Washington Insider -- Monday

Bearish Prospects for NAFTA

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

WTO Dispute Body Agrees To Investigate China TRQs for Rice, Wheat, Corn

A formal investigation into China's administration of its tariff rate quotas (TRQs) for wheat, rice and corn was launched today by the World Trade Organization's (WTO) Dispute Settlement Body (DSB) at the request of the U.S., according to a Geneva trade official.

The United States submitted its second request for a WTO dispute panel after its first request was blocked by China at a DSB meeting on August 31. Requests cannot be blocked a second time.

The U.S. alleges that China administers TRQs inconsistently with its commitments under China's 2001 accession agreement and the General Agreement on Tariffs and Trade (GATT).

Specifically, the U.S. said the TRQs are not administered in a transparent, fair or predictable basis and because China does not use clear procedures and requirements that would not prevent the filling of each TRQ.

RCEP Talks Stall As Rival TPP Reemerges

As negotiators seek to wrap up the 16-nation Regional Comprehensive Economic Partnership (RCEP) trade pact they are facing a new challenge with the resurgence of the rival Trans-Pacific Partnership (TPP) agreement.

When President Donald Trump withdrew the U.S. from TPP shortly after taking office, Asia Pacific nations turned their focus to RCEP. Now, the 11 remaining TPP members are making an effort to resurrect that deal, while progress has stalled on RCEP.

The goal of an agreement by end-year on RCEP, which includes China, India and Japan, but not the U.S., will not be reached, according to chief negotiator Iman Pambagyo. Still, a bigger concern for him is that some RCEP members may exit the deal to prioritize TPP, a pact that does not include China.

"Perhaps down the road, toward the end of the year, someone will say, 'That's enough for me. We're not joining at this point. We will join on some other date,'" Pambagyo said in an interview earlier this week. It is possible the pact could lose two to three members, he remarked. He did not specify which countries were at risk of leaving.

Washington Insider: Bearish Prospects for NAFTA

Most urban dailies are taking a look at NAFTA this week as the third Round of talks gets under way in Ottawa, Canada. For example, both the New York Times and Washington Post emphasized that President Trump "has spent months pummeling the North American Free Trade Agreement". He called the trade pact a "disaster" and insisted that it cost American jobs.

And, they all emphasized that that this Round will tackle "NAFTA's thorniest issues." The Post concluded that "it is not clear that the trading relationship will emerge intact.

The talks, which have centered on logistics and topics of agreement, are now heading into the gritty details of "proposals that could ultimately upend the pact and force any of the trading partners to walk away from the deal," the Times said.

The American government is prepared to come out swinging. Wilbur Ross, the secretary of commerce, wrote in an op-ed in The Washington Post on Thursday that NAFTA has provided too many advantages to workers and countries outside the North American pact and put American jobs at risk.

His comments were underscored by an accompanying Commerce Department report, released on Friday, which included data showing that fewer of the components and raw materials of goods traded under NAFTA have been made in the United States since 1995, a year after the pact went into effect. The report also said the share of content from trading partners outside NAFTA, including China, has risen sharply in imports into the United States from Mexico and Canada.

The Trump administration's report is expected to dominate NAFTA discussions over so-called rules of origin—rules that govern what share of a good must be produced in North America to qualify for NAFTA's zero tariffs, in many cases. The United States is expected to push for raising those limits and negotiators also appear poised to argue for a new requirement on how much of those need to be made in the United States.

For the administration, the ultimate goal of these policies is spurring American manufacturing and reducing the trade deficit.

John McLaren, an economist at the University of Virginia who has researched the effects of NAFTA, cautioned that changing the rules now could have unintended side effects if they disrupt the supply chains that industries have built up around the existing NAFTA rules. While McLaren has done research showing NAFTA contributed to slower wage growth among some workers, he said the system is so ingrained that changing it now could actually create worse outcomes for workers.

McLaren's research has shown that, in the towns and industries most affected by NAFTA, some blue-collar workers saw their wages grow more slowly than workers elsewhere between 1990 and 2000.

"But given the changed environment in the 20 years since, I do not see how those same workers would benefit now from paralyzing NAFTA through excessive rules of origin," McLaren said. "What Mr. Ross is suggesting sounds a bit more like 'strangling American manufacturing."

Canadian and Mexican negotiators have said that they would be opposed to any United States-specific content requirement. But this may be only one of several controversial issues on the table, as negotiators consider proposals over protecting intellectual property, raising labor standards and settling corporate disputes.

Alejandro Poire, dean of the School of Social Sciences and Government at Tecnologico de Monterrey in Mexico, said some of the negotiators around the table for NAFTA talks also worked together on the proposed Trans-Pacific Partnership, a 12-country trade deal negotiated during the Obama administration.

Mr. Trump withdrew from that pact, which he also criticized as a bad deal, on one of his first days in office. Many of the basic proposals to modernize NAFTA this time around are drawn from the agreements that the United States, Canada and Mexico forged as they negotiated the TPP.

Given that the same negotiators are hashing out many of the same points, the countries are so far basically in agreement, Poire said. But those areas of agreement "are about to run out. So one would expect increasing levels of controversy in the next few weeks," he said.

When that happens, negotiators will turn increasingly to the agenda of Trump and his advisers. The president has denounced the TPP and existing American trade policy and some of the administration's proposed policies represent a sharp turn.

That may put an untenable amount of pressure on the pact. If the three countries cannot come to an agreement, Trump has said repeatedly that he would be willing to walk out.

This kind of talk makes many ag groups very, very nervous. Occasional nods from negotiators including comments that they know about ag's concern that the talks first, "do no harm" to current markets. Still, at the current time, reviews of NAFTA and what's expected frequently seem to raise tensions among ag producers—and, certainly suggest that they should watch the talks closely as they continue, Washington Insider believes.

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