Washington Insider-- Monday

Trade Uncertainty

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

China Major Focus in Annual Report On US Trade Barriers

Chinese trade practices, such as excess capacity, forced technology transfer and online piracy is a major focus in the 2017 National Trade Estimate Report on Foreign Trade Barriers, issued by the Office of the U.S. Trade Representative (USTR). The report lists major problems posed for U.S. exports and investments on a country-by-country basis with the intention of reducing barriers and opening markets to U.S. goods and services.

The 19 pages in the report devoted to China includes the lack of access for U.S. beef, and will provide ammunition for President Donald Trump and his trade team when they meet their Chinese counterparts April 6-7 in Florida.

Regarding China, the following are two commentaries from the report:

Agricultural Biotechnology: Overall delays in China’s approval process for agricultural products derived from biotechnology worsened in 2016, creating increased uncertainty among traders and resulting in adverse trade impact, particularly for U.S. exports of corn. In addition, the asynchrony between China’s product approvals and the product approvals made by other countries widened. China has made repeated bilateral commitments to work with the U.S. and to improve its approval process, without demonstrable progress. Currently, eight products of importance to U.S. export interests are awaiting biotechnology approvals in China.

Beef: China’s longstanding import ban on U.S. beef creates a significant trade barrier that appears to lack scientific justification and consistency with international standards. Even though the U.S. is internationally recognized by the World Organization on Animal Health (OIE) as one of the safest producers of beef and has “negligible risk” status, China has banned imports of U.S. beef since 2003, and it is seeking to impose onerous requirements on future imports of U.S. beef, including full traceability of the cow from birth farm to slaughter facility.

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Bills Introduced to Alter Rules on Commodity Checkoffs

Rules for USDA checkoff programs designed to promote commodities would be altered under a series of bills introduced in the House and Senate March 29.

Prohibiting commodity checkoff groups from contracting with an organization that lobbies on agricultural policy and anti-competitive activity, unfair or deceptive acts, or any act or practice that may be disparaging to another agricultural commodity or product, is the goal of a measure (HR 1753) introduced by Reps. Dina Titus, D., Nev., and Dave Brat, R., Va.

A similar bill was introduced in the Senate (S 741) by Sens. Cory Booker, D-N.J., and Mike Lee, R-Utah. Lee also introduced a bill to make participation in the programs voluntary. Measures in both chambers would also require the USDA inspector general and the Government Accountability Office (GAO) to make audits of checkoff program budgets and expenditures available to the public.

"Checkoff programs are not pots of money for corporations to use to attack their political opponents," Titus said in a statement. "This legislation will ensure that checkoff programs are not picking winners at the expense of the sector of the agriculture community that values animal husbandry."

USDA's Agricultural Marketing Service (AMS) operates 22 checkoff programs for commodities including pork, eggs and dairy. Producers pay a small fee on each sale, the money going to promote the commodity or pay for research. However, the programs have come under criticism because of their mandatory fees and alleged favoritism toward some businesses.


Washington Insider: Trade Uncertainty

The state of play on trade policy seems murkier than ever these days. Immediately after the election, in which both candidates ran against “job killing trade,” press reports indicated a pullback in overseas investment, including in Mexico.

Now, that view has changed, Bloomberg says, and “the pace is picking back up.” It presents several examples from Mazon, Illinois; Spokane, Washington; and Pennsauken, New Jersey and concludes that “while Trump hasn’t stopped pounding his America First bully pulpit, and the future of NAFTA remains uncertain, there’s cautious optimism and a hopeful attitude that cooler heads will prevail in Washington.”

Bloomberg quotes Ross Baldwin, chief executive officer of Tacna Services Inc., which facilitates relocations and reports that “Baldwin has seen the evidence: After business ground to a halt back in November, he’s now juggling two Mexico-bound clients including San Diego-based Tacna who helps manage 4,500 workers in Mexico where factory wages are about a fifth of those in the United States.” That may explain why Mexican manufacturing jobs rose 3.2% in January from a year ago as they dropped 0.3% in the U.S., Bloomberg says.

