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DAVID KRUSE

The coming disorder part 1

May 25, 2018
Farm News

"America First" pulls this country away from the world trade order that has existed since post-WWII replacing it with something that is a work in progress, yet to be fully defined. The ag sector is on the leading edge of this change about to undergo a massive supply chain disruption and re-configuration marked by new trade barriers as America pulls out of the existing structure.

China is the largest ag market in the world and has been the US best customer. The Trump administration is pursuing a unilateral re-alignment outside of the confines and discipline of the WTO. All was not perfect in the existing world order. There were trade barriers defining the global ag sector whereby the EU practiced advanced sophisticated protection of its ag sector and China practiced a very managed ag sector under state central control that was not market driven. The U.S. ag sector was winning more than it was losing in the old system within the limitations of sometimes unbalanced rules. Where we were winning was with pork and beef exports to Asia and soybeans to China where these were market makers. Export dependence is a two-edged sword slicing in our favor when open and opening an artery when cut across our grain.

The Trump administration is demanding a re-structuring of world markets under the pretense that as the U.S. was running trade deficits that we were losing under the existing structure. That could be debated but they have no interest in debate and have the initiative to pursue a global trade adjustment that they feel will put "America First".

They are pursuing this change without allies, taking on all countries where they believe that a trade imbalance exists. Past geopolitical alliances are being ignored as geopolitical friends running a trade surplus with the US are considered no better than our enemies who are running a trade surplus with the U.S. This has had the effect of reducing the number of friends still aligned with the US. The remaining allies, the UK, Israel and the Saudis are not big trading powers in global markets, hardly worthy of being called a trading bloc.

The Trump administration is pursuing a very aggressive trade policy against the current trade system that has not always included negotiation as the first step. The Trump administration initially rebuffed Chinese entreaties to talk, only agreeing to negotiate on its schedule and terms. Brazil was taken back by U.S. audacity. The Trump administration levied tariffs on steel and aluminum, then issued temporary stays on implementation as they took requests for waivers.

Brazil was one of those countries. Brazil entered negotiation over the steel tariffs with U.S. officials and then were stunned when U.S. officials broke them off abruptly, telling them what their quota would be. Negotiation over -just like that. Brazil is now livid over the insult and frankly this will push them further toward China as global supply chains are reconfigured. The idea that the U.S. can roughhouse trading partners into submission and still be friends will be sorely tested.

The premise that the Trump administration has adopted that the U.S. has controlling leverage over China relative to trade is false. China has reduced the portion of its economy that depends on trade and has also reduced the portion of its economy dependent on trade with the U.S.

The things that it has been doing strategically, with securing trade routes through the South China Sea and in constructing a new silk road to Europe, have the objective of their getting along without us. This separation of trade interests will result in higher costs from tariff-driven inflation and higher interest rates as capital flows are negatively impacted through-out the world. Under the current world order, capital can move around the globe to wherever it made the most sense seeking the best return, generating the most world GDP. The developing disorder is going to disrupt all of that. The current world trading order is going to first fracture and then reconfigure along new alliances.

China is no longer buying our soybeans, has placed tariffs on pork, sorghum, ethanol and DDGs as well as is slow-walking other imports such as apples through their quarantine system to send a message of what is to come if the Trump administration implements the next round of $50 bln in tariffs which appears at this time to be extremely likely. The Trump administration demanded a complete end to the Chinese state run capitalistic economy by 2020 which if conceded to would plunge the Chinese economy into a historic recession. They have zero inclination to make this change on any calendar timeframe. They intend to keep their system. They would make other concessions as on tariffs and they have demands as well for access to U.S. technology that the U.S. is not going to allow. There is an impasse and it will intensify before any resolution is possible.

The idea that we are not in a trade war with China at this moment seems to be just parsing terminology. Given that the U.S. strategy is thus far to go after any trading partner with a trade surplus, it quickly becomes the U.S. against the world. This will create incentives for our trade partners to create new trade alliances. The current supply chains will reconfigure to adapt to the new rules as they develop. China will have no trouble creating new trade alliances with its neighbors in Asia, its historical trade relationship with Europe and its new buddy, South America, in order to ensure its food security. The U.S. may even drive its NAFTA partners, Canadas and Mexico, toward the Chinese trade orbit. I will delve into the specifics of how the Coming Disorder will impact the U.S. Ag sector in Part II.

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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