Washington Insider - Thursday

US Trade Deficit Problem

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

Perdue Predicts NAFTA Deal by December 2018

USDA Secretary Sonny Perdue predicted that the U.S., Canada and Mexico will reach a deal to revise the North American Free Trade Agreement (NAFTA) by December, especially once the July 1 Mexican presidential elections are over.

"Once we get Mexican politics out of the way, I think we’ll have a deal," Perdue told the House Agriculture Committee during a hearing on the rural economy. Perdue said he is "more hopeful" about the fate of NAFTA 2.0 than he has been in the past, in part because of how negotiations are going with Mexico. "We've probably seen more movement on Mexico’s side than with Canada," Perdue said. "But I believe we’ll get a better deal from both of them and preserve the benefits for all three countries."

Perdue Talks about China and US Sorghum at House Hearing

House Agriculture Chairman Mike Conaway, R-Texas, asked USDA Secretary Sonny Perdue at Tuesday's hearing on the rural economy about China’s decision over the weekend to launch an investigation into imports of U.S. sorghum.

"This is an example of how fragile the agricultural economy and commodity prices are to trade disruptions," Perdue said, noting how sorghum prices dropped immediately after the news broke that China had opened an anti-dumping and countervailing duty investigation. "We need to be careful as we take actions."

Washington Insider: US Trade Deficit Problem

One of the statistics the administration frequently cites is the balance of trade—or, the lack thereof, the New York Times reported this week. The Times says the U.S. trade deficit with China climbed to its highest level on record in 2017, a development that “could prompt the administration to seek “tougher trade actions in the coming months.”

The gap between Chinese goods imported to the United States and American goods exported to China rose to $375.2 billion last year, up from $347 billion the prior year, the Times said.

The overall United States trade deficit in goods and services with the world widened 12.1% to $566 billion last year, the largest gap since 2008.

Economists said the growing trade deficit stemmed largely from the strength of the United States economy, which helped American consumers afford more imported electronics, clothes and appliances. The declining value of the dollar last year, which makes American products cheaper to buy overseas, also helped to lift exports, but not enough to prevent the gap from widening.

The Trump administration has long promised to eliminate the trade gap, citing it as evidence of the decline of American manufacturing and a troubling reliance on foreign goods.

Basically, the deficit is the excess of imports over exports for goods and services. Amounts are rounded, in billions of dollars, seasonally adjusted.

In response to the government estimate, Wilbur Ross, the Commerce Secretary, said the administration would ultimately reduce the trade deficit by enforcing trade rules, renegotiating existing trade pacts and forming new ones. He pointed to the ongoing renegotiations of trade deals with Canada, Mexico and South Korea, as ways in which the United States would narrow the trade gap.

Back in 2016, Peter Navarro and Ross, then senior economic advisers to the Trump campaign, proposed that President Trump would eliminate the $500 billion United States trade deficit, generating enough tax revenue to largely offset the cost of the president’s tax plan. Navarro, now director of the White House National Trade Council, said that the administration’s trade plans would allow it to eliminate trade deficit “within a year or two.”

Despite the administration’s frequent promises to reduce the trade deficit, many economists believe that his trade policies will be largely powerless to reverse the trend, the Times said. That’s because the overall trade deficit is governed by macroeconomic factors, including the relative growth rates of countries, the value of their currencies, and their saving and investment rates. So, while changes in trade policy can shift imports and exports from one country to another, for example, reducing the American trade deficit with China while increasing its trade deficit with Thailand, they are unlikely to reduce the American trade deficit overall, the Times says.

In addition, the administration’s signature economic policy so far — the $1.5 trillion tax cut — is likely to widen the trade deficit in coming years by encouraging more investment in the United States, many economists say.

Bryan Riley, director of the Free Trade Initiative at the National Taxpayers Union, said that an increase in the trade deficit from the prior year “should not be viewed as a problem to be fixed, but as a predictable result of a growing economy that enables people to afford more imports.”

Eswar Prasad, a professor of trade policy at Cornell University, cautioned against Trump’s interpretation of the bilateral trade deficit as a scorecard for an economic relationship.

Prasad said that some persistent deficits, like the one that the United States runs with many countries including China, could be a sign of structural imbalances, like China’s historic tendency to undervalue its currency. But bilateral trade balances can increase for many reasons, both bad and good — for example, if wealthier American consumers want to buy more stuff — making it a problematic metric for measuring fair trade.

“The problem is that even if China were to provide greater access to its markets today, if the U.S. economy were to do well, and China were to slow its growth, the deficit might actually increase,” Prasad said. “It would certainly be problematic to view the size of that deficit as an indicator of whether trade is fair.”

So, the trade balance likely will continue to be both large and highly controversial—and possibly to increase risks for exporters who have developed substantial, valuable markets in foreign countries. How the current trade balance affects national policies remains to be seen, but producers already worried by administration threats against NAFTA should watch the current developments closely as the trade policy debate intensifies, Washington Insider believes.

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