The renewed exodus shows how difficult it will be for Trump to turn the macroeconomic tide just by jawboning alone, Bloomberg argues. This week, he trumpeted a Ford investment in Michigan plants with a cap-lock fanfare: “JOBS! JOBS! JOBS!” However, the $1.2 billion will create or retain only 130 positions. Bloomberg notes that while Ford canceled plans in November for a new $1.6 billion facility in Mexico, winning Trump’s praise, it employs more than 7,000 workers in that country.

The administration still plans to renegotiate NAFTA, but “talk of punitive tariffs can’t erase the need to manufacture in lower-cost countries,” said Alan Russell, CEO of El Paso, Texas-based Tecma Group., which also helps open and operate factories in Mexico. Competing European companies tap the Czech Republic for low wages and Asia has Vietnam and the U.S. needs Mexico to remain competitive with labor-intensive products, he said. “This isn’t about taking jobs from the U.S. – It's about saving companies,” he thinks.

Russell helped Firstronic LLC open a factory in Juarez in 2014 to make circuit boards for customers including Audi and Tesla Inc. Workers, sporting maroon lab coats and wearing rubber straps on their shoes to ward off static electricity, make about $10 a day running computer-driven machines that insert capacitors and resistors onto green boards and solder them into place.

The Juarez expansion and joint ventures in the Czech Republic and China apparently were factors in Grand Rapids, Michigan-based Firstronic winning larger contracts from producers of auto parts and medical supplies, said CEO John Sammut. His sales are surging at a 30% annual clip. In Spokane, Triumph Group dismissed almost 80 production workers in January and plans to eliminate another 30 jobs by August as it moves work to Mexican plants, said Steve Warren, a local official of the International Association of Machinists and Aerospace Workers. “They are being pressured to supply parts as low cost as possible,” he said.

Tapping cheap labor sometimes isn’t just about lowering costs, but accelerating growth. Large purchasers, including Kongsberg Automotive and Dura Automotive Systems, prefer to deal with a few global suppliers rather than myriad local companies, Bloomberg says. “If we were only producing in the U.S., we would lose out on the vast majority of the contract opportunities,” Sammut said. With the increase in business, Firstronic has added revenue and jobs in Grand Rapids, he said.

Still, businesses haven’t dismissed NAFTA renegotiations or policies being considered in Washington that might prove costly. A plan by House Republicans to implement a 20% border adjustment tax has raised concerns, especially among retailers such as Wal-Mart Stores Inc. that import many of their wares. The tax would be applied to sales of imported goods to reduce the U.S. trade deficit, which reached $734 billion in 2016.

Trump repeated to a joint session of Congress last month his refrain that he will make it “much, much harder for companies to leave our country.” But the administration’s recent fights, including ravel bans blocked by courts and a health-care bill scuttled by his own party, underscore the limitations on presidential power and the difficulty the administration may face in either punishing companies or overhauling NAFTA, Bloomberg says.

At a February conference in El Paso to discuss how Trump’s policies may affect trade, most in the room of plant managers, supply-chain officers and suppliers predicted NAFTA would likely be changed but not discarded, and that the changes might not be “harmful.”

Whatever happens, Russell said his business fostering Mexican manufacturing will grow this year. He sees the pressure to reduce costs as “relentless.” “When you dissect the worst-case scenarios, it still makes sense to go forward with their business plans,” he said. “It’s a competitive world.”

At this point, USDA’s Secretary in waiting, Governor Perdue of Georgia, has defined himself as a dedicated advocate of trade growth but his formal confirmation is stuck in line behind what may be an extended battle over the administration’s nomination for the Supreme Court. In the tough intra-administration battle over ag trade he continues to be eagerly awaited, Washington Insider believes.


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