Washington Insider -- Thursday

Coronavirus Impacts and the EU

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

USDA IG to Assess MFP Process

USDA Inspector General Phyllis Fong told lawmakers Tuesday her office is reviewing USDA’s authority to provide more than $20 billion in direct payments to producers without an appropriation from Congress via the Market Facilitation Program (MFP).

She also said they will look at questions on whether the aid is unfairly tilted to certain states and commodity groups. “We are going to start out with the basic issue of authority for the programs, and then we are going to get into the design and implementation, eligibility and look at the producer questions,” Fong said at a House Appropriations subcommittee hearing. “The first piece of our work should be coming out in the next several months.”

Senate Ag Committee Ranking Member Debbie Stabenow, D-Mich., has complained repeatedly the aid is tilted to southern states based on the per-acre payments via the 2019 MFP effort (MFP 2) while USDA continues to point to the totals received by states in the Midwest, with Iowa, Illinois, Texas, Minnesota and Kansas receiving the most.

As of February 10, USDA said that $14.23 billion has been paid out under MFP 2.

Trump Administration Issues Report On Countries’ Trade Status

The Trump administration issued a notice Tuesday that denies developing country status to nations the administration deems “wealthy” and says has “abused” special and differential trade treatment under World Trade Organization (WTO) rules.

Among the countries excluded under the administration action are China, Brazil, India, Indonesia, Malaysia, Thailand and Vietnam. The criteria included gross national income per capita exceeding $12,375 or the country's share of world trade.

WTO rules on subsidies permit developing or least developed countries a higher threshold before rules against subsidies would apply to their exports.

The notice included a list of least-developed and developing countries that still enjoy special status under U.S. law, including Bangladesh, Kenya, Cambodia, Honduras, Pakistan, Zimbabwe, Ecuador, Egypt and El Salvador.

Washington Insider: Coronavirus Impacts and the EU

The media is focused heavily on the potential impacts of the coronavirus this week, especially on the European Union – in spite of the fact that only scattered cases of the virus have appeared in Europe, the New York Times says.

One key reason for concern is the fact that the disease is proving very difficult to quarantine. As a result, the European impact “may be severe enough to push the vulnerable German economy, and perhaps the entire eurozone, into recession,” the Times says.

The report notes “the concerns of a growing number of economists” as it becomes clear that it will take weeks, at best, before the Chinese economy resumes its role as a prolific exporter of essential factory goods.

In Germany, the chief executive of Daimler, one of Germany’s most prominent companies with several plants in China, said the crisis is one of uncertainty. “I’m calling China every day,” Ola Kallenius said at a news conference on Tuesday. “It’s too early to say if and how other factories could be affected. We are talking about global networks.”

The rest of the world also could suffer economically, Fed chair Jerome Powell, warned U.S. lawmakers on Tuesday. We are closely monitoring the disease “which could lead to disruptions in China that spill over to the rest of the global economy,” Powell told House Financial Services Committee members.

A dismal profit report by Daimler on Tuesday underlined why it would not take much to shove the 19 European countries that use the euro into a downturn that could exacerbate a slump in global trade that was apparent long before the coronavirus claimed its first victims.

Daimler said that it slipped into the red at the end of 2019, battered by the cost of adjusting to new technologies and by its penalties from diesel emissions cheating.

Vehicles are Germany’s biggest export, and economists are predicting that official data to be published Friday will show that the German economy shrank in the fourth quarter of 2019 because of a slump in manufacturing.

The problems of German automakers “reverberate around the continent” because so many small and midsize parts suppliers depend on them for sales. Italy’s economy shrank in the fourth quarter in part because its industrial north is closely linked to Germany. “For most countries, Germany is the most important trading partner,” said Carsten Brzeski, chief economist at ING Germany. “If it starts to slow down, other countries will feel it.”

Daimler reported a quarterly loss of 11 million euros compared with a profit of 1.6 billion euro in the fourth quarter of 2018. The evaporating earnings put Daimler, the maker of Mercedes-Benz cars and trucks in a weak position as it confronts the economic consequences of the coronavirus outbreak.

Auto factories and others are being shuttered longer than planned after the Lunar New Year holiday and people also are being kept out of showrooms. On Monday, Daimler said it had begun gradually ramping up production at its Chinese factories, but that the situation remains tense and unpredictable. There is widespread concern that assembly lines around the world could be forced to shut down for lack of components made in China.

China also has become a critical market for all German carmakers--it sold nearly 700,000 Mercedes-Benz cars in China last year, more than twice as many as it sold in the United States.

For the full year, net profit at Daimler plummeted 64% to 2.7 billion euro. Sales in 2019 rose 3%, to 173 billion euro.

“The coronavirus provides a substantial risk for the expected global recovery, as hopes were pinned on an improvement of the Chinese economy,” Stefan Schneider, an economist at Deutsche Bank, said in a note to clients on Tuesday. A recession in Germany early this year is “quite probable,” he added.

Ziehl-Abegg, a German maker of industrial fans, has a factory in Shanghai with 450 workers. Even after the factory was allowed to reopen this week fewer than half of the employees reported to work. Many were ordered to stay home because they had visited affected areas of China during the Lunar New Year.

German machinery makers like Ziehl-Abegg are coming off a “terrible” year. New orders for products like machine tools or construction machinery slumped 9% in 2019 because of the trade fight with the U.S., Brexit and auto industry woes, the Times said.

“The political turmoil created uncertainty and uncertainty is poison for investment,” said Olaf Wortmann, economist for the Mechanical Engineering Industry Association in Frankfurt. Now, the coronavirus outbreak is another blow.

In addition, Daimler, like Volkswagen, faces significant accusations that it programmed diesel vehicles to cheat on emissions tests. It said this week that it had set aside 4 billion euro for the year to cover the cost of legal proceedings and penalties in Europe, the United States and elsewhere.

Daimler’s legal problems are amplified by the industry’s biggest shift in technology in a century. Like other carmakers, Daimler must invest billions in electric cars and autonomous driving, or risk becoming irrelevant, the Times said.

So, we will see. Clearly, the virus is shocking the industrial world in unexpected ways and creating trends that should be watched closely by producers as they emerge, Washington Insider believes.

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