US warns EU that its “Farm to Fork” initiative will hurt EU farmers, double prices, and aggravate US-EU trade conflicts — The US trade deficit and manufacturing job losses become electoral issues — The administration considers transformer tariffs and action against Chinese e-pay firms — The Quad meets in Tokyo.
The weekly trade report with L.C.
A new point of US trade friction with the European Union has arisen, this time focused on the bloc’s green initiative for agriculture dubbed “Farm to Fork.” The initiative is a central part of the European Green Deal. The European Commission writes:
We need to redesign our food systems which today account for nearly one-third of global GHG [Greenhouse Gas] emissions, consume large amounts of natural resources, result in biodiversity loss and negative health impacts (due to both under- and over-nutrition) and do not allow fair economic returns and livelihoods for all actors, in particular for primary producers.
It includes actions to massively reduce the agricultural use of pesticides and antibiotics and boost organic farming and plant-based proteins while inserting “green” standards across the agriculture-to-consumer spectrum. The initiative also aims to promote the same strategy worldwide, including through the use of trade policy to win commitments from other countries to take similar action. It was unveiled in May and has yet to be implemented.
“Let the consumer choose”
Agriculture Secretary Sonny Perdue, speaking with European reporters on October 6th, told them that the initiative will force up costs for European farmers and thereby lead to pressure for protectionism. “The impact on transatlantic trade can be extremely problematic,” he declared, saying that the US might consider filing a World Trade Organization complaint if the initiative is fully implemented:
Every sovereign nation has a right to determine the rules… for their food and agricultural production… but when you try to impose those standards on international trade… it becomes extremely problematic…. If we export food to the EU and the consumers don’t want [it], that’s the market. What we are asking is let the consumer choose.
Noting how the EU’s curb on GMO [genetically modified organism] crops make European farmers less competitive, Purdue said, “If European farmers are restricted from using modern tools… they will have the only choice of protectionism.” In contrast, US farmers, he said, have been “fabulously successful” in using GMOs as part of “sustainability goals” that include food “for the global masses” and economic benefits to producers. Ag Department economists, he said, have estimated that if the EU initiative is adopted globally, it will double the price of food.
In the US, support for GMOs and agricultural innovation is bipartisan, with only the left fringe of Democratic activists expressing opposition. But environmentalists in the Democratic Party base could argue that the EU curb is consistent with Biden-Harris support for the Green New Deal. Then similar policies could be adopted in the US.
Lighthizer spins the trade deficit
US Trade Representative Robert Lighthizer released a lengthy, data-filled justification of the Trump administration’s trade policy to explain the worsening US trade deficit. The Commerce Department’s October 6 release of the August US trade balance was embarrassing for the administration. It showed clearly that President Trump’s trade policy has not led to the promised reduction in the deficit. In fact, the imbalance has gotten worse over the course of his presidency. The August gap was the widest since 2006. The monthly deficit jumped to $67.1 billion as imports grew faster than exports, the merchandise trade deficit hit a record, and the services surplus fell.
This was the last trade data release before the November 3rd election. The White House apparently felt it had to counter the perception of failure.
Lighthizer acknowledges actual causes of deficits
Lighthizer’s rationalization for the mounting deficit contradicted his and the president’s previous assertions that the trade deficit is a measure of a country’s trade policy — not macroeconomic fundamentals, such as the ratio of domestic saving to investments and consumer spending. In the past, Lighthizer blamed deficits on alleged weakness of prior administrations in confronting trading partners on unfair practices. Now, he ascribed the rising deficit to the fact that the US economy has been recovering from the pandemic more rapidly than some other countries. Thus, the US has been drawing in imports while other countries have been trimming their purchases of US exports.
The revival in US domestic demand to which Lighthizer attributes the increase in imports is due to the economic pickup following the reopening of the shut-down economy. But it is also a function of the stimulatory fiscal and monetary policies that has been going on since the beginning of this administration and the years before that under President Obama. Such expansionary policies diminish domestic savings. They are the key macroeconomic cause of trade deficits. When domestic investment and spending exceed domestic savings, capital has to be imported and the trade deficit grows.
A New York Times article, “Top China Critic Becomes Its Defender,” suggested a split between Lighthizer and Secretary of State Pompeo over negotiating a free trade with Taiwan, with Lighthizer opposed out of fear that it would jeopardize the administration’s Phase One trade deal with China.
Vice presidential debate
China policy also came up at the October 7th vice presidential debate. Democratic candidate Kamala Harris accused the Trump administration of losing the trade war with China:
[T]he vice president [Pence] earlier referred to … part of what he thinks is an accomplishment, the president’s trade war with China. You lost that trade war. You lost it. What ended up happening is, because of a so-called trade war with China, America lost 300,000 manufacturing jobs. Farmers have experienced bankruptcy, because of it. We are in a manufacturing recession, because of it.
