This year’s international trade outlook focuses primarily on trade policy, which should once again dominate market-based developments in its significance for export-oriented U.S. agriculture. News media coverage of trade policy has focused on the on-again, off-again negotiations with China and the prospects for Congressional ratification of the revised North American Free Trade Agreement (NAFTA). We review these as well as longer term developments that are less visible, but probably more important. Most notably, we discuss the President’s efforts to depart from the rules-based international trading system that has come to serve U.S. agriculture so well. But we begin with a short summary of the U.S. Department of Agriculture’s forecast for agricultural trade in 2020.

USDA Forecast

The U.S Department of Agriculture’s November forecast for agricultural exports in 2020 is $139 billion, up $2 billion from the August forecast (Daugherty and Jiang, 2019). Rising prices for soybeans added $1.2 billion in forecast exports, while increased demand for imported pork in China contributed to an increase of $400 million in predicted pork exports. Falling beef prices reduced the value of expected beef exports by $200 million. Exports to China in 2020 are forecast to total $11 billion, up $3.5 billion from the value expected in August.

Short term trade policy issues to be resolved in 2020

The trade policy story that has garnered the most news attention in 2019, and should continue to do so in 2020, is the ongoing negotiation with China. The President does not have much leverage. He will be up for re-election next year, and probably needs to reach a deal of some kind. Rural voters in the Midwest were critical to his election in 2016, and they have borne a heavy share of the burden associated with the trade war. The issue that motivated this conflict, China’s inadequate enforcement of international rules on intellectual property, will be difficult to resolve credibly within the President’s short time horizon. If a deal is reached, it will probably involve a short-term commitment by China to purchase large quantities of agricultural goods. This would not be a solution to the larger issues, nor is it likely that it would undo the damage already done to U.S. agricultural interests during the trade conflict.

The Chinese leadership, of course, is not facing an election next year. Moreover, it does not appear that the prices of China’s exports to the U.S. have fallen in response to the tariffs (Foy, 2019); the implication being that Chinese firms have not been forced to respond to U.S. tariffs by reducing their prices. The United States is only one market in a global economy. The emerging evidence makes it seem likely that China’s exports that would have been sold in the U.S. were instead diverted to other markets. Substitution across markets also seems to have been an important part of Chinese buyers’ responses to China’s tariffs on U.S. agricultural exports (Khan, 2019). Chinese tariffs on U.S. soybeans need not impose a large burden on Chinese buyers so long as other suppliers like Brazil and Argentina can meet their needs. The existence of other markets limits the leverage the U.S. has in any go-it-alone trade war, which is one reason that previous Presidents employed trade policy strategies that involve international institutions and/or coalitions of like-minded governments.

Another trade policy issue that will likely be resolved in 2020 is the question of whether Congress will ratify the renegotiated NAFTA, now known as the U.S.-Mexico-Canada Free Trade Agreement (USMCA). The renegotiated agreement offers a modest update to the original NAFTA. It maintains most of the structure and provisions of the old agreement, but includes new provisions for digital trade, longer patent lives for biologic pharmaceuticals, and increased North American content rules for automobiles. There are a number of provisions relevant to agriculture; the most relevant being an opening of dairy and poultry markets in Canada (Krug, 2018). Openings of this kind were negotiated by the Obama administration as part of the Trans Pacific Partnership (TPP) agreement, but were abandoned when President Trump withdrew from the agreement on his first day in office. USMCA is a vehicle for restoring the Canadian portion of this lost market access.

Although you would not know it from the news headlines, Article I, section 8 of the U.S. Constitution gives Congress the authority to set U.S. tariffs. Since it would be difficult for Congress to negotiate directly with foreign leaders, in modern times Congress grants the President temporary to negotiate trade agreements on its behalf. Usually presidents consult heavily with Congress during the negotiations, recognizing that they will likely need bipartisan support, regardless of which party controls Congress (each party contains numerous trade skeptics, so a strictly partisan process is unlikely to succeed). USMCA was negotiated at a time when Republicans controlled the House of Representatives, and the President’s negotiating team did not pursue priorities that Democratic leadership wanted in a NAFTA update. With the Democratic takeover of the House of Representatives in 2018, that calculus had to change. The current status of the agreement is that the President’s team is negotiating with Democratic leadership, which wants changes to the agreement prior to a vote on the floor.

The implications of the USMCA for agriculture depend on what it is being compared to. Under an assumption that a ‘No’ vote would simply mean a reversion to NAFTA, a Purdue University study found that the agreement would increase U.S. agricultural exports by a modest $454 million (Chepeliev et al, 2019). The bulk of this growth would occur in dairy and poultry products. Although it seems unlikely that he would have the legal authority to act without Congress, the President has threatened to withdraw from NAFTA if the USMCA is not passed (see: Lawder, 2017). The same Purdue study found that withdrawal from NAFTA would decrease U.S. agricultural exports by $21.8 billion (that’s billion with a “b”). From the point of view of agriculture exporters, at least, it would seem that a key reason to pass the USMCA is to preclude any further damage that the trade war might do to US exports.

