Washington Insider -- Tuesday

Trade Fight's Danger Signs

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

USDA Trims Outlook On Hogs Due To Mexico Tariffs

Mexico is the largest importer of U.S. pork by volume and has started talking with the European Union on bringing in supplies from the bloc. USDA said in its Livestock, Dairy & Poultry Outlook report that hog prices will average 19% lower in the third quarter and 17% lower in the fourth quarter compared to year-ago levels, in part due to adjustments to Mexican tariffs.

"Although hog prices remained below a year earlier in May and early June, with May packer margins trailing those of a year ago by almost 29%, slower processor demand for hogs, soft domestic demand for pork, and price adjustments to Mexican tariffs will weigh on hog prices in the second half of 2018," USDA said.

Senate Easily Approves Start of Farm Bill Debate

The Senate Monday evening voted 89-3 to limit debate on proceeding to the House-passed farm bill, which will serve as the legislative vehicle for the Senate 2018 farm bill.

The five-year bill passed the House on a 213-211 vote June 21. The Senate bill cleared the ag panel June 13 on a 20-1 vote, a clear and now unusual bipartisan measure.

The Congressional Budget Office (CBO) estimates that the Senate bill would cost $428 billion in the first five years and $867 billion over CBO’s 10-year scoring window of fiscal 2019 through 2028. The House farm bill would cost about the same for both time periods.


Washington Insider: Trade Fight’s Danger Signs

The pushback against trade policies that threaten healthy overseas markets appears to be growing, although the Congress appears to have backed away from a direct confrontation with the administration. However, Bloomberg is reporting this week that the main statistic used to support the growing trade fight is both partial and limited, and that the administration’s focus on trade in goods ignores recent totals in trade benefits.”

Bloomberg says that while the administration “has called the surplus the European Union generates trading goods with the U.S. “unfair” and has used it to stir up conflict with the 28-nation bloc, when trade in services and other payments such as dividends and remittances, the U.S. has a 12 billion-euro ($14 billion) surplus.

Perhaps equally significantly, Bloomberg also says that the escalating trade battle between the U.S. and the rest of the world “is raising the risk of a meaningful slowing in an otherwise vibrant American economy.”

While the tariffs already in place and set to be implemented will barely dent U.S. growth, economists say, “the panoply of additional measures being considered would take a perceptible bite out of gross domestic product if they go ahead.”

“It’s going to be more noticeably painful,” said Peter Hooper, chief economist at Deutsche Bank AG in New York told Bloomberg.

Hooper, who expects the economy to expand 3% this year, said the steps already taken or in the works would clip just 0.1 percentage point off GDP growth. “However, when the administration threats to slap a 10% tariff on an additional $200 billion of Chinese imports and a 20% levy on car shipments from the European Union, then the impact grows to 0.3 point to 0.4 point,” he said. And the fallout could even be greater if heightened tensions begin to infect consumer, business and investor confidence.

“It really dings the economy but certainly doesn’t undermine it,” said Mark Zandi, chief economist at Moody’s Analytics Inc., who agreed with Hooper’s estimate of a roughly 0.3 percentage point impact from the accumulated trade actions.

Even though markets have taken the contretemps largely in stride, U.S. equity futures followed Asian shares lower recently after an escalation of tensions. As a result, central bankers are taking notice, Bloomberg says. Federal Reserve Chairman Jerome Powell said on June 20 that officials are beginning to hear that companies are postponing investment and hiring due to uncertainty about what comes next.

“Changes in trade policy could cause us to have to question the outlook,” he said during a panel discussion at a European Central Bank conference in Portugal.

The increasing tariff strife poses particular problems for the central bank because it’s likely to both raise inflation and depress growth.

Still, administration officials have played down expected economic impacts of the trade battle. “Anyone who thinks the economy is being wrecked doesn’t know what they’re talking about,” Commerce Secretary Wilbur Ross told Bloomberg recently.

The worsening trade friction comes at a time when the U.S. economy is, in the words of Powell, “performing very well,” as tax cuts power both consumer and company spending that could be the strongest in almost four years.

The tariffs though could have an impact on activity going forward by raising costs for households and businesses. “It’s starting to chip away at the tax cut,” said Nariman Behravesh, chief economist at IHS Markit. “If they keep down this path, all the positive effects of the tax cut will be gone.”

“The U.S. can afford a trade war relatively more than Europe, China” and other countries because its economy is more domestically driven, said Christian Keller, head of economic research for Barclays Plc.

Exports amounted to almost 12% of U.S. GDP in 2016, compared with close to 20% for China and 43% for the EU, World Bank data show.

While China has policy levers it can pull to try to offset the impact from trade struggles, Europe is more vulnerable, Zandi said. The ECB’s benchmark interest rate is already at zero.

Of course, Europe’s troubles could redound back on the U.S. if the euro weakens against the dollar, as seems likely, he said.

It could be a “tipping point” for the global economy if the administration goes ahead with tariffs on $200 billion more of Chinese goods and a 25% tax on all car imports, said Ellen Zentner, chief U.S. economist for Morgan Stanley.

So, we will see. Especially difficult to explain will be negative impacts on important ag markets that have recently been growing, in spite of the Commerce Secretary’s optimism. Producers of a number of commodities likely are more worried about those specific markets than about impacts on overall performance of the economy—trends that producers should watch closely as policy trends materialize, Washington Insider believes.

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