Washington Insider - Tuesday

Agriculture Watching Steel-Aluminum Trade Situation

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

Agriculture Watching Steel-Aluminum Trade Situation

Ag market traders are closely watching whether President Donald Trump and his trade officials this week announce long-awaited trade policy moves against China and others. Bloomberg on Friday published an article, "Trump Favors Commerce's Harshest Steel and Aluminum Tariffs, Sources Say" that noted "Trump has said he wants to slap a global tariff of 24% on steel imports, the most severe of three options presented to him in a report in January.

He's also considering as much as a 10% duty on all aluminum entering the U.S., which would be more than 2.5 percentage points higher than the harshest of Commerce's recommendations." Axios reports the Bloomberg account is "accurate, but with one small tweak: Sources [say] the president has told confidants he actually wants a 25% global tariff on steel because it's a round number and sounds better." An investigation into Chinese trade and business practices by U.S. Trade Representative Robert Lighthizer could also trigger a reaction from Beijing.

USDA May Have Some Announcements on US-China Trade This Week

The Commodity Classic is on this week, and the corn-soybean gathering could be the format for USDA to roll out details of its plans on U.S. soybean shipments to China.

Recall that on Jan. 1, new rules went into effect on foreign matter content in those shipments and USDA said it would be developing a plan to put in place throughout the U.S. soybean system to meet those requirements.

Washington Insider: Infrastructure Program's Impacts

There is a bitter fight underway in Washington now on infrastructure, and what the administration program would do and what it would actually accomplish. The concept is complicated, and would rely on both public and private funding.

This week, the Washington Post is charging what others also have claimed that the President is overselling the financial impact of his plan by a large amount.

When the White House unveiled its program it claimed a $1.5 trillion impact through a $200 billion federal investment, the Post said. The White House said the other $1.3 trillion would come from new state, local and private spending "unleashed by its spending plan."

Now, people are hard at work checking on the details. For example, the Penn Wharton Budget Model team found that the new federal investment would lead at most to an additional $30 billion in state, local and private spending, or about 2% of the amount envisioned by the White House.

"We really tried to be generous here," said Kent Smetters, faculty director of the Penn Wharton Budget Model. "But what the literature says is that states will figure out how to qualify for these grants without changing their existing behavior."

The White House did not welcome the Penn Wharton results, arguing that it failed to account for global investments in U.S. infrastructure.

"The author of the study clearly failed to read the President's framework," a White House spokeswoman charged, and they "got the policy flat wrong. Furthermore, they view the U.S. economy as closed and assume there is no growth with this investment, even though it is abundantly clear that the economy is booming under President Trump's pro-jobs, pro-growth agenda."

But both liberal and conservative economists have panned the White House's $1.5 trillion number as based on "rosy assumptions unlikely to come to fruition."

"I think it's basically spot-on," Michael Sargent, a policy analyst on infrastructure at the conservative Heritage Foundation, said of the Penn-Wharton study. "When you're looking at total spending, it seems about right."

Douglas Holtz-Eakin, who served as President George W. Bush's chief economist and remains influential in Republican circles, said he thought Penn-Wharton's $230 billion number was probably on the low side. But he agreed that the model was essentially fair and that the White House's $1.5 trillion number is way too high.

"I think they're making a fair point: How the states respond matters, and there's no guarantee that they'll pony up an additional $1.3 trillion," said Holtz-Eakin, who is president of the American Action Forum, a conservative advocacy organization. "The major problem with the plan is selling it as $1.5 trillion. If they sold it as, 'We can identify some really good infrastructure projects without giving a number,' everyone would look at it and say, 'Yeah, that makes sense.'"

The White House proposes that $100 billion would go to competitive projects, administered by the federal government, with awards of up to 20% of their costs. Under the proposal, states and localities would have to find new sources of revenue -- the White House has suggested property or sales taxes -- to qualify for the federal help. White House officials have also floated raising money for the plan by increasing tolls or other user fees.

The other $100 billion in the plan is split into $50 billion for rural infrastructure programs, $20 billion for "transformative" projects like tunnels for high-speed rails, and $30 billion to expand loan programs.

Still, banking on states to come up with the rest of the cash is also an imperfect solution, economists said. Part of the problem is that even if they produce the money to get the new federal grants, they are likely to offset that increase by reducing infrastructure spending elsewhere.

"I'm not surprised at the conclusion that very little additional spending will be called forth by this plan," said Douglas Elmendorf, who served as director of the Congressional Budget Office under President Barack Obama, adding that he had not personally reviewed the Penn-Wharton model. "State and local governments are constrained in their funds more than the federal government, because they generally have to balance their books on an annual basis."

Wharton's projections were based on more than two dozen academic studies on federal infrastructure spending, according to Smetters, the Wharton economist. One of the more optimistic academic papers was a 1974 study that found that states increase their total spending by $1.06 for every federal dollar received. But subsequent studies found much lower effects, Smetters said.

So, we will see. The administration is banking heavily on the overall impacts of the changes both to cut deficits and to generate investment. The infrastructure upgrades are very important for producers, who depend on efficient commodity movement to maintain competitiveness overseas. As a result, it is not so much who is right and who wrong in this fight, but whether we really can make over our facilities. This is a high-stakes battle for producers who should watch carefully as it proceeds, Washington Insider believes.

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