Longer term issues in U.S. & global trade policy

In addition to occasionally giving the President authority to negotiate trade agreements, in the post-World War II period Congress granted the Presidency a number of discretionary and/or emergency powers to impose import tariffs. The unwritten understanding was that Presidents would use these powers sparingly: First because the President presides over the whole nation, and the costs of tariffs to the entire economy outweigh the benefits to tariff-protected sectors; and second because the President is responsible for American foreign policy, and aggressive use of tariffs would undermine traditional U.S. foreign policy goals such as the spread of peace and prosperity and the development of market-oriented economies around the world. President Trump seized on these emergency/discretionary powers to levy tariffs as a way to implement his own trade policy. One of the longer-term issues in U.S. trade policy is whether Congress will seek to reclaim its authority to set the broad course of trade policy. At least three pieces of legislation in the Senate address this issue (Behsudi, 2019).

One of the most significant trade policy issues of the upcoming Presidential election will be the future relationship of the United States and the World Trade Organization. In the post-World War II period, the United States has been the most influential advocate for an international trading system that focused on opening markets through negotiation, agreed-upon rules that constrain governments’ ability to arbitrarily raise tariffs or other trade barriers, and rules that limited governments’ ability to discriminate in favor of one country’s exports against those of another member. In 1995, with U.S. support, this process created the World Trade Organization, an international body that embodied the mindset that U.S. negotiators had pushed for 50 years: that a rules-based system would limit economic conflict, and increase prosperity by giving exporting firms more certainty about their access to foreign markets. Prior to President Trump, Presidents of both parties had stressed the importance of these principles, even if they sometimes strayed from them in the face of domestic political pressures.

President Trump, by contrast, has threatened to withdraw the United States from membership in the WTO, although it is unlikely that he could do this without authorization from Congress (BBC, 2018). His chief trade negotiator, U.S. Trade Representative Robert Lighthizer, is a steel industry lawyer known in Washington for his brass-knuckled use of political muscle and obscure U.S. trade laws to support the interests of his clients (Peterson, 2018). Ambassador Lighthizer has recently taken this approach to the World Trade Organization, hobbling the WTO’s system for settling disputes among its membership, a topic we discussed last year (Hillberry, 2018).

Ambassador Lighthizer’s approach to negotiating trade agreements reflects a disregard for WTO rules, and it seems, a disregard for Congressional oversight. A hallmark of trade negotiations under this president has been the idea that trade negotiations proceed in “phases.” The U.S.-Japan Agreement recently notified to Congress is described as “phase one” of an ongoing process of negotiations with Japan. In phase one, the U.S. is to give Japanese autos preferential access to the U.S. market in exchange for restoration of the access to the Japanese market that U.S. agricultural products lost when President Trump withdrew from TPP. This “mini-agreement” seems to violate WTO rules requiring that preferential agreements between two WTO member countries liberalize “substantially all” trade between them (GATT, 1947, Article XXIV). The agreement was also negotiated without input from Congress. In the House Ways and Means committee hearing on the topic, a hearing at which neither Ambassador Lighthizer nor his deputies chose to testify, several members of Congress noted the lack of consultation with Congress and the limited breadth of the U.S.-Japan agreement (SIFMA 2019). The administration’s approach on phase one of the agreement seems consistent with the president’s general instincts on trade policy. If the Japan-U.S. agreement is a template for future U.S. agreements, then it raises very important questions about the future of U.S. trade policy and its place within global institutions (Olson, 2019).

The future course of trade policy under a Democratic president is also somewhat hard to predict. While Presidents Clinton and Obama engaged in protectionist rhetoric on the campaign trail, in office President Clinton signed enormous trade agreements while President Obama negotiated the ambitious TPP agreement. What we might expect from the next Democratic president is perhaps more uncertain than usual. It seems likely that candidates from the moderate and progressive wings of the party would take different approaches, though these differences have not yet been well-articulated. It also seems likely any future President’s approach to trade policy will have been affected by President Trump’s executive action in this area, whether that President were to take office in 2020 or in 2024.

Uncertainty about the future of U.S. trade policy has left the international trading system adrift (Economist 2019). The lack of intellectual property protection in China is an ongoing issue that the multilateral system has found difficult to address. The mere entrance of China into global markets caused economic dislocations across the globe, even as it delivered new opportunities for China and for its trading partners. Now the United States, long the system’s most important advocate, appears to be turning away from its own handiwork. It seems unlikely that the rules-based trading system can survive continued misbehavior by its two largest members.

