S. exports and 20% of its total imports.

Even the smallest of these percentages represent a massive volume of trade. But while a dislocation from the U.S. export market would be damaging to the Chinese economy, it could be catastrophic for Mexico.

"It's a question of your alternatives to negotiating," said Daniel Shapiro, director of the Harvard International Negotiation program and author of "Negotiating the Non-Negotiable."

"For Mexico, they arguably can't walk away without doing substantial damage to their economy... they are in a less powerful position than the U.S.," he said.

"With China, their alternative to negotiating with the US... is maybe investing in other European countries or elsewhere. It's still a big deal, but they are more powerful because they are less dependent on the U.S. in that negotiation."

Years ago, it might have seemed unlikely that the U.S. would follow through with any trade policies that could trigger a trade war. But the strength of Trump's anti-trade mandate, Britain's surprise exit from the European Union and the rise of far-right parties around the world have made even the intellectual elite question some of these pre-existing assumptions.

At the same time, economists agree that any trade wars the U.S. starts or stumbles into could be devastating to Americans as well. About $118 billion of cars and auto parts moved tariff-free between the U.S. and Mexico last year, according to the Commerce Department. If a tariff were imposed, it would take years for companies to rebuild their global supply chains. In the meantime, U.S. consumers would pay significantly higher prices for daily purchases.

Shapiro said that while U.S. trade measures against Mexico would hurt the Mexican economy, "the opposite is true too. If the U.S. does not negotiate an agreement with Mexico, what is our best alternative? Are there enough factories readily available and suppliers to make up the lost supplies?"

For the most part, these trade analyses and nuances may well be far from compelling to the new administration, which is busy finding potential appointees for the enormous number of positions it must fill in order to operate. Still, trade is well known as a "two way street," with obligations negotiated over several decades of negotiations and that calculus likely still holds.

The administration thinks better deals can be negotiated, and that likely is so, but it may be surprisingly difficult—and, include tricky pitfalls. Even before the world knows who will be in charge of the Trade Policy Module, it is hoped that sharp pencils and heavy duty green eyeshades are in plentiful supply, and carefully used—a process that producers should watch very, very carefully as it proceeds, Washington Insider believes.

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