Washington Insider -- Tuesday

Trade Policy Objective Questioned

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

US-China Phase One Trade Deal Signing Still on For Wednesday

A Chinese delegation, led by Vice Premier Liu He, arrived in China Monday in preparation for signing of the phase-one deal with the U.S.

There have been more than 200 invited to the signing ceremony.

Despite some conjecture to the contrary, Treasury Secretary Steve Mnuchin said the agreement was not changed as it was translated and still calls for China to buy $40 billion to $50 billion in U.S. ag goods annually and a total of $200 billion in U.S. goods over two years.

The U.S. and China will undertake semiannual talks to push for economic reform and resolve disputes, similar to a format from previous administrations that Trump trade officials had once criticized. The effort (separate from trade talks) will be headed by and Liu, among other senior officials, according to a statement by Mnuchin and U.S. Trade Representative Robert Lighthizer.

As for enforcement, Mnuchin also said that if China does not comply with terms of the deal, “the president retains the authority to put on tariffs, both existing tariffs and additional tariffs.” A special office will be set up in each country to monitor implementation.

If conflicts are not resolved within 90 days, the U.S. could take unspecified “proportionate” action against China and vice versa..

GAO To Study Small Refiner Waivers Under RFS

The Government Accountability Office (GAO) will investigate the EPA's issuance of hardship exemptions to small refineries, which allow them to avoid complying with the (Renewable Fuel Standard).

The probe was requested by a bipartisan group of Midwestern lawmakers who say the waivers hurt the revenues of farmers and biofuel producers.

Meanwhile, the matter will be the subject of a meeting in Washington to close out the week. The National Capital Area Chapter of the U.S. Association for Energy Economics holds a discussion on "State of the Renewable Fuels Standard," focusing on "Renewable Volume Obligations, Renewable Identification Numbers, and the small refinery exemption."

Washington Insider: Trade Policy Objective Questioned

Bloomberg reported recently that while current data are suggesting that President Donald Trump may be poised to deliver on one of his biggest economic promises: Reducing the annual U.S. trade deficit with China and the world, that accomplishment could come with plenty of caveats attached and even what some economists see as worrying signs for the U.S. economy.

November trade data showed that the U.S. goods and services deficit decreased by 0.7%, or $3.9 billion, in the first 11 months of 2019 from the same period a year earlier. That puts the annual deficit on track to fall for the first time since the president took office, promising to rebalance America’s economic relationship with the world.

The administration also claims that despite the continuing doubts of many mainstream economists, “clearly the Trump tariffs are working,” said White House adviser Peter Navarro.

However, most of the tariffs now in place on some $360 billion in imports from China are due to remain despite the phase one deal. “We should see continued improvement in the China numbers as tariffs remain largely in place while purchases should increase significantly across our agricultural, energy, manufacturing, and services sectors,” Navarro said.

The U.S. tariffs so far have clearly had an effect on trade with the world’s second-biggest economy but the trend has been down in November, declining for the sixth straight month and reaching the lowest since March 2013.

The biggest contributor to the drop in the deficit from January through November was the continuing boom in shale oil, Bloomberg reported. In nominal terms, the U.S. petroleum-trade shortfall with the world fell to $13.1 billion in the first 11 months of 2019, more than $35 billion less than it was in the same period of 2018.

When it comes to the rest of the U.S. economy – including a manufacturing sector the administration has promised to revive – the trade picture looks very different. The non-petroleum deficit grew almost $20 billion to $766.2 billion in the first 11 months of 2019, putting it on track to beat 2018’s full-year record deficit of $824.8 billion.

The other major factor driving the narrowing of the U.S. trade deficit was a decrease in imports rather than an increase in exports. That is often a sign of weaker demand for the U.S. rather than an economy poised to record another burst of growth, Bloomberg notes.

It also creates a statistical quirk that has long been the source of a bitter debate between advocates of tariffs like Navarro and other economists. Because of the way gross domestic product is calculated, a reduction in imports contributes to faster headline growth. Yet most economists argue that is an accounting anomaly rather than a reason to cheer, especially if it is a sign of a weakening demand rather than stronger domestic production.

The slowdown in imports has been accompanied by one in exports. It also has been exacerbated by companies drawing down on inventories built up earlier this year to try to get ahead of tariffs, according to Eliza Winger, who covers the U.S. economy for Bloomberg Economics.

The import contraction in the fourth quarter of last year appeared to be the largest seen since the 2007-2009 recession, said Greg Daco, chief U.S. economist for Oxford Economics.

By his calculations, net exports would add 1.2 percentage points to GDP growth in the fourth quarter of 2019 – also the biggest such contribution seen since the crisis a decade ago. That it was likely to make up half the 2.4% growth Daco is forecasting for the quarter is not necessarily encouraging.

Navarro insists that the tariffs have contributed to a re-shoring of manufacturing and broader investment in the U.S. economy.

It’s not clear from the data that has in fact happened, however. Last year saw a slump in business investment, with many companies blaming uncertainty related to Trump’s trade policies for holding off on big capital investments. Other data have pointed to a slowdown in U.S. manufacturing last year.

It’s also unclear how beneficial a small reduction in the trade deficit in 2019 would be in an election year, Bloomberg says. At more than $562 billion, the U.S. goods and services deficit in the first 11 months of the year is already more than $60 billion higher than it was in all of 2016, the year President Trump was elected.

Over the course of the Trump administration’s term, the deficit is clearly up, so in that sense he has not succeeded, said Brad Setser, a senior fellow at the Council on Foreign Relations.

“What he has shown is if you put big enough tariffs on, that can change both the bilateral balance of trade,” Setser said. “What he hasn’t shown is that his tariff-based strategy can generate a revival in U.S. manufacturing.”

Clearly, the administration is continuing to aim for lower trade deficits – and there is considerable industry and academic skepticism of that objective. Now as the phase one deal is signed with China and attention shifts to next steps, producers should watch that debate closely as it proceeds, Washington Insider believes.

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