Protectionism and the deconstruction of globalization
The world is turning upside down. For most of my life the U.S. ag sector has been feeding the world. It has been the cutting edge of innovative, sustainability and productivity for food production that the rest of the world envied. Granted, we have some unusually exceptional resources and natural logistics in the heartland that has given us the competitive advantage as the bread-basket of the world. We have been told that 95% of the world’s population lives outside the U.S.
Global economic growth in the past century has turned literally hundreds of millions of peasants into consumers. The first thing that they spend their income on is calories and better food. They have become “our” customers. Globalization opened borders and reduced trade barriers lowering the cost of food worldwide which fueled improving GDP which created wealth which again circled back to improved diets and higher demand for food.
The U.S. ag sector benefited from globalization. Was it perfect?…of course not. Many countries retained a system of food protectionism that they categorized as national security. The trend of globalization ran into a wall at the WTO as India and others blocked an advancing round of trade liberalization. China retained plenty of trade barriers all the while becoming our largest customer. The EU became a non-GMO anti-biotech island of stubborn ignorance as they maintain closed ag markets while they benefited from trade in other economic sectors. This was German trade hypocrisy. The WTO, which was created to mediate trade disputes, had a mixed track record. It could alleviate small trade disputes if the litigants were very patient. It lacked efficiency and depth but offered a vehicle to start the process. It was better than nothing. How much better? We will be able to judge that after it is gone. The WTO has an important role to fill.
Donald J. Trump (DJT) came into office with a huge chip on his shoulder relative to his perception of the global economy and the U.S. role in it.
He has an exceedingly negative view of trade and its impact on the U.S. economy. He put together a team of trade negotiators that went to work upending the world trade order looking to rebalance it more in our favor. I think that USTR Robert Lighthizer may be the most effective member of the administration that there is, although there is not much competition for that honor. Lighthizer had to turn trade ideology into substance were the rubber met the road. It is one thing to talk about trade policy and another to execute it. Lighthizer remarkably operated in many places at once.
The South Korean trade pact, KORUS, came first because of the geopolitics of the Korean peninsula. They took NAFTA apart and reassembled it as the USMCA. They passed initially on TPP and later circled back to accept a very similar USJTA with Japan. DJT launched a trade war with China that has resulted in what appears to be a time-out in what is called Phase-one where we get to see if they can maintain a deal. It was meant to benefit the ag sector as China is required to buy $36.5 billion worth of U.S. ag products this year. Phase-one feels more like one inning in a worsening trade war that is far from over yet. Lighthizer is now focused on negotiating trade deals with the EU and UK. With all of this work accomplished re-negotiating old trade deals and creating new ones, none of them have been in force long enough yet for U.S. ag to feel the benefits. There was pain in the process of negotiation for the U.S. ag sector that has not gone away yet. CCC MFP cash has run out so it appears like the U.S. ag sector is going to sink or swim on its own in this deep pool of global trade.
Then along came the Covid-19 pandemic. What DJT got started in upending the old-world trade order, Covid-19 is flipping it on its nose. It is getting so scuffed up, bruised and broken that we may not soon be able to recognize it. The trade war with China is sliding toward a cold war. Instead of riding out bumps in trade liberalization, we are seeing some trade relationships go into the ditch. I think Brexit qualifies. The Russia-Saudi crude oil price war is a frontal attack on U.S. shale oil and biofuel industries striking at U.S. oil independence, something that DJT has been uncharacteristically quiet about. He talks more about “Obama-gate”, whatever that is, than what the crude oil trade war has done to our energy security. He has made no mention that I have heard over the damage done to the ethanol industry. It is the Dems that put a provision for aid to the ethanol industry in the HEROs act.
The pandemic is likely to unleash the strongest wave of global protectionism seen since the Great Depression. DJT brought tariffs back into fashion. The trend of globalization gave countries the confidence that they could rely on others for their food security and they benefited from being able to buy food from low cost producers. That confidence is now on a respirator and appears that the patient will not make it. Mindsets over food security are changing the world over. Food deficit countries are going to subsidize domestic food production while accumulating food reserves. They are not wanting to get caught short of food needs which is a sure way to destabilize governments. The U.S. meat supply chain broke and foreign buyers will lose confidence in the U.S. as a reliable supplier while soaring prices will cause US consumers to see meat exports as a threat to their food security. It is amazing that in just a few weeks how everything can get turned upside down. Globally, countries are going to re-evaluate their food security and there will be changes made to bolster their domestic production and rely less on foreign supply. That is protectionism and the deconstruction of globalization.
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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