Washington Insider - Wednesday

US Threatens Allies with Reciprocal Tax

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

Canada's Freeland to Stop In US to Talk NAFTA, But Won't Meet With USTR Lighthizer

NAFTA will the focus of a one-day stop Wednesday in the U.S. by Canadian Foreign Minister Chrystia Freeland, according to a statement from the Canadian government. The visit is to "emphasize the importance of NAFTA and Canada-United States trade as an engine of growth and prosperity for the people of both countries."

While Freeland is expected to meet with Commerce Secretary Wilbur Ross and some U.S. lawmakers, indications are she will not have a session with U.S. Trade Representative Robert Lighthizer. Freeland's visit comes as the three countries involved in the NAFTA 2.0 talks are poised for the next round of negotiations in Mexico starting February 26.

US Queries Canada on Wine, Dairy at WTO

The U.S. asked Canada Feb. 12 to explain several regulatory changes regarding wine and dairy ahead of next week's World Trade Organization (WTO) agriculture review.

The questions may be relevant to the ongoing renegotiation of the North American Free Trade Agreement, where the U.S. and Canada remain at odds over various agricultural trade policies.

Regarding Canada's dairy policies, the U.S., Australia, and New Zealand asked Canada to explain its application of new milk classes that America previously criticized as import substitution policies that may violate WTO rules. Last year the Canadian dairy industry established a new “class 7” milk category to price ingredients like protein concentrates, skim milk, and whole milk powder used to make cheese and yogurt. The move followed Ontario's decision in 2016 to set up a “class 6” milk category that U.S. ranchers blame for reduced market prices for ultra-filtered milk and depressed demand for U.S. milk exports. U.S. trade officials in 2017 complained that Canada's national ingredient strategy harmed U.S. ranchers by incentivizing Canadian dairy producers to manufacture protein substances using Canadian milk.

Washington Insider: US Threatens Allies with Reciprocal Tax

Well, the president added a little flavor, if not much real detail, to the trade policy debate on Monday when he said that the United States would soon announce a “reciprocal tax” on countries that take advantage of the United States on trade, including trading partners he described as “so-called allies.”

He then characterized the process as follows, according to the Washington Post: “They’ll send in their product, and we won’t charge them anything,” the president said during a meeting with mayors and governors to discuss his proposal for rebuilding American infrastructure. “And we send them our product — same product as they’re sending us — and they’ll charge us 50% and 75% tax, and that’s very unfair.”

He apparently did not offer real examples of such transactions, but promised that more information would be forthcoming as soon as this week. Some White House officials quickly played down his comments, with one senior administration official saying that the proposal was “nothing formal right now.”

“The reciprocal tax is, simply, what you do to us, we’ll do to you,” the official said.

But when it comes to imposing reciprocal tariffs, trade analysts said the president’s hands were somewhat tied. The relatively low tariffs that the United States charges on many foreign goods were hammered out through decades of bargaining and bartering at the World Trade Organization.

Tariffs charged on individual products in various countries can vary widely. Most countries, especially wealthier ones like the United States, have relatively low tariffs on imports but may have negotiated at the WTO to protect some sensitive industries with a higher tariff. For example, the EU uses this approach a lot.

Depending on the case, the WTO may have the authority to overrule the administration should it enact new tariffs, an action that would then allow other countries to raise their own tariffs on American products as a punishment. To substantially raise its tariffs, the United States would most likely have to leave the WTO — a prospect that could damage the American economy given how globally integrated many companies have become.

The White House has already taken action to impose tariffs on washing machines and solar power modules and is currently considering several other trade actions that could raise tariffs on specific products or countries.

On Tuesday, the president met with lawmakers, including Ohio’s senators — Sherrod Brown, a Democrat, and Rob Portman, a Republican and former USTR under the Bush administration — to discuss an ongoing investigation into whether steel imports pose a national security threat by harming that industry in America. The administration began the investigation last spring, but the results were delayed amid pushback from economic and defense advisers. Senators Brown and Portman both support the tariffs.

The administration is also weighing actions to penalize China for what it says is infringement on American intellectual property. That could result in tariffs on high-tech Chinese products, or restrictions on some kinds of Chinese investment in the United States.

Trump sees these negotiations more darkly than many other do. “We cannot continue to be taken advantage of by other countries,” Trump said Monday. “We cannot continue to let people come into our country and rob us blind, and charge us tremendous tariffs and taxes, and we charge them nothing.”

He added that the United States was losing “vast amounts of money with China and Japan and South Korea and so many other countries.”

“They’ve gotten away with murder for 25 years,” he added. “But we’re going to be changing policy.”

A key problem with these proposed negotiations is that the administration is proposing to use much narrower criteria than do different analysts. Modern trade criteria seek to negotiate generally low tariffs to stimulate trade for both sides and balance these broadly, rather than narrowly—for example, the President’s example envisioned selling and buying the same product while suffering from uneven border measures. Modern trade deals are designed to allow each side to concentrate on what it produces most efficiently, thus maximizing efficiency for both trading partners.

Well, the current market experience using very narrow trade criteria seems to generate strong tensions and pushback and restrictions on market access. And, it seems that Washington is awash with lobby groups who are pressing hard for continues market access to growing overseas markets—amid concerns that the newly proposed criteria will restrict trade rather than open more markets even wider.

Producers expect that Secretary Perdue, with his newly strengthened trade policy and marketing staff will convince recalcitrant Trump officials, as well as trading partners, that U.S. products are among the world’s most competitive now and are “open for business” especially for the remaining months of the marketing year—a market boost producers need as they contemplate a new planting and growing season, Washington Inside believes.

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