Vice President Mike Pence countered that Biden was China’s “cheer-leader” who “wants to go back to the economic surrender to China…. [and] to repeal all the tariffs that President Trump put into effect.”
Harris made no mention of the Trans-Pacific Partnership agreement backed by the Obama-Biden administration and many congressional Republicans and whether a Biden-Harris administration would seek to restore it. Pence kept describing administration policy as “free and fair” trade – a euphemism for trade that is not free but protectionist and hardly fair to those American producers and consumers harmed by tariffs.
Manufacturing job losses become an issue
Recent business and press reports have observed that the US has been losing jobs in the steel, coal, auto, and other manufacturing sectors despite Trump’s attempt to save them with tariffs. The Business Roundtable released a study finding that about 20% of US jobs (about 40 million) rely in some way on international trade and the number has been rising. According to the study, “opening markets to American goods and services around the world through rules-based trade is critical to US economic recovery.”
Commenting on electoral implications, Reuters published a long article on October 9th titled “Trump steel tariffs bring job losses in swing state Michigan.” The article noted that
Trump’s strategy centered on shielding U.S. steel mills from foreign competition with a 25% tariff imposed in March 2018. He also promised to boost steel demand through major investments in roads, bridges and other infrastructure. But higher steel prices resulting from the tariffs dented demand from the Michigan-based U.S. auto industry and other steel consumers. And the Trump administration has never followed through on an infrastructure plan.
But it’s not clear the Biden campaign offers an alternative. Reuters continued:
Many Democrats have supported steel tariffs. The Biden campaign did not respond to a request for comment on its steel trade policy. In a statement to the United Steelworkers in May, Biden said steel tariffs would remain until a global solution to limit excess production — largely in China — can be negotiated.
Tariffs create need for more tariffs for those hurt
The Wall Street Journal weighed in on the impact of tariffs in an October 29th editorial titled, “A Commerce 232 trade probe threatens to raise electricity prices.” The focus was on the situation facing the domestic electrical transformer industry, which had suffered from the 25% tariff slapped on electrical steel, making it less competitive with imported transformers and parts. AK Steel, which makes electrical steel in Ohio and Pennsylvania, now wants a tariff on transformers so that there will be less competition for domestic makers that use domestic electrical steel. A tariff could be imposed through Commerce’s self-initiated Section 232 investigation of transformers. The rationale for the tariff would be the alleged threat to national security — despite the fact that most of the imports come from close US allies like Japan.
The editorial ends: “With five weeks to go before an election, sources say Mr. Trump is under great pressure to satisfy a special interest in two battleground states…. more proof that flirting with protectionism is a loser.”
Chinese e-payments to be banned?
Even as the Trump administration’s efforts to ban US operations of Chinese apps TikTok and WeChat face court injunctions, there is, reportedly, intense discussion within the administration of banning the Chinese e-payments platforms of Alibaba’s Ant Group (owner of Alipay systems) and Tencent Holdings (owner of WeChat pay).
The reason for potentially expanding the ban is that the payments companies, while not active within the US, are expanding internationally. This will give them access to personal financial data on millions of people worldwide – a potential security risk.
It isn’t clear what authority the administration might use if it decides to move ahead with a ban. Action is being pushed mainly by China hawks at the State Department. Any action against these companies — especially Ant, which is about to go public on the Hong Kong and Shanghai exchanges — would likely anger Beijing even more than the TikTok/WeChat actions did.
In person Quad meeting in Tokyo
Tokyo hosted the second meeting of the Quad (US, Japan, Australia, India) foreign ministers on October 6. The ministers also held separate bilaterals with each other, and Secretary of State Mike Pompeo met with Prime Minister Yoshihide Suga as well.
Ministers Pompeo, Marise Payne, and Subrahmanyam Jaishankar traveled to Tokyo. That an in-person meeting took place rather than a virtual event was a sign of the meeting’s importance. Host Minister Toshimitsu Motegi said before they arrived that the ministers wished to confirm the importance of “the Free and Open Indo-Pacific [FOIP] vision.” This vision, like the Quad itself, was championed by former PM Shinzo Abe.
China is the Quad’s key target. Protecting maritime lanes and discouraging Chinese territorial ambitions is a main objective of the FOIP vision. Beijing has therefore expressed its opposition to the group and did so again this week. Chinese opposition helped squelch the first formation of the Quad over a decade ago despite the four countries’ interest in it. But not this time.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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