Washington Insider -- Thursday

US Annual Trade Gap Shrinks

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

NEC’s Kudlow Expects Delay in US Exports to China

National Economic Council (NEC) chief Larry Kudlow told CNBC that the China coronavirus situation is expected to have an impact on U.S. exports to China, likely delaying the increase outlined in the phase-one trade deal.

“The export boom from that trade deal will take longer because of the Chinese virus,” Kudlow said of the pledge by China to boost its purchases of U.S. ag, energy, services and manufactured goods.

Meanwhile, former White House aide Clete Willems said the U.S. would need to show some understanding with China on the trade front as the country confronts the coronavirus situation. "We simply do not know the scope of this and what the economic impact is going to be. It does mean that in the short term it is going to make it difficult to make progress on phase two, and there will be a conversation with respect to implementation,” Willems told Reuters in Washington.

As for the impact to the U.S. economy, Kudlow said it would be “minimal,” and the U.S. was ready to help China.

“We would like to make them as healthy as we can,” he said. Expectations are the situation could trim U.S. GDP by 0.2 percentage points in the first quarter and another 0.2 percentage points later in the year.

“It is not a catastrophe. It is not a disaster. I think people should be very calm about this,” Kudlow said. “This is not going to be that big a deal for us.”

WTO’s Azevedo Calls For Real Action On WTO Reforms

A realization is building that real reforms to the WTO are needed, according to Director General Roberto Azevedo.

“The reality is we need very significant changes,” Azevedo said. “A few coats of paint will not be enough.”

In remarks to the Washington International Trade Association (WITA), Azevedo touched on the dispute settlement process at the WTO and the appellate body, the source of U.S. complaints about the WTO process.

“In my mind, I can see a much better functioning dispute settlement system, but my mind is not enough,” Azevedo said.

While he did not meet with either U.S. Trade Representative Robert Lighthizer nor President Donald Trump in his visit this week, Azevedo noted he has been engaging with U.S. officials on a consistent basis. But he emphasized, “What we need to do is transform those ideas into concrete action.”

As for not meeting with Lighthizer or Trump, the WTO chief said, “It does not mean that I cannot come back. I need somebody to tell me – ‘This is the time.’”

Washington Insider: US Annual Trade Gap Shrinks

Bloomberg is reporting this week that the U.S. trade gap narrowed last year. Lower shipments from China and declining oil imports are driving the trend, the report said. However, it also noted that the “overall gap” remains wider than it was before President Trump took office, although the trend is seen as giving the president evidence he has delivered on his pledges to reduce the gap.

The annual deficit in goods and services decreased for the first time in six years, narrowing 1.7% to $616.8 billion according to Commerce Department data reported on Wednesday. However, the December gap rose from the prior month to $48.9 billion, wider than the median estimate of economists as oil imports from Canada jumped.

President Donald Trump frequently cites the trade deficit as evidence of the failure of earlier trade policies — even though most economists don’t dwell on the indicator since it reflects numerous broader economic trends beyond overseas purchases and sales. However, Bloomberg notes that the gap remains more than 20% wider than before the president took office. That reflects steady gains in American consumer spending, which drives imports, Bloomberg said.

The annual merchandise-trade deficit with China — the principal target of the administration’s trade war — narrowed 17.6% to $345.6 billion after hitting a record in 2018. Imports from the country slumped 16.2%, exceeding the drop in 2009 during the global financial crisis, while shipments to China declined 11.3%, the biggest drop since at least 2003.

That pushed China down to third place among America’s top trading partners for goods in 2019, as Mexico claimed the top spot, slightly ahead of Canada. The merchandise deficits with Mexico and the European Union hit records, while the U.S. surplus in services declined by 4% to $249.2 billion as imports gained.

Bloomberg also said it expected that the phase-one trade deal with China is likely to have an impact on the composition of trade flows, “but not the overall net position.” The boost to exports growth, however, appears likely to be delayed by the coronavirus outbreak. Overall, Bloomberg estimates exports will add only slightly to GDP in 2020 and for net trade to continue to subtract from full-year growth.

Even with the trade tensions in recent months, oil was a chief force behind the full-year deficit narrowing. Petroleum imports dropped $31.4 billion to $193.9 billion while exports increased, narrowing the full-year gap in such products to a record-low $13.7 billion. On a monthly basis, the U.S. has been a net exporter since September. However, the non-petroleum goods deficit was $839.2 billion, a record high.

In addition, the U.S. and China last month signed the first phase of a trade agreement that is expected to boost Chinese purchases by $200 billion over the next 24 months, the culmination of almost three years of acrimonious talks that have roiled markets. However, the coronavirus “threatens to affect that target that many observers thought was lofty before the outbreak.” Officials in Beijing are said to be hoping Washington will agree to some flexibility on pledges in their deal.

At the end of January, President Trump signed a new trade pact with Canada and Mexico into law extending the life and updating the trading bloc created by NAFTA in the 1990s. The White House is now turning its attention to scrutinizing trade links with other nations and regions including the UK, Africa and the European Union, with whom relations started to sour in 2018 when the administration invoked national-security considerations to impose tariffs on steel and aluminum from Europe.

President Trump argued on Tuesday in his State of the Union address that the administration’s tariff strategy with China has worked and will protect U.S. workers and intellectual property, open markets and “bring billions and billions of dollars into our Treasury.”

Bloomberg also noted that while the remaining Chinese tariffs mean significant payment flows to the U.S. Treasury, they raise costs for importing firms who must decide whether to take this “hit” to profits, shift supply chains or pass along price increases to customers.

As a share of the economy, the overall trade gap narrowed to 2.9% of gross domestic product from 3% in 2018 — still significantly smaller than in the decade before the last recession, when it approached 6%.

For the full year, U.S. exports fell 0.1% to $2.5 trillion as shipments of civilian aircraft declined amid the grounding of Boeing Co.’s 737 Max plane, while sales of autos, consumer goods and petroleum gained. Imports fell 0.4% to $3.12 trillion on lower purchases of crude oil, computer accessories and telecommunications equipment.

So, we will see. There continues to be significant global trade tensions that likely will continue to dampen global growth, although the phase one deal with China is being welcomed as providing significant relief in the months ahead. At the same time, there are growing uncertainties regarding the impacts of Brexit and the continuing possibility of U.S. tariffs on European autos — as well as continued fights over European tax policies on U.S. firms — debates that should be watched closely as they proceed, Washington Insider believes.

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