Washington Insider -- Tuesday

By DTN's Washington Insider

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

US Still Wants Further Negotiations With China On Trade

The tit-for-tat announcements by the US and China on Friday have not dashed optimism from the US for negotiations with China.

"Our hope is that it does not lead to a rash reaction from China," US Trade Representative (USTR) Robert Lighthizer said in an interview with the Fox Business Network after the tariffs were announced. "We hope that this leads to further negotiations and we hope it leads to China changing its policies."

Those comments came before the White House announced Monday that President Donald Trump wants to place 10% tariffs on an additional $200 billion in imports from China.

A senior Trump administration official said the U.S. is looking for structural changes to the way China deals with technology. The administration wants Beijing to stop forcing American firms to transfer know-how.

Beijing has signaled it will not accept major changes to its Made-in-China 2025 blueprint, which lays out how the Asian nation plans to lead in emerging industries such as artificial intelligence.

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FDA Says They Have Jurisdiction Over Lab-Grown Meat

The Food and Drug Administration Friday (FDA) issued a statement claiming jurisdiction over lab-grown meat. That puts the agency potentially at odds with USDA.

USDA Secretary Sonny Perdue has previously said his agency would have responsibility.

FDA Commissioner Scott Gottlieb issued a statement Friday saying that the agency not only has jurisdiction over the products but that it also plans to hold a public meeting on the issue next month. "We take seriously our commitment to the consumers and industry who look to the FDA for important guidance when it comes to our nation’s food supply, including the pathway for bringing forward safe, emerging food innovations," Gottlieb said in a joint statement with FDA Deputy Commissioner Anna Abram.

From USDA's perspective, Perdue has said there are some "gray lines between FDA and USDA on many things, but meat has been under the purview of USDA, as well you know meat and poultry has been the sole purview of USDA. We would expect any product that expects to be labeled as meat would come under that same inspection criteria."

FDA is planning to hold a public meeting on July 12 to solicit input on lab-grown meat.

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Washington Insider: Deepening Trade Policy Criticism

As the administration has moved to implement more of its trade policies, criticism has been widespread, but usually on a relatively superficial basis.

However, that is changing at least modestly as critics raise increasingly fundamental issues, The Hill said this week. It carried an analysis by a conservative analyst, Desmond Lachman – a resident fellow at the American Enterprise Institute who was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and chief emerging market economic strategist at Salomon Smith Barney.

He is charging that the administration’s trade policy is “ungrounded in economics and oblivious to history.”

He wrote to say that as President Trump slaps increased import tariffs on China as well as on U.S. allies like Canada, Europe and Mexico, he consistently cites the U.S. bilateral trade deficit with these economies as a reason for his actions. In his mind, increased import tariffs will reduce that deficit and in the process, increase U.S. jobs at home.

However, Lachman concludes that “sadly, the president’s assertions on trade do not stand up to economic analysis,” and he lists four reasons for his conclusion. His most important reason, he says, is that the administration’s objective of reducing the U.S. trade deficit, is at marked odds with his expansionary budget policy.

He thinks that by engaging in an unfunded tax cut that will increase U.S. debt by $1.5 trillion over the next decade and by going along with a $300 billion public spending increase, the president’s “budget policies are sure to increase the budget deficit and reduce public savings.”

This, as we should have learned from our experience in the 1980s, risks taking us back to the twin deficit problem of those years because “arithmetically a country’s trade balance is the difference between its saving and its investment rates.”

If the Trump administration truly wanted to reduce the country’s trade deficit, it would not be running an expansionary fiscal policy at this late stage in the cycle, he thinks. “Rather, it would target policies that would improve the country’s public finances and thereby increase its savings rate, Lachman says.

Second, as both China and the Europeans have made clear, they will retaliate in kind to increased U.S. import tariffs by increased restrictions of their own. If they do, it is difficult to see how, even according to the president’s logic, increased U.S. tariffs would improve the U.S. trade deficit.

What the U.S. might gain in terms of an improved trade balance from imposing tariffs, it would lose by having other countries impose retaliatory tariffs of equal scope on U.S. exports.

Third, a strengthening of the U.S. dollar is the last thing that the Trump administration needs if it wishes to improve the trade deficit--because a strong dollar would discourage U.S. exports and incentivize U.S. imports.

Yet, a strong dollar is precisely what the administration will get by its expansionary fiscal policy and by its increased import tariffs on its allies.

By following an expansionary budget policy now, “the administration is in effect forcing the Federal Reserve to raise interest rates at a faster pace than it would otherwise have needed to do to stave off inflation.”

At the same time, by undermining investor confidence abroad by threatening additional import tariffs, especially on automobiles, the administration is inducing central banks abroad to keep interest rates low to support their economies.

With interest rates at home rising and those abroad in Europe and Japan staying unusually low, it should come as no surprise to the administration if the dollar keeps on strengthening.

Fourth, even if one conceded that a trade deficit involves the U.S. losing jobs abroad, can it really be argued that eliminating the trade deficit will increase employment at home? With the U.S. economy now operating, in the words of the Federal Reserve, at or above full employment, where would the additional workers to fill those jobs be found?

“Would not eliminating the trade deficit simply add to inflationary pressures at home without further reducing unemployment?” he asks.

A trade policy approach not grounded in economics and seemingly oblivious to the disastrous experience with beggar-thy-neighbor policies of the 1930s is reason enough for serious concern, Lachman says.

However, there’s more. He thinks is the “real risk that when President Trump’s expansive fiscal policy lead to an increase rather than to a reduction in the trade deficit, he will double up on his restrictive trade policy approach.”

If that occurs, we should brace ourselves for a full scale global trade war with all of its adverse consequences for the U.S. and global economies.

This is a much darker trade policy analysis than is usually encountered in the current debate, and it raises deeper questions — well beyond the typical analysis of the near-term impact on fall elections.

Trade policies, especially when stirred into the overall economic outlook are extremely complex, and few analysts attempt to broaden the focus to the extent Lachman does. Still, even though it is complex, the debate is extremely important to the U.S. ag sector, as well as much of the rest of the economy — and, it is one producers should follow closely as it proceeds, Washington Insider believes.

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(GH/BAS)

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