Washington Insider -- Tuesday

US Policies Moving Toward Currency War

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

US Ag Imports Set New Record While FY 2018 Ag Exports Miss The Mark

The value of U.S. ag imports slipped to $9.46 billion in September, the first time under $10 billion so far in Fiscal Year (FY) 2018. That put total imports at a record $127.6 billion, above the $126.5 billion mark forecast by USDA which also would have been a new record.

Ag exports, meanwhile, eased to $10.3 billion in September and pushed the total for FY 2018 to $143.4 billion. That was below the level expected by USDA of $144.5 billion. The monthly trade surplus was $852 million for a total trade surplus in FY 2018 of $15.8 billion, under the $18-billion level expected by USDA.

The U.S. export total rose from FY 2017 when shipments totaled $140.2 billion against imports that hit a then-record $119.1 billion for a trade surplus of just over $21 billion.

The strong showing in U.S. ag imports kept a lid on the U.S. trade surplus several months during FY 2018, with six months where the trade gap failed to clear $1 billion. The trade surplus was under $1 billion in five months during FY 2017 and FY 2016 with FY 2015 the last time the trade surplus was under $1 billion six months.

USDA IG Latest to Wade Into ERS/NIFA Moving Plans

The controversy over the administration's plans to move two key USDA agencies has taken yet another turn, with an internal department official set to look at the situation.

USDA's inspector general (IG) will look at whether USDA followed proper steps in its plan to move the Economic Research Service (ERS) and the National Institute of Food and Agriculture (NIFA) outside of the Washington, D.C., area.

The review was requested by House Minority Whip Steny Hoyer, D-Md., and Delegate Eleanor Holmes Norton, D-D.C., to USDA IG Phyllis Fong.

In that initial letter, the lawmakers questioned whether "USDA has the legal and budget authority to execute the relocation and reorganization of these two important agencies without additional authority being provided by Congress."

While agreeing to review the matter the IG said it would focus on two issues raised by Hoyer and Norton. First, it will "determine USDA’s legal and budgetary authority to execute a) the realignment of the Economic Research Service (ERS) under the Office of the Chief Economist and b) the relocation of ERS and National Institute of Food and Agriculture (NIFA) offices."

Washington Insider: US Policies Moving Toward Currency War

The Hill carried an opinion piece on Friday that argued that that the administration’s policies are moving the U.S. moving toward currency wars—the last thing “a troubled global economy needs.”

The writer was Desmond Lachman, a resident fellow at the American Enterprise Institute who has held a number of high posts in global economic organizations and the U.S. private sector—and who frequently chides the administration for what he considers short-sighted economic policies.

He worries now that the nation is headed for a “full-blown currency war where all countries try to gain a competitive advantage through policies aimed at cheapening their currencies.” What’s more, he now finds it “difficult to see how the world will avoid such a war.”

If the experience with currency wars in the 1930s offers any lessons, it is that they can be very harmful to global prosperity by exacerbating "beggar-thy-neighbor" policies, he says.

While there are several reasons to believe that the world is drifting toward a currency war, he says the most important would appear to be the basic contradiction between the Trump administration’s trade and budget policies.

A principal objective of President Trump’s trade policy is to drastically reduce the U.S. trade deficit with a view toward bringing manufacturing jobs back home. However, this policy sits at odds with a budget policy consisting of large unfunded tax cuts and big public spending increases, he says.

Such a budget policy risks causing the U.S. budget deficit to balloon, and it also risks taking us back to the twin budget and trade deficit problems of the Reagan years.

One indication of the “inconsistency” between the Trump trade and budget policies is the fact that the U.S. trade deficit has kept rising since President Trump assumed office and is now running at an all-time high.

Another indication is that over the past year, the U.S. dollar has increased in value by around 10% as an expansive U.S. budget policy is forcing the Federal Reserve to raise interest rates to keep inflation in check. This has had the effect of making our exports less competitive and of cheapening our imports, which is hardly consistent with the goal of reducing the trade deficit.

Another reason for fearing that we are heading toward a global currency war is that the world economic recovery is becoming increasingly less synchronized, Lachman says. At a time that the U.S. economy is being boosted by a large tax cut, other important parts of the global economy are stuttering due to idiosyncratic reasons of their own.

This risks having other countries maintaining very loose monetary policies as the Federal Reserve continues to hike U.S. interest rates and will drive the U.S. dollar ever higher.

One major area of the global economy that looks set to weaken is that of the European economy where troubles are coming “not as single spies but as battalions.”

The United Kingdom risks “crashing out of Europe” without a Brexit deal; Italy’s populist government appears to be on destructive collision course over its budget with its European partners that could constitute an existential threat to the euro; and Germany now faces a prolonged period of political uncertainty as Chancellor Angela Merkel prepares to make her exit from the European political stage.

In addition, a more immediate trigger for a global currency war is likely to be a further weakening of the yuan. This would seem to be especially the case in the context of the ongoing U.S.-China trade war and the Trump administration’s repeated warnings to China not to manipulate its currency.

Sadly, there is every reason to think that China’s currency will continue to weaken against the dollar in the period ahead, he thinks. For one, Chinese monetary policy is likely to be loosened to support a Chinese economy that is being buffeted by falling domestic stock prices, the bursting of a credit bubble and rising U.S. import tariffs.

For another, with the U.S. dollar appreciating against most other world currencies, the Chinese government has little option but to allow its currency to weaken against the dollar in an effort to prevent China from losing international competitiveness along with the United States.

Averting a world currency war would be in everyone’s economic interest. However, he fears that would require better international policy coordination that only U.S. leadership can provide.

A good place to start would be for the Trump administration to address the basic contradiction between U.S. trade and budget policies that are exacerbating global external imbalances and are putting undue upward pressure on the U.S. dollar — but he adds that judging by the "America First" rhetoric that continues from the White House, “I am not holding my breath for this to happen anytime soon.”

So, we will see. Lachman’s views are not much of a surprise since he often writes on trade topics and has frequently criticized administration policies. However, trade policy is a key issue in today’s elections and likely will continue to be and certainly is an issue producers should continue to watch closely for the foreseeable future, Washington Insider believes.

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