Washington Insider - Monday

Trump's Tariff Talk

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

Grassley Signals 'Emerging Solution' On Biofuels via White House Meeting

A waiver of the Reid Vapor Pressure (RVP) for E15 to allow sales of the higher ethanol blend year-round is emerging as one of the potential solutions after three White House meetings this week on biofuels. Sen. Chuck Grassley, R-Iowa, tweeted after a session Thursday that year-round sales of E15 would drive prices for Renewable Identification Numbers (RINs) down, calling it a "win-win" for biofuels. Reuters reported that Trump told attendees at the Thursday session he backs a two-year cap on RIN prices but also raising ethanol blend levels. Sen. Ted Cruz, R-Texas, and Pat Toomey, R-Pa., were also at the meeting and indicated Trump sees the important of lower RIN costs but also expanding the market for ethanol.

RIN prices fell on reports of Trump backing a cap on the credits refiners have to purchase to prove compliance with the Renewable Fuel Standard if they do not blend enough ethanol into the gasoline supply. But POET CEO Jeff Broin indicated in a statement that "nothing new" was discussed at the meeting and that he would seek to protect the interests of "this industry, farmers and consumers." Trump called for another meeting to be held next week and Trump reportedly wants to see studies regarding the impacts of various options.

CCC Interest Rates Continue To Move Higher

Commodity loans disbursed during March will carry a 2.875% interest rate, according to USDA's Commodity Credit Corporation (CCC), the highest since October 2008 when the rate was 3.0%. The rate reflects the amount CCC is charged by the U.S. Treasury plus 100 basis points – or 1%.

Borrowing costs have been rising in recent months and with the U.S. Federal Reserve expected to increase short-term interest rates at least three times in 2018, those borrowing costs are expected to increase further on the commodity loan producers can obtain from the government and on loans from commercial lenders.

Washington Insider: Trump's Tariff Talk

Well, almost everybody is talking about the administration’s plans to introduce big, new tariffs. For example, the New York Times says that after making good on tax cuts and regulatory rollbacks that business leaders wanted, President Trump has turned to a part of his economic agenda that “many of them fear: tariffs.”

In fact, some administration officials appear almost giddy at the prospect of shaking up the system. Secretary Wilbur Ross, for example, said over the weekend that the tariff impacts on production costs would be modest.

Now, across the economy, there is a growing worry that by imposing stiff and sweeping tariffs on steel and aluminum and other items, the administration will ignite a trade war with other countries that could damage American exporters and raise costs for manufacturers that rely on global supply chains. This could not only “crimp” economic growth, but undermine positive impacts from the administration’s deregulation push and its signature $1.5 trillion tax cut.”

The odds of such an outcome now appear to be rising, prompting congressional Republicans to push Mr. Trump in public and in private to reconsider. “If the president goes through with this, it will kill American jobs — that’s what every trade war ultimately does,” Senator Ben Sasse, R-Neb., said on Friday. “So much losing.”

So far, Mr. Trump is not having any of that criticism, saying on Twitter recently that “trade wars are good, and easy to win.” Others argued that even the prospect of a trade war could hurt the economic expansion underway. The NYT says that’s because any uncertainty can prompt companies to curtail investment or hold off on hiring.

The Times also says that, “any actions threaten the global supply chains on which the American economy is heavily dependent. The number of workers who will lose out if countries are cut off from America far exceeds the number who stand to gain from the pending tariffs.”

“Industries that buy steel and aluminum, not to mention agricultural exporters, employ many times more people than the industries that the president wants to protect,” said Peter A. Petri, an economist and trade expert at Brandeis University’s International Business School. “Business investment depends on predictable policy, and relentless chaos takes its toll even if cooler heads short circuit some initial proposals.

NYT notes that in the simplest possible way of thinking of the potential cost of the new tariffs — just applying the 25% tax on steel and 10% tax on aluminum the president plans — we’re talking about only $9 billion.

More complex modeling would be needed to produce a reliable estimate of the overall cost of the tariffs, but the point is about the order of magnitude. These are not numbers that are enough to cause much damage to a $20 trillion economy, or to justify the $460 billion decline in the value of the stock market that took place between Thursday’s open and Friday midday.

This market drop makes more sense if you look at the president’s announcement not in terms of what it means for imported steel and aluminum, but rather what it says about the president himself, the Times argues.

In April, following leaks indicating that Trump planned to withdraw the United States from NAFTA, there was an onslaught of phone calls to the White House from CEOs and international leaders. And pro-trade advisers worked to get the president’s ear. He backed off, saying the next day that he would give NAFTA renegotiation a try.

Lately, there has even been talk that the administration might reverse course and move to rejoin the Trans-Pacific Partnership, the trade deal that the United States pulled out of at the start of the Trump administration.

Then came Thursday.

Trump not only overruled his more pro-trade advisers, but he also did so in an impromptu way, seemingly setting policy before the details had been worked out and without buy-in from across his own administration.

Moreover, rather than try to tamp down fears of an all-out trade war, President Trump appeared to relish the idea. And, if the president is so gung-ho about a trade war and is now willing to ignore his more cautious advisers, what comes next might be a cycle of increasingly harsh tariffs that could slam the brakes on global growth, the Times said.

For example, by provoking responses from Canada and Mexico, the tariffs could derail the current NAFTA renegotiation and perhaps undercut WTO. The administration, which has marginalized the organization, could choose to ignore new rulings, a step that would stir chaos in the global trading regime.

Analysts at Moody Analytics told the Times that a NAFTA breakdown would cost the United States 1.8 million jobs. He calculates that a full global trade war, while far less likely, would carry much higher risks, including nearly four million lost American jobs.

On Thursday, the conservative Wall Street Journal editorial board called the tariffs the “biggest policy blunder of his presidency.” The top two Republicans in Congress — the Senate majority leader, Mitch McConnell, and the House speaker, Paul Ryan — were imploring Trump privately to reconsider.

So, we will see what happens, and what the economic impacts are. The recent announcements have widened the deep split within the Republican Party and certainly could raise new threats for agriculture well beyond NAFTA—with the potential to both damage significant ag markets. The coming trade fight is one producers should watch closely as it unfolds, Washington Insider believes.

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