Pete's Comments: How bad is trade really?

President Donald Trump listens to Canadian Prime Minister Justin Trudeau at the trade-focused G7 Summit in early June. Pictured (clockwise from top left) are Theresa May, prime minister of the UK; Angela Merkel, chancellor of Germany; Donald Trump, president of the U.S.; Justin Trudeau, prime minister of Canada; Emmanuel Marcron, president of France; Shinzō Abe, prime minister of Japan; and Giuseppe Conte, prime minister of Italy. Not included in the photo, but still present at the table at the time, were the representatives from the European Union, Commission President Jean-Claude Juncker and Council President Donald Tusk.

You look around the world and all counties seem to have their political issues. Then President Donald Trump comes along and forces everyone out in the open. Just think about it—starting negotiations with North Korea to calling out Canada’s Prime Minister Justin Trudeau for not reducing milk tariffs, as if 36 million Canadians are going to consume more milk.

Everyone is trying to protect their own nests. It is a natural response to look out for your own brood, just like a family, and every country in the world is doing it. Trump is trying to look out for us through fair and reciprocal trade.

When Trump lowered corporate taxes to 21 percent, he just made the tax code more competitive with the rest of the developed world. Folks in the European Union were crying foul, saying that it was a subsidy. No, it was just making our corporate culture more competitive around the world.

And what did we get? According to the Atlanta Federal Reserve Bank’s GDPNow forecast model, we’re getting 4.8 percent economic growth during the second quarter. Suddenly, the economy is booming, and it is working to lift everybody. Trump probably figures that with a booming economy there is no better time to straighten out a few trade deals. We just hope he gets it done quickly.

These little skirmishes never seem to end quickly, and somebody always gets damaged. NAFTA seems to be working well for agriculture, but Mexico is already looking for other commodity suppliers and working on trade deals. Cheap labor has been their greatest asset in attracting foreign investment, but they are also protective about foreign investment.

China is the big prize and at times you must wonder if its President Xi Jinping and Trump trying to game each other. When China was allowed into the World Trading Organization, everyone expected them to become more democratic and change to the world’s governing order. After 20 years we realized that they went the other way and traded on their own terms, which included demanding companies turn over their proprietary technologies. Then China changed its constitution to allow Xi be a lifetime ruler. It’s like someone forgot they are a communist country with a heavy hand and 1.3 billion mouths to feed.

Agriculture is always the whipping boy when it comes to tariffs. We put tariffs on steel and aluminum, so China puts tariffs on soybeans and pork. And they consume a lot of both products. They charge a 25 percent tariff on U.S. cars while we charge a 2.5 percent tariff on Chinese cars. Why we tolerate that lack of fairness is beyond me. I can’t think of a Chinese brand of automobile that we would import, but I’m sure we import a lot of car parts.

Ironically, red meat exports were on fire during April. Beef was up 16 percent in volume and pork exports to Mexico were up 41 percent in volume compared to a year ago. The USDA’s Economic Research Service (ERS) said that we sold beef directly to 93 different countries and values were up 20 percent. It’s a great day when you can sell more product for more money. I would have to say that some of these countries we’re having trade issues with were (or are) trying to stock up on pork before tariffs go into effect.

The ERS points out that April data precludes many of the new announcements that were made regarding tariffs on pork from Mexico and it’s likely too early to see changes from China’s new tariff regime. New trade policies from U.S. trade partners are difficult to assess because there are so many moving parts in these dynamic markets. Exchange rates, individual product elasticities, and relative values to other countries create a moving target to forecast.

Economists are also saying that currency exchange rates will help offset tariffs. The Federal Reserve bank is pushing interest rates higher to keep inflation in check, but the higher interest rate also makes the dollar more valuable to investors, and if you trade, you need U.S. dollars to do it.

Argentina’s currency has lost 51 percent of its value and the Brazilian real has lost 13 percent. These weaker currency values make Argentinian and Brazilian goods more competitive on the trade front. It’s considered a head wind to U.S. grain and soybeans. However, with the crop problems in South America, the U.S. should still have no trouble grabbing market share in the near term.

It’s anybody’s guess how these trade deals will work out. It seems to me that China sends us cheap consumer goods while we send them staple goods like commodities. Global economies are doing well right now and there is a lot of incentive to keep trading. — PETE CROW


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