Washington Insider -- Monday

Administration Embraces Market Pain with Little Concern for Contagion

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

Sen. Heitkamp Hears NAFTA Concerns, Discusses Farm Bill

Concerns from members of the Northern Plains Potato Growers Association (NPPGA) surrounding the impact of renegotiation of the North American Free Trade Agreement (NAFTA 2.0) were raised with Sen. Heidi Heitkamp, D-N.D., in her home state last week.

On the topic of NAFTA, she addressed concerns that the current agreement fails to ensure a level playing field for American producers, along with worries that the U.S. could end up withdrawing from the pact.

Trade concerns are high on the list for the potato industry, as North Dakota ranks sixth in the nation in overall potato production and first in red potato production.

“The Red River Valley produces some of the best potatoes in the country, and our potato farmers and processers are acutely aware of how changes to trade agreements can directly impact their ability to sell this high-quality crop,” Heitkamp told the growers. She acknowledged, "NAFTA is not perfect and needs to address its provisions that put some of our producers at an unfair disadvantage," but added, "throwing around disruptive rhetoric and threatening to withdraw is not the way to do it."

Meanwhile, Heitkamp stressed the need to pass a full five-year farm bill this year, especially given the current trade headwinds, saying, "passing a farm bill before the current one expires at the end of September is absolutely critical." She added that she wants to produce a final bill that will provide farmers "with the certainty they need, and expand their access to markets."


USDA Announces More Reorganization Plans, Changes For ERS, NIFA

Reorganization plans continue to move forward at USDA, with an August 8 announcement detailing changes for the Economic Research Service (ERS) and the National Institute of Food and Agriculture (NIFA) – including plans to move most of their employees out of the Washington, DC, region.

The changes are "intended to improve customer service, strengthen offices and programs, and save taxpayer dollars," USDA said in a release.

For ERS, the biggest organizational change will be rolling the agency back under the Office of the Secretary alongside the Office of the Chief Economist (OCE). "[ERS and OCE] have similar missions," USDA said. "ERS studies and anticipates trends and emerging issues, while OCE advises the Secretary and Congress on the economic implications of policies and programs." Ultimately, the changes "will enhance the effectiveness of economic analysis," it added.

Meanwhile, both ERA and NIFA will be relocated out of the Washington, DC, region, and USDA said it is possible both may be co-located "when their new homes are found." The department said turnover at the agencies and recruitment issues influenced the decision, adding "the high cost of living and long commutes" around Washington was a factor.

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Washington Insider: Administration Embraces Market Pain with Little Concern for Contagion

Much of the press now is concluding that they do not understand the administration’s trade objectives — and accuse it of “embracing financial-market pain” with a trademark “penchant for turmoil” as a trademark in U.S. politics.

For example, Bloomberg reported this week that the decision Friday to double steel and aluminum tariffs on a Turkish economy already reeling from a currency crisis came just days after imposing new sanctions on Russia, creating market havoc in both countries. It noted that “most Asian markets ended down for the week amid the U.S.-China tariff war.”

But, rather than worrying about US markets becoming infected by sell-offs elsewhere, the President is “cheering on the economic losses suffered by the targets of American tariffs and sanctions,” Bloomberg says. It also commented that just a week ago, he said that “duties he imposed on China were working far better than anyone ever anticipated,” while adding that the U.S. “market is stronger than ever.”

Bloomberg thinks that these “broadsides” suggest the President is unfazed by disorder in overseas markets and expects they will force foreign capitals to bend to his will.

Reinforcing the administration approach are its favorite benchmarks -- the U.S. stock market and employment figures. Despite some spillover, the Standard & Poor’s 500 Index remains close to the highs set earlier this year.

Still, pushback seems to be growing, Bloomberg says. It cited Turkish President Recep Tayyip Erdogan’s Friday NY Times OpEd pledge that the American economic actions wouldn’t shape Turkey’s actions – and that Trump’s unilateral actions would only undermine American security interests. “Failure to reverse this trend of unilateralism and disrespect will require us to start looking for new friends and allies,” he wrote.

While Bloomberg notes that President Trump has ushered in the exact kind of disruption he likes to cultivate it also suggests that there are growing questions whether the current strategy “will achieve durable results.”

“He likes brinkmanship. He likes to push people to the edge of their comfort,” said Douglas Holtz-Eakin, the former chief economist for President George W. Bush’s Council of Economic Advisers who is now president of the American Action Forum. “There are big risks with this approach.”

Disturbances from Trump’s strong-arm tactics could spread between markets. Coupled with the possibility of economically driven political instability and retaliation against American businesses, Trump is engaged in a high-stakes gamble, Holtz-Eakin said.

Turkey’s meltdown sent shock waves through other emerging markets and Europe. The euro sank as much as 1.2% to the weakest in more than a year after a Financial Times report that the European Central Bank raised concern about the region’s banks’ exposure to Turkey.

However, if administration officials are worried about financial contagion, they haven’t shown it, Bloomberg says. National Economic Council Director Larry Kudlow mocked China over retaliatory actions earlier this week, saying he viewed their response as “weak” and warning that the Chinese “better not underestimate President Trump’s determination to follow through.”

Earlier, trade adviser Peter Navarro said he was unconcerned by the potential impact of the tariffs being imposed by the administration. “We got two economies that add up to around $30 trillion in annual GDP,” Navarro told CNBC. “The amount of trade we’re affecting with the tariffs is a rounding error compared to that.”

Administration officials admit their confidence has been boosted by a recent framework agreement with the European Union intended to calm the disruption caused by the president’s tariffs. Under the handshake deal, Europe has committed to increasing US energy and soybean imports in exchange for Americans backing off additional levies.

Still, the president’s approach has also prompted national security concerns among some observers. The Pentagon said Friday that operations were continuing as normal at Turkey’s Incirlik air base, a key U.S. staging ground for Middle East operations, though the country has previously suspended American access during a dispute over arms trading in the 1970s.

Friday’s sanctions amounted to a “reckless escalation,” according to Brian Klaas, a fellow in comparative politics at the London School of Economics. “Turkey is a NATO member and a U.S. airbase in Turkey is stockpiled with 50 nuclear bombs,” Klaas said. “His tweets continue to pose serious national and international security risks.”

So, we will see what happens. Clearly, the administration’s preference for trade fights is drawing increasing political criticism, especially as it threatens well established U.S. ag products markets in many areas. And, while some in the administration may be willing to consider such losses as “necessary collateral damage,” that view is likely to continue to be a hard sell for many in agriculture, Washington Insider believes.


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