U.S./Mexico Talks Continue Today; Border Arrests at Seven-Year High

Posted on 06/06/2019 7:10 AM

Fed's Beige Book shows stress of tariffs, weather-impacted planting

Talks between the U.S. and Mexico over migration continue today, before President Donald Trump's threatened tariffs are set to take effect Monday and as the number of migrants on the southern border continues to surge to a seven-year high. Trump tweeted last night that "progress is being made but not nearly enough" in discussions with Mexican officials. Trump said talks would resume today but if no agreement is reached, tariffs on imports from Mexico would take effect Monday. Biggest hurdle: Trump has not spelled out what the Mexican government would need to do to satisfy him.
     Fitch’s downgrade of Mexico’s credit rating to BBB took the Mexican peso lower. Moody’s has also revised the country’s outlook to negative.
     The Federal Reserve on Wednesday detailed negative conditions in agriculture, citing wet spring weather and trade headwinds in its latest “Beige Book” report.
     USDA Sec. Sonny Perdue told reporters on Wednesday that USDA was still reviewing the issue of MFP 2 aid for prevent-plant acres and could have an answer as soon as Friday. As previously noted, USDA is mulling using the CCC Charter Act to possibly aid such producers and not via the MFP 2 package, which is contingent on tariff impacts. During the MFP 2 trade-aid announcement, USDA officials said farmers who don’t plant a crop in 2019 won’t qualify for assistance. “The Market Facilitation Program is designed for tariff disruptions and we have a safety net in insurance over preventive planning,” Perdue said. “So, I implore our producers to look at their situations, both on the ground and in the markets and do what they would do.” Sources say Perdue's comments on this topic have largely caused the confusion because he gave oxygen to using the MFP 2 program for prevent-plant aid. Thus, the move to possibly use another approach for such aid, but even that is not assured. Sources say there is no new news here because USDA lawyers insisted before the MFP 2 press release was put out that such aid could not impact prevent-plant acres.
     Trump double-speak on China continues. President Trump told reporters that tariffs on China could be raised by another $300 billion if necessary. "But I think China wants to make a deal and I think Mexico wants to make a deal badly," he said on his way to France.
     A proposed biotech crop rule from USDA’s Animal and Plant Health Inspection Service would exempt numerous genetically engineered plants from federal regulations
     Hemp, hemp hurray. Fed Gov. Michelle Bowman promised Sen. Jon Tester (D-Mont.) at a Senate hearing on Wednesday that the central bank will clarify that hemp is now a legal product and that hemp businesses should be able to access services from financial firms.
     $10 trillion and counting... Rep. Alexandria Ocasio-Cortez (D-N.Y.) said Wednesday that any plan to sufficiently address the climate crisis will need to cost at least $10 trillion.
     Talk is cheap. This year, for the first time, American adults are expected to spend more time looking at their mobile phone than their TV.


U.S./Mexico update:

  • Talks between Mexican and U.S. officials had not made enough progress, according to President Donald Trump on Twitter. He plans to slap tariffs of 5% on Mexican products, starting on Monday, if Mexico does not stop migrants reaching the American border. Figures released on Wednesday by a Texas economic consulting firm showed illegal border crossings at a seven-year high — 144,200 border arrests in May, a 32% increase from April. Most crossed the border illegally, while about 10% arrived without the proper documentation at ports of entry along the border. Talks continue today.
    Apprehensions at Mexico border
  • Trump insisted earlier that he was not bluffing, but he also predicted that Mexico would make a deal to avert a series of escalating surcharges on its products. Marcelo Ebrard, the Mexican foreign minister, met Wednesday afternoon for two hours with Vice President Mike Pence and Secretary of State Mike Pompeo, hoping to convince Trump’s top advisers that Mexico is working aggressively to protect the border. Pompeo left Trump's trip in Europe to attend the meeting in Washington. Homeland Security Secretary Kevin McAleenan also joined the meeting.
  • Ebrard said he was optimistic about reaching a resolution before the tariffs go into effect Monday. “We have the opportunity to share our point of view, explain why the Mexican position, that we are following regarding this issue, and tomorrow we are going to follow the talks,” he said. Pence said the efforts were insufficient because they would most likely reduce migration only at the margins, instead of the wholesale changes that Trump was looking for.
  • Ebrard said he did not want to discuss the possibility of Mexico’s retaliation to U.S. tariffs since the two sides are now involved in negotiations. He said Pence was focused on finding common ground.
  • Trump has set a deadline of June 10, saying he will use broad emergency powers to begin taxing all Mexican goods at 5% and to increase the tax to 25% by October if illegal crossings do not completely end.
  • Trump trade advisor Peter Navarro suggested Wednesday that President Trump may not need to impose tariffs on Mexican goods because the threat of import taxes alone caught "the Mexicans' attention." Speaking on CNN Newsroom, Navarro said, let's stay calm and look at the chessboard here."
  • Even if a disapproval resolution passes the Senate, it would likely fall to a Trump veto without support from roughly 50 House Republicans, who rarely break with the president. "End of the day, we should support the president so we can get an agreement so we don't have tariffs. Them talking about not supporting him undercuts his ability to do that," said House Minority Leader Kevin McCarthy (R-Calif.) on Wednesday.
  • California and Texas are among the states whose economies would be hit hardest by tariffs. One private report said the proposed tariffs would result in 406,000 lost jobs. Link for details from the New York Times.
    Mexico Imports
  • As tariffs bite, get ready for a 1970s-style supply shock. Market turmoil over U.S. tariffs on China and the threat of the same on Mexico stems from a fear of the unknown: No one knows what a trade war will look like, but the 1973 Arab oil embargo holds some clues, the Wall Street Journal reports (link).
  • Customs brokers latest to sound concern over threatened Mexico tariffs. Customs brokers are pressing lawmakers and the administration to rethink the proposed tariffs that would take effect June 10 on imports from Mexico, citing the financial impacts and expected disruptions to trade if the tariffs go into effect. "The disruption caused by these tariffs will be significant, raising costs for U.S. businesses of all sizes that will cascade negatively through the entire economy," the National Customs Brokers and Forwarder's Association of America (NCBFAA) said in a letter (link) to congressional leaders, asking House Speaker Nancy Pelosi (D-Calif.) to schedule a vote on a resolution of disapproval or other legislative action to thwart the tariffs. The Pacific Coast Council of Customs Brokers & Freight Forwarders Association said in a letter (link) to administration officials and key lawmakers they have "grave concern, even alarm, that it will be impossible to comply, as the mechanisms for compliance are not available between now and June 10, or even before the increase planned for July 1." They argue the continuous bond filed by customs brokers on behalf of importers will become insufficient this month, and reviewing the financials will take weeks. They also pointed out that payment of duties in June alone could exceed the capacity of most brokers, particularly if they handle large numbers of importer clients.
  • Another move by the Trump administration was announced Wednesday when it announced it would begin restricting or canceling education, legal aid and playground recreation for migrant children in government shelters.
  • The peso yesterday slid as much as 1.3% as credit ratings agency Fitch downgraded the nation’s sovereign debt near junk status - citing risks posed by heavily indebted oil company Pemex and trade tensions - while Moody's lowered its outlook to negative.
  • USMCA-related impact. Chris Krueger of Cowen Washington Research Group, in a Wednesday evening note, summarized the damage Trump’s move against Mexico may have already done to his own trade agenda: “Whether or not the tariffs go into place on Monday, we believe that real and lasting damage has been done to the broader Trump trade grand strategy. A week ago, the overarching strategy involved a Fortress/Factory North America locked down against China with supply chains migrating to more ‘friendly' countries. The crowning achievement of the Administration's trade policy — USMCA — was moving through Ottawa and Mexico City post steel and aluminum tariff relief. Seemingly out of the sky, Trump kneecaps Mexico with tariff threats and throws U.S. ratification into a tailspin. We do not believe USMCA can pass the current Congress.”

