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DAVID KRUSE

Trump trade war

April 27, 2018
Farm News

The Trump administration has been planning for a trade war for some time. This seems to come as a surprise to many who never believed that he was seriously going to implement his "America First" trade policy. Even after announcing pending tariffs, many still hold back in disbelief that they will be implemented.

Trump has picked his battles. He did not bend South Korea over as hard as he one time threatened to on Korus because of geopolitical concerns but is still holding that trade agreement hostage to a geopolitical resolution of the Korean peninsula too. Japan has also gotten lighter treatment for geopolitical reasons. They have invested a great deal in the US, employing a lot of Americans. Trump may need some help from Japan with China so doesn't want to alienate them until they get closer to a Sino-US resolution. Japan is rearming and has the second largest blue water navy in the world behind that of the US. It is larger than most realize. The ultimate confrontation may come between China and Japan and we will back Japan.

This challenge of China will start with this trade war but it is not where it will likely end. The idea that we are going to threaten tariffs against China and they will easily concede, as some seem to think, is absurd. They will make concessions, things that they knew that they would eventually have to change, but for whatever trade barrier they eliminate they will think of something else to add. I think that the election of Trump was a political fluke which required a perfect storm that will be difficult to duplicate in 2020. It is likely that someone else will be President and Beijing will conclude that they will not press an "America First" protectionist trade policy as hard as Trump. I believe that the odds are low that Trump will be impeached, even in the advent of evidence of "high crimes and misdemeanors" but greater odds being that conditions would be so difficult that he does not run for a second term.

Xi Jinping will be around as long as he wants as President of China, not hindered by elections, so it would be a reasonable conclusion that he will long outlast Trump in office. Beijing will be good to go with the long game. If Beijing can hurt Trump constituencies bad enough with reciprocal tariffs they may have more influence on the outcome of the 2020 presidential election than the Russians had on the last one. That is why Trump is talking up US patriotism trying to spin animosity toward Chinese trade policies into domestic loyalty.

One of those Trump constituencies is the US Farmer. That is why the Trump administration has been hard at work trying to discern what plan that they can implement to reimburse us for damage done by tariffs in order to buy electoral loyalty. Ag Secretary Confederate Perdue wanted and received CCC authority to tap the US Treasury for up to $30 bln in funding that could be used to support commodity prices in the omnibus spending bill. I frankly do not currently believe that Congress can pass a new farm bill because of the widening rift between proponents and opponents over SNAP spending. There would be better odds of extending the current one.

It is to be seen whether they give us (farmers) money or borrow us money or some combination of both for damages. For example: Let's say they announce non-recourse loans to farmers for $4 corn and $10.50 soybeans. If soybean prices plummet to $8 you put the soybeans under loan and if the price is lower when the term of the loan ends the commodity could be forfeited or sold with the difference reimbursed up to the loan rate by the CCC. They could bring back LDPs. That would keep farmers whole for a while although it would not fix the fact that they will have screwed up global trades flows for the Ag sector that could last over a decade. End-users will scream like they have been stuck with a sword if domestic prices are supported by loans which is why the LDP route may be the more likely. Otherwise, grain gets held off the market.

Given the amount of work that they are putting into this I think that the Trump administration thinks that there is a good chance that tariffs will be implemented and that they will have to authorize aid to farmers to shore up their political support in Red farm states. Frankly, US farmers do not want this aid, preferring a market instead, but will have to take it if the trade war heats up and commodity prices are drastically impacted. Reliance on a quick negotiated outcome is, well. . .very optimistic. Optimists first argued that he would not threaten tariffs and then that he would not implement them and then that they were being used only as negotiating tools to give leverage for a negotiated resolution. They also think China, of course, needs our market, so has to concede to our demands. I am not an optimist on this trade war.

One caveat to all of this is that I think that the odds for a successful resolution of NAFTA 2.0 have gone up considerably. Trump may take on China and get some support, however, NAFTA carries broad favorability within the farm sector and the US business community in general, and they do not want him screwing that up too. If he goes down the rabbit hole on both China and NAFTA, even if farmers are compensated for some losses, his Red state political support would not survive that.

Frankly, I think his pledge to "make it up" to farmers is poorly informed as to the scope of economic damage that would be done in order for farmers to receive full compensation. His administration strongly professes support for the RFS too. . . right up until they hand out RIN waivers like candy to refiners undermining it. Trump didn't know what supporting the RFS meant either.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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