Washington Insider -- Monday

Trade Pacts and Strategy

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

US Ag Imports Continue on Record Pace:

U.S. agricultural exports in August totaled $10.98 billion against imports of $10.36 billion for a monthly trade surplus of $619 million. The value of imports fell slightly more than the fall in the value of exports, resulting in the trade surplus edging up by $17 million compared with July.

The monthly results also confirmed the record pace of U.S. ag imports continues. Imports have never been valued at $10 billion or more every month of the Fiscal Year (FY) before, with the next-best showing in FY 2017 when imports crested $10 billion four months, including three consecutive months over the March-May period. Not only have agricultural imports been at $10 billion or more so far in FY 2018, they have bested $11 billion four months.

The export total of August of $10.98 billion was the lowest mark of FY 2018, a year which included two months of $13.2 billion or more in exports – October and November.

The U.S. ag trade surplus has been under $1 billion six months in FY 2018, but so far has not registered a deficit. The last time the ag trade surplus was under $1 billion for six months was in FY 2015. The trade surplus was below $1 billion five months in each of FY 2016 and 2017, including registering a trade deficit one month in each of those two fiscal years.

Canadian Dairy Farmers Air Concerns on USMCA with Trudeau

Canadian dairy producers met with Canadian Prime Minister Justin Trudeau last week in Montreal and expressed concern about provisions in the U.S., Mexico, Canada Agreement (USMCA) that grants the U.S. increased access to the Canadian dairy market.

Comments from officials after the session indicate they remain concerned about the potential impacts to their industry even as the Canadian government pledged to compensate farmers for their losses.

"The absence of details on measures to mitigate the impact of the concessions made within the USMCA, as well as the absence of a vision for the future of our industry at this time, cannot appease the concerns of the dairy farmers," said Pierre Lampron, president of Dairy Farmers of Canada. In remarks after the session, Trudeau said, "They told me they were worried. They told me they felt they have continued to give through a number of trade deals we have signed and they are right. Dairy farmers across the country have faced challenges with those trade deals."

Trudeau said he acknowledged their concerns and reiterated the government would "work with them."

Washington Insider: Trade Pacts and Strategy

Well, the recent agreement on the modified NAFTA deal has lowered the political temperature among trading partners in North America somewhat, pundits are struggling to see what it might mean. For example, the New York Times in its Upshot section this week says that the administration strategy is coming into focus – but that “skeptics remain.”

The article goes on to explain that the new focus suggests that the administration has been beating up on traditional allies, including Canada, Mexico, the European Union, Japan and South Korea “to extract moderate concessions favorable to American interests.” The Times cites the South Korean deal and the recent NAFTA agreement as examples.

However, the Times also thinks this process supports the ultimate goal which is to reset the economic relationship between China and the rest of the world.

And while that may take time and cause pain the main idea is it’s a multistep process to force China to improve trade terms with American companies. It also is intended to bolster the United States in a geopolitical rivalry with China that is becoming more tense, as Vice President Mike Pence articulated last week.

One telling piece of evidence for this strategy is a provision in the new North American deal that will make it more difficult for Mexico or Canada to deal with a “nonmarket” economy like China without risking their favored access to the huge U.S. market.

Larry Kudlow, the White House economic adviser, outlined this concept at the Economic Club of Washington last Thursday. China is the target “first and foremost,” he said.

“We are talking to the European Union again, we are talking to Japan again, and we are moving to what I have characterized as a trade coalition of the willing to confront China,” Kudlow said.

The Times also says this is a change from earlier in the year. At that point, from the outside at least, the administration seemed to be changing its approach by the week and sometimes by the day. “It has often seemed that there has been a series of improvised moves, with different senior officials favoring different approaches,” it said.

Now, with the new North American deal, it’s become easier to see how the different elements of Trump trade fit together. The “nonmarket” provision seems devised to give the United States veto power over any deal Canada or Mexico might seek with China.

Still, there are skeptics. Just because there is a more coherent strategy in the administration’s stance toward global trade than in the recent past doesn’t mean it will work, the Times said.

“I do think we can see a strategy, but that doesn’t mean it’s a good strategy,” said Mary Lovely, a professor at Syracuse University and a fellow at the Peterson Institute for International Economics. “They’re going to use these bilateral deals to strong-arm countries into lining up behind the U.S. on China. But I don’t know what the endgame is.”

Some items on the Trump administration’s list of demands in negotiations with the Chinese seem unlikely to be met, as they would compel China to abandon its entire strategy to modernize its economy, the Times said.

There’s a risk that even if the effort to isolate China succeeds, the result might be simply a bifurcated world trade system in which there is one orbit of countries with close ties to the United States, and another tied to China, with minimal overlap.

One crucial question is whether the administration’s strategy of pummeling allies with attacks, threats and tariffs can yield not just revised trade agreements, but also the trust needed to undertake a concerted campaign against China.

That could happen if the scars and bruises from negotiations this year linger, compounded by the administration’s disinclination to engage in multilateral negotiations with many parties at once.

The new North American deal, a case study in such unwillingness, shares many elements with the Trans-Pacific Partnership (TPP), which was abandoned by the Trump administration in early 2017. That whole agreement was intended as a strategic counterweight to Chinese economic power in the Pacific Rim.

But rather than reopen the TPP, the administration chose the path of separate deals with each country – thinking that it will have greater negotiating leverage that way, as was the case with the new USMCA.

The risk of that approach is that when the United States hammers out each deal separately, it may be hard to then turn around and create any kind of unified pressure against China.

“To go into battle, together, you need to know that a partner is reliable, that if they tell you something, they’ll stick to it,” said Phil Levy, a senior fellow at the Chicago Council on Global Affairs. “This administration has been anything but reliable on trade policy.”

It now is clear that the administration isn’t just looking to blow things up – this fight is “really a warm-up for a trade war with China.”

So, we will see. A key point is the amount of “pain” the fight with China implies and who is to bear that – and how long that might continue. Some ag groups have said they are willing to support the trade policy, but want the fight to be over “quickly,” a hope that likely will be difficult to attain, Washington Insider believes.

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