Fed's Beige Book notes trade and tariffs raising concerns, and conditions in U.S. ag have deteriorated. Two themes were clear in the anecdotal recap of activity based on information collected on or before May 24 by the Minneapolis Fed — trade and tariffs were raising concern and conditions in U.S. agriculture have deteriorated.

Concerns over trade uncertainties and tariffs were cited by several Fed districts as being a factor that was holding up or delaying some business activity. "Trade uncertainty has delayed business investment," according to the Philadelphia Fed recap, with the update from Dallas noting, "Outlooks were generally less positive than during the prior reporting period, with tariff and trade negotiations driving up uncertainty." However, the Dallas recap noted that relative to businesses, "a few were optimistic that an agreement would be reached and benefit the U.S. long term" relative to the trade tensions with China.

The Atlanta Fed pointed to the trade and tariff situation in their transportation sector notes. "Regarding trade policy uncertainty, some transportation contacts developed contingency plans to reduce capital expenditures and headcount to offset tariff-related revenue shortfalls," the recap said. "Expectations at District ports are for the pulling forward of freight ahead of the tariffs followed by a drop off in activity in the second half of the year."

Some pointed out at the increased tariffs were raising costs, but it was not universal that companies and businesses were able to pass those increased costs onto consumers or other end users.

Much of the attention in agricultural comments was relative to the difficult conditions facing farmers in several areas this spring in terms of getting crops planted. But both the Dallas and St. Louis Fed recaps cited the trade/tariff situation as being another factor weighing on the sector. "Contacts have continued to report concerns over depressed crop prices and the effects of renewed trade tensions with China," the St. Louis Fed noted. The Atlanta Fed noted "mixed" conditions for agriculture in much of the district, with both dryness and too much moisture noted.

The recap from the Chicago Fed summed up the difficult spring, indicating that "wet weather and low prices continued to be challenges for farmers in April and early May," with reports of planting delays "throughout the District because fields were too wet. Contacts indicated that it would soon be too late to plant corn in some areas and that switching to soybeans, while possible, would be costly due to wasted fertilizer and the low price of soybeans. Contacts also noted that the poor field conditions were adding to some farmers' financial distress." St. Louis also indicated the agriculture conditions in the district declined "moderately" compared to the prior Beige Book, but had "significantly worsened" compared to year ago. In Minneapolis, the report noted "contacts expressing concerns that some farmers might not be able to get a crop in the ground at all this year."

From the Kansas City Fed came a notation that "farm income decreased modestly, and farm loan repayment rates slowed slightly since the last survey period. Conditions deteriorated more in Missouri and Nebraska, where contacts reported a moderately faster decline in income and slower rate of loan repayment."

Easing rules on genetically engineered crops. The Trump administration would exempt many new genetically engineered crops from regulation by the U.S. Department of Agriculture under a broad overhaul of biotechnology rules announced on Wednesday. USDA said the move would cut the cost of developing genetically engineered plants and would exempt crops with traits “similar in kind” to modifications that could be produced through traditional breeding techniques. Developers would be allowed to make a “self-determination” that their products are exempt from regulation. The administration argued the approach will allow regulators to focus on "increasingly complex products which, in turn, may pose new types of risks.”

USDA estimates the proposal would save developers an average of $3.6 million for each new genetically engineered crop, if the product is not also regulated by the Food & Drug Administration or Environmental Protection Agency. If another government agency also regulates the plant, the average savings would drop to $730,000.

This common sense approach will ultimately give farmers more choices in the field and consumers more choices at the grocery store,” Greg Ibