Washington Insider --Wednesday

High Costs of Recovery in Puerto Rico

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

New Report Defends US Farm Programs

A comprehensive study by Brandon Willis, a lawyer, academic, and former administrator of USDA's Risk Management Agency (RMA), examined the implications of the Heritage Foundation recommendations to eliminate the farm bill's safety net, deeply cut and phase out crop insurance, make unilateral concessions in the context of the World Trade Organization (WTO), and repeal U.S. domestic trade laws.

Willis labels the report flawed because it "selectively uses data" to draw certain conclusions. Heritage said agricultural risk is no different than the risks of other businesses. But Willis countered that Heritage ignores data showing the "rate of return on agricultural assets exceeded the return on nonfarm assets in only one of 32 years,” and that the higher income volatility for agriculture is due to "weather-related risks and global markets distorted by high foreign subsidies, tariffs, and non-tariff trade barriers,” and that exit rates in agriculture are higher than other businesses even with a safety net in place.

China Delays Food Import Regulations for Two Years

China will hold off implementing new food import regulations until October 2019, the country has notified the WTO. "The General Administration of Quality Supervision, Inspection and Quarantine of China is currently studying the comments from relevant countries/regions," said the notification.

"According to the comments and application received, we hereby decide to provide a transitional period of two years: from 1 October 2017 to 30 September 2019." The U.S. and European Union (EU) had pushed for a delay in the regulations, maintaining it could negatively impacts billions of dollars in trade. The rules would have required all food imports to have health certificates, even for products that are considered low risk.

Washington Insider: High Costs of Recovery in Puerto Rico

Much of the press focus this week remains on Puerto Rico. Even before the storm hit and devastated much of the island’s infrastructure, it was in deep debt and struggling to repay. Now the focus is on other economic bottlenecks that keep costs high and income low across the island.

A detailed Op-Ed article in the New York Times by writer Nelson Denis says much of the problem is a 1920’s federal law that was designed to protect the U.S. shipbuilding industry and the shipbuilding labor force — the Jones Act.

Section 27 of this law says that only American ships can carry goods and passengers from one United States port to another. In addition, every ship used in that trade must be built, crewed and owned by American citizens.

Now, Denis asserts, the Jones Act has outlived its original intent and “is strangling the island’s economy.” He points to the law’s requirement that “any foreign registry vessel that enters Puerto Rico must pay punitive tariffs, fees and taxes, which are passed on to the Puerto Rican consumer.”

The foreign vessel has one other option, he says. “It can reroute to Jacksonville, Fla., where all the goods will be transferred to an American vessel, then shipped to Puerto Rico where — again — all the rerouting costs are passed through to the consumer.”

The impacts of this are severe, he argues and mean that “the price of goods from the United States mainland is at least double that in neighboring islands, including the U.S. Virgin Islands, which are not covered by the Jones Act. He observes that the cost of living in Puerto Rico is 13% higher than in 325 urban areas elsewhere in the United States, even though per capita income in Puerto Rico is about $18,000, close to half that of Mississippi, the poorest of all 50 states.

Denis cites a 2012 report by University of Puerto Rico economists who found that the Jones Act caused a $17 billion loss to the island’s economy from 1990 through 2010. Other studies have estimated the Act’s damage to Puerto Rico, Hawaii and Alaska to be $2.8 billion to $9.8 billion per year. Denis argues that “if the Jones Act did not exist, then neither would the public debt of Puerto Rico.”

Outright repeal of the law has already been backed by the Heritage Foundation, Cato Institute, Manhattan Institute and several major publications. The Federal Reserve Bank of New York found that the Jones Act hurts the Puerto Rican economy, and two Republicans, Senator John McCain, R-Ariz., and Representative Gary Palmer, R-Ala., have submitted bills to repeal or suspend it, a step the shipbuilding industry opposes, Denis says.

He sees suspending or repealing the law as crucial to the arduous rebuilding process ahead but which could include a modernized infrastructure and its own island-based shipping industry. This vision includes the island as a shipping hub between South America, the Caribbean and the rest of the world that generates thousands of jobs and opportunities for skilled laborers and small businesses. On an island with official unemployment over 10% and perhaps actually closer to 25%, this could energize their entire work force, he says.

While the administration has an army of workers helping the island recover from the storm, it does not seem much interested in temporarily setting aside federal restrictions on foreign ships' transportation of cargo, and recently said such a move “is not needed.” The government had waived those rules in Florida and Texas until last week.

On Capitol Hill, congressional leaders are discussing options and how to pay for it all. Puerto Rico was already struggling from steep financial and economic challenges well ahead of Maria. In fact, only last year, House Speaker Paul Ryan, R-Wis., and Democratic leader Nancy Pelosi, D-Calif., joined with President Barack Obama to help recession-ravaged Puerto Rico deal with an earlier debt crisis. After the recent storm, Puerto Ricans will be eligible to benefit from the same pots of federal emergency disaster aid and rebuilding funds available to residents in Texas and Florida.

Ryan said Monday that Congress will ensure the people of Puerto Rico "have what they need."

Well, changing rules that raise costs for Puerto Ricans does not appear to be high on most political priority lists, although it has been discussed in ag circles and elsewhere for years. However, it also has been intensely controversial.

However, that may be changing — a “border adjustment tax” that would have imposed significant duties on a broad range of U.S. imports was formerly a feature in many budding tax reform proposals, but now appears to have been abandoned.

If that implies a change of heart about such protections, it could also lead to new discussions about the nearly 100 year old Jones Act, along with potentially beneficial changes for ag operations in many U.S. regions and so such discussions should be watched closely by producers, Washington Insider believes.

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