Washington Insider -- Friday

What About Trade?

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

Mexico Is No Longer the Biggest Buyer of US Corn

Mexico is no longer the biggest buyer of corn from the U.S., a development that shows trade tensions are pushing American grain toward other markets while Mexico lines up new suppliers. Sales to Mexico through May were $1.04 billion, down 6.7% from a year earlier, USDA said Thursday in a monthly update, according to Bloomberg.

That contrasts with the 32% increase for the overall value of U.S. corn exports in the period. Japan boosted its purchases 53% to $1.19 billion to become the largest importer of American corn. In recent weeks, Mexican purchases were rebounding as the peso recovered. Of note, U.S. dairy-product exports to Mexico are up 23% year-over-year, according to USDA data.

US Commodity Groups Voice Concern Over US Absence in Recent Trade Deals

“We have been falling behind for too many years, and our farmers and exporters are finding themselves having to compete with higher tariffs in key markets," said Jaime Castaneda, senior vice president at the National Milk Producers Federation. "Japan is just the latest example of additional benefits that Australia and the EU will have over the U.S."

In the new EU-Japan trade accord, Japan committed to eliminate a 4.3% tariff on high-quality cuts of pork over a 10-year period. Over the same period, the duty on low-quality cuts would drop from $4.33 per kilogram to roughly $0.45 per kilogram.

That deal nearly matches what U.S. pork producers would have had under the Trans-Pacific Partnership (TPP) agreement that was pulled back by President Donald Trump. Regarding beef, the EU-Japan deal will eventually reduce Japan's import tariff on beef from 38.5% to 9%. Australia and Japan reached a deal in 2015 that now gives Australian beef a 12% tariff advantage, which is growing by the year.

Washington Insider: What About Trade?

Well, you never know. While the U.S. business and ag sectors continue to be deeply worried about future sales overseas, given the administration’s protectionist inclinations, so far, those predictions haven’t played out, Bloomberg is reporting this week. International trade is having its best performance in years as global growth enjoys its strongest “synchronized” upswing since 2010.

The signs of resilience cited are many. Ford Motor Co. last month canceled plans to build the Focus in Mexico and announced it would assemble the car in China instead, underscoring the ability of multinational firms to circumvent trade threats in a world of global supply chains. The model -- the first made-in-China vehicle for American buyers -- may become the Asian nation’s biggest automotive export ever to the U.S.

Tesla Inc. also has its eyes on China. The maker of electric cars is close to an agreement with the city of Shanghai to make vehicles in China for the first time, Bloomberg says.

At the European Central Bank, policy makers have expressed confidence the global recovery is increasingly supporting trade and euro-area exports, underpinning an upswing that has so far been largely driven by domestic forces. Bank of Canada Governor Stephen Poloz, who is expected to raise interest rates next week, has been citing the synchronized nature of global growth as a major positive for the recovery.

British manufacturers are enjoying what Bank of England Deputy Governor Ben Broadbent has called a “sweet spot,” in which firms still have access to the European Union’s single market until Brexit is complete while already enjoying a boost in competitiveness because of the weaker pound.

“At the beginning of the year, we thought there would be much greater trade-related risks,” said Helen Qiao, Bank of America Merrill Lynch’s chief economist for Greater China. “That has largely died down.”

Still, fears of a damaging trade spat between the world’s two biggest economies haven’t gone away. Fresh tensions are emerging between the U.S. and China. President Xi Jinping has complained of a negative turn in relations ahead of a planned meeting with Trump on the sidelines of a Group of 20 summit in Germany this week, and tensions over North Korea are continuing to grow.

For his part, President Donald Trump has repeatedly accused key trading partners, including China, of unfair trade. His administration is weighing whether to impose sweeping tariffs on steel imports, according to people familiar with the matter.

Criticism of globalization is fueled by the fact that while the trade rebound has inflated corporate profits, it hasn’t translated into substantial wage gains, said Stephen Roach, senior fellow at Yale University and former chairman of Morgan Stanley Asia. “That has created a significant backlash against trade, correctly or not.”

Politics aren’t the only factor that could upend the trade recovery, Bloomberg thinks. Weakening commodity and energy prices will hurt emerging economies in particular. So will the fading impact from a cycle of smartphone upgrades that has driven demand for Chinese purchases of electronics components.

Still, the report emphasizes a surprisingly robust current outlook. Trends in global trade remain strong, especially in Asia where exports are growing at the fastest pace since 2011. South Korean shipments abroad, a useful indicator of global demand, expanded almost 14 percent in June from a year earlier, an eighth straight month of gains.

And, several countries are forging ahead with trade deals. The Trans-Pacific Partnership, which the U.S. left in January, could still be resurrected by the end of this year even without America’s involvement, New Zealand Prime Minister Bill English said in a speech last month.

The European Union and Japan have overcome differences on farm and car exports to clear the way for a free-trade agreement between two partners that make up more than a quarter of the world’s economic output.

In addition, the “degree of connectivity between global supply chains, companies and customers” also makes it more unlikely political tensions will derail world growth, Bloomberg thinks.

“Our strong hunch is that international trade volumes will continue to expand,” Mickey Levy, chief U.S. and Asia economist at Berenberg Capital Markets wrote in a note. “Any new barriers that are actually erected as a consequence of the populist thrusts toward nationalism will get a lot of attention but have only minor macro impacts.”

A new report by the World Trade Organization found that trade restrictions in the Group of 20 economies have risen only at a moderate rate, despite the fears of rising protectionism.

All of which gives grounds for optimism, said Chetan Ahya, co-head of global economics and chief Asia economist at Morgan Stanley. “We are seeing a big pick up in trade numbers,” he said.

So, we will see. Germany and China are assuming leadership of the G-20 these days and the global geopolitical outlook could well be vulnerable to the current growing instability, especially in Asia, as the U.S. struggles with major new economic policy alternatives. How all of this settles out remains to be seen—fights producers should watch very closely as they proceed, Washington Insider believes.

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