A key question remains: how to handle China, especially with respect to its inadequate protection of foreign intellectual property? Purists would say that intellectual property protection has no place in international trade agreements (Bhagwati, 2005). But the U.S. owners of intellectual property have provided much of the domestic political muscle supporting international engagement by the U.S., and Presidents can hardly ignore their interests. Moreover, if a rules-based system is to have integrity then it must also enforce these rules along with the others. President Obama’s approach to the China issue was to negotiate the TPP, a large and deep trade agreement in Asia that excluded China. Prospective Chinese membership in the TPP was meant to be a carrot that would induce better behavior by China over time. Another strategy would have been to build an international coalition that would apply a big WTO-consistent stick. President Trump discarded these options early in his presidency, choosing instead to apply the smaller stick of U.S. policy alone. Three questions that should have been asked more force-fully before these choices were made are 1) Can U.S. policy alone be successful in changing China’s behavior? 2) Are whatever benefits that would arise worth the costs that a U.S.-only policy imposes on other sectors of the U.S. economy? and 3) With China on the brink of surpassing the U.S. as the world’s largest economy, should the U.S. really be advocating a return to the Law of the Jungle?

The international trading system – including both the WTO and regional trade agreements that are WTO-compliant – was painstakingly built over almost seven decades. In the last two decades especially this system has served U.S. agriculture very well. A breakdown of the rules-based international system is thus a huge risk for U.S. agriculture. U.S. withdrawal from the WTO would also have enormous consequences for U.S. agriculture, as it would give other agricultural exporters preferential access to most of the global economy. A strategy of weakening the WTO from within also risks damaging export- oriented sectors like agriculture. It is difficult to know exactly what the future holds, as much depends on the outcome of the election, and how the election affects politicians’ behavior. Altogether, it seems quite possible that 2020 will be the most important year for U.S. agricultural trade policy since at least the mid-1990s.

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References

BBC 2018, “Trump threatens to pull U.S. out of World Trade Organization,” British Broadcasting Corporation, August 31, https://www.bbc.com/news/world-us-canada-45364150

Behsudi, Adam 2019 “Grassley forging ahead with bill to rein in Trump’s tariff powers,” Politico, June 11, https://www.politico.com/story/2019/06/11/grassley-bill-trump-tariff-powers-1521786

Bhagwati, Jagdish 2005, “From Seattle to Hong Kong,” Foreign Affairs, December, https://web.archive.org/ web/20070406153234/http://www.foreignaffairs.org/20051201faessay84701/jagdishbhagwati/from-seattle-to-hong-kong.html

Chepeliev, Maksym, Wally Tyner and Dominique van der Mensbrugghe, 2018, “How differing trade policies may impact U.S. agriculture: The potential impacts of TPP, USMCA and NAFTA,” GTAP Working Paper #84. https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=5670

Economist 2019, “It’s the end of the World Trade Organisation as we know it” https://www.economist.com/finance-and-economics/2019/11/28/its-the-end-of-the-world-trade-organisation-as-we-know-it

Foy, Marcus, 2019, “U.S. Consumers Have Borne the Brunt of the Current Trade War,” NBER Digest, https://www.nber.org/digest/may19/w25672.shtml

GATT 1947, General Agreement on Tariffs and Trade, https://www.wto.org/english/tratop_e/region_e/region_art24_e.htm#understanding%20Hillberry,%20Russell%202018,%20%E2%80%9CThe% 20Administrations%E2%80%99

Hillberry, Russell 2018, “The Administrations’ Trade Policy: What It May Mean for the Future!” December, Purdue Agricultural Economics Report, https://ag.purdue.edu/agecon/ Documents/PAER%20December%202018_FINAL.pdf

Khan, Yusuf, 2019, “China is sourcing more of its farm goods from other countries, and that’s a bad sign for the US,” Market Insider, July 31, https://markets.businessinsider.com/news/stocks/china-sources-more-farm-goods-brazil-us-trade-war-2019-7-1028403926

Krug, Kathy L. 2018, “USMCA – Impact on agriculture,” Norton Rose Fulbright publication, November, https://www.nortonrosefulbright.com/en/knowledge/publications/f3a05b3f/usmca—impact-on-agriculture

Lawder, David, 2017, “Any Trump NAFTA withdrawal faces stiff court challenge: legal experts”, Reuters, November 21. Available at https://www.reuters.com/article/us-trade-nafta- trump-options/any-trump-nafta-withdrawal-faces-stiff-court-challenge-legal-experts-idUSKBN1DL2PK

Olson, Stephen (2019) “The Japan-US ‘Mini-Deal’ Has Big Implications,” The Diplomat, August 9, blog post available at https://thediplomat.com/2019/08/the-japan-us-mini-deal-has-big-implications/

Peterson, Matt (2018) “The Making of a Trade Warrior” The Atlantic, December 29, https://www.theatlantic.com/politics/archive/2018/12/robert-lighthizers-bid-cut-chinas-trade-influence/578611/

SIFMA (2019) “House Ways and Means Hearing on the U.S.- Japan Agreement,” Securities Industry and Financial Markets Association, November 20 https://www.sifma.org/resources/general/house-ways-means-subcommittee-hearing-on-the-u-s-japan-agreement/