Washington Insider -- Monday

New Economic Pressure From Tariffs

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

US June ag exports were lowest of FY 2019

The value of U.S. agricultural exports fell in June compared with May, but it was enough to bring back a trade surplus as the value of U.S. ag imports fell by nearly $1 billion.

U.S. ag exports were valued at $10.79 billion in June, down from $11.40 billion in May. That was the smallest value for U.S. ag exports registered so far in Fiscal Year (FY) 2019 and the first month so far in FY 2019 that U.S. ag exports have not been $11 billion or more.

U.S. ag imports were valued at $10.61 billion, down from $11.65 billion in May. This fits with historical patterns where the value of imports often has declined from May to June.

The result of the shifts brought back a trade surplus for U.S. agriculture of $176 million after two straight months of trade deficits, including the record mark of $865 million in April. It also marked seven straight months where the difference between U.S. ag exports and imports has been at a deficit or has been less than $1 billion.

US, EU Sign Agreement Giving US Beef More Access To EU Market

U.S. beef producers will garner a larger share of the European Union (EU) market for beef produced without hormones via an agreement signed in Washington on Friday.

The agreement establishes a duty-free tariff rate quota (TRQ) exclusively for the United States for shipment of hormone-free beef to the EU. The initial TRQ is 18,500 metric tons for the U.S. initially, rising over seven years to 35,000 metric tons annually.

The value of U.S. beef exports would rise by $270 million when fully implemented to a total of $420 million annually.

The European Parliament still must give their consent to the agreement.

Washington Insider: New Economic Pressure From Tariffs

The Washington Post reported this weekend that “next round of tariffs” could cost U.S. consumers and accused the administration of falsely arguing that China “bears their sole cost.”

The Post said that the new tariffs targeting made-in-China consumer products, announced just one day after Federal Reserve Chair Jerome H. Powell warned that administration trade policies were sapping business investment. The Post calls the new 10% tariff on an additional $300 billion of Chinese goods starting Sept. 1 is “a striking economic gamble” especially as the president approaches a 2020 reelection campaign.

Investors, political opponents and the Chinese government all “scrambled to respond.”

On Wall Street, the Dow Jones industrial average fell more than 98 points Friday, its fourth straight daily decline.

While the administration’s top economic adviser, Larry Kudlow, brushed off concerns if price increases, Kudlow thinks that they will be “very, very small.”

Nevertheless, the Post said several administration officials indicated “mounting concern” that uncertainty resulting from the administration’s frequent use of tariffs had squelched business investment and could smother a second-half economic rebound.

In Beijing, Chinese officials vowed to take “necessary countermeasures,” and called the U.S. escalation of trade frictions and tariff hikes “out of line” with American and Chinese interests and the interests of the world. They risk bringing the world economy into recession, a Commerce Ministry statement said.

The President fired back saying China needed to make significant concessions for the two sides to reach a trade deal. He also took a shot at the weakening yuan, saying the Chinese currency was “going to hell,” and he told the press that the tariffs are designed to persuade the Chinese to shrink the trade deficit by buying more American products and to make fundamental changes in their state-led economic system.

Still, the Post notes that after more than a year of the most aggressive use of tariffs by an American president since Herbert Hoover, the total trade deficit continues to widen—and for the first six months of 2019, the gap between U.S. imports and exports rose to $316.3 billion, up 8%.

Wall Street also disapproves. The Dow rose 43% between Election Day in 2016 and January 2018, when the president imposed his first import levy, on solar panels. Since then, the market has risen just 1%, the Post said.

Little more than a month ago, it appeared that the United States and China had agreed to a truce in their trade war after Trump and Chinese President Xi Jinping met at the Group of 20 summit in Japan. The president said he would refrain from further tariff hikes in anticipation of sizable new Chinese purchases of American farm goods.

But after the purchases—which the Chinese denied promising—failed to materialize and talks in Shanghai this week made little progress, the President acted. Observers believe the trade truce is “off,” said Frank Samolis, a trade lawyer with Squire, Patton Boggs.

The paper says the U.S. economy may be vulnerable, and while it remained largely healthy in July, some investment professionals detected hints of weakness. Hiring in May and June was lower than first reported; job growth this year has been lower than in 2018 and the average workweek, another key indicator of labor-market health, contracted slightly last month. Annual growth was 1.7 percent, the Post said, down from 3.1 percent in the first three months of 2019.

Consumer spending, the backbone of the U.S. economy, is critical now as business investment “fizzles” because of the costly tariffs and the fading impact of the 2017 corporate tax cut. The latest tariffs could be particularly damaging by raising prices on items such as iPhones, laptops, shoes and baby products, which could cause consumers to spend less, economists warn.

“Tariff man is back and more dangerous than ever to our economy,” said Peter Boockvar, the chief investment officer at Bleakley Advisory Group, in a note to clients. “No amount of Fed rate cuts will offset that.”

The administration last year crafted the first three rounds of tariffs on Chinese goods to hit mostly industrial components used by U.S. manufacturers. Those American companies absorbed the costs in most cases by shrinking their profit margins, redesigning their operations and passing along higher prices to their business customers. Still, Kudlow insists that the new tariff impacts will be “de minimis.”

Nonpartisan groups disagreed, and estimated that the latest import tax would cost a typical family of four $350 a year in addition to $850 from existing China tariffs, the Tax Foundation says.

Higher prices are a near certainty, said Richard Bernstein, a New York-based investment manager. “The Fed is clearly pro-inflation. The administration doesn’t admit this, but it’s pro-inflation, too,” he said. “Who puts tariffs on unless you want higher prices?”

So, we will see. The administration believes in its “get tough” policy and seems determined to continue to rely on it to force compliance from trading partners, including China. How this policy affects overall trade and especially that in ag products are trends producers should watch closely as they emerge, Washington Insider believes.

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