Washington Insider -- Tuesday

Trade Policy Warning

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

US, China Said To Both Be Talking About Lifting Some Sanctions

Ratcheting back tariffs on Chinese goods to calm markets and give China an incentive to make more-substantial concessions in trade negotiations with the U.S. is being advocated by Treasury Secretary Steve Mnuchin, according to the Wall Street Journal (WSJ), but the effort is getting pushback from U.S. Trade Representative Robert LIghthizer.

The Treasury Department told the WSJ said that the positions "are all at the discussion stage" and neither Mnuchin nor Lighthizer have made any recommendations "on tariffs or other parts of the negotiations with China," with a spokesman for USTR saying the agency concurred with the Treasury statement. However, sources indicate that China, too, is discussing the potential of reducing tariffs on imports of U.S. goods.

Also surfacing in the mix is a WSJ report that the two sides discussed reopening China's market to U.S. chicken exports. All indications from sources are that USTR, not Treasury remains the key player in the talks and that Lighthizer has not supported reducing tariffs on China at this stage. Further, contacts say President Trump will have the final say in what happens relative to the China negotiations and he has not shown signs of being willing to remove tariffs at this point.

But the fact that both sides are talking about reducing tariffs is further evidence that both President Trump to Chinese President Xi Jinping want an agreement between the two countries.

Grassley Continues To Lay Out Trade, Tax Agenda

More thoughts on upcoming trade talks, the partial government shutdown and tax policy are being offered by new Senate Finance Committee Chairman Chuck Grassley, R-Iowa.

After claiming the gavel at Senate Finance, Grassley has not shied away from discussing topics slated to hit the panel's agenda. He recently commented on the Trump administration's effort to secure approval of the U.S.-Mexico-Canada Agreement (USMCA). Now, Grassley is once again weighing in on upcoming U.S.-European Union (EU) free trade agreement talks and issuing a fresh warning about how the ongoing shutdown might impact them.

New tariffs on imports of EU automobiles into the U.S. could be deployed by President Donald Trump as leverage in negotiations with the EU, according to Grassley. "I am not in favor of tariffs, but they are a fact of life when Trump's in the White House," Grassley told reporters. "They may be an effective tool. I know Europe is afraid of it." And, using those tariffs, he noted, is "probably the only thing that will bring Europe to the table in a reasonable way."

Grassley's remarks are a shift from the stance he took initially that the U.S. should not "alienate our allies" with tariffs.

As for coming trade talks with Europe, he said he warned EU Trade Commissioner Cecilia Malmstrom any U.S.-EU trade pact has to have agriculture in it. "My inference to Malmstrom was, 'what is the sense of negotiating if you don't include agriculture?'" he said. "Obviously, she took the opposite point of view."

Washington Insider: Trade Policy Warning

This week The Hill is carrying a letter from a former USDA official who suggests that despite the President’s assurances to the Farm Bureau’s annual meeting “that he had their backs on trade,” members are beginning to display “much unease.”

The writer, who is reporting reactions from producers at the recent annual membership meeting, has impressive policy credentials. He is Joseph Glauber, a senior research fellow at the International Food Policy Research Institute and a visiting scholar at the American Enterprise Institute. Glauber also was for 30 years a USDA economist and served as chief economist from 2008 to 2014.

Glauber says that any thoughts that “candidate Trump’s anti-trade campaign rhetoric would cool when he assumed the presidency were dashed in the first week after his inauguration,” when he pulled the U.S. out of any engagement with the Trans-Pacific Partnership, an agreement that the American Farm Bureau Federation had estimated would increase annual U.S. net farm income by $4.4 billion.

Glauber argues that withdrawal from TPP will cost potential benefits of increased trade as TPP competitors such as New Zealand, Australia and Canada gain favorable access to markets like Japan and Vietnam—markets where U.S. agricultural exporters have built substantial market shares.

The next item on the president’s early trade agenda was the renegotiation of NAFTA, an agreement Glauber thinks has been very good for U.S. agriculture as ag exports to Canada and Mexico topping $39 billion in 2017. Glauber says that after 14 months of what appeared to be “stressful negotiations,” a new NAFTA emerged that “ended up looking a lot like the old NAFTA with relatively small changes in the agricultural provisions.”

The good news was not really that that there was promise of additional access to Canada’s dairy, poultry and eggs sectors with resulting small benefits. Nor was it the new agreement’s modernization features. Far more significantly, the new agreement maintained the tariff concessions that had been negotiated in 1992 under the original NAFTA that substantially expanded access to Canadian and Mexican markets for U.S. agricultural producers.

However, even the benefits from the original and new NAFTA agreements are currently being compromised by the administration’s “so-called Section 232 tariffs imposed against exports of steel and aluminum to the United States and the retaliatory tariffs Canada and Mexico are imposing.” He thinks those actions likely reduce U.S. agricultural exports by as much as $2 billion, more than offsetting any gains associated with the changes embedded in the proposed new agreement.

Also, the threat by the administration to withdraw from the “new NAFTA” if it is not approved by Congress is even more troubling and could cost U.S. farmers almost $9 billion in lost exports, he says. Upping the ante to achieve passage of USMCA could be viewed as a high-stakes negotiating ploy, but it also means that the consequences of failure that “would be hard felt by U.S. agriculture.”

Finally, he commented about the administration’s on-going trade war with China and notes that over the past eight years, China has been the top export destination for America’s farm products, accounting for about one-fifth of U.S. agricultural exports.

For example, annual U.S. soybean exports to China have averaged over $12 billion in recent years, with harvests from one of every four acres planted to soybeans in the United States exported to China — or, at least was, before China slapped tariffs on soybeans last July in response to U.S. tariffs on many of China’s exports to American consumers. Since then U.S. soybean exports have been forced to find new markets, at sharply discounted prices.

The chief beneficiaries have been soybean farmers in Brazil and Argentina who received higher prices and are estimated to have planted an additional 8 million acres of soybeans this fall in response to increased demand from China for their crops.

With the recent resumption of talks between China and the U.S., China has begun to purchase U.S. soybeans again, however only in limited quantities and with an uncertain future for further U.S. exports--pending resolution of thornier trade issues like intellectual property protection, investment practices and other structural issues.

The challenge that confronts the Trump administration now is how to resolve legitimate trade concerns without permanently damaging the longer-term growth trajectory for U.S. agricultural exports to China.

The farm sector is in its fourth year of relatively moderate crop and livestock prices and lower farm incomes. Exports have been the one bright spot in the agriculture outlook and producers are understandably concerned about the current direction of trade policy. What some would call hard bargaining by a president who considers himself the ultimate dealmaker, others view as a game of chicken in which U.S. agriculture may end up paying a heavy price.

Glauber doesn’t share any details about what he thinks the specific future policies should be, but clearly thinks that a warning about future policy risks is in order. In addition, he clearly thinks the trade policy debate is one producers should continue to watch very closely as it intensifies, Washington Insider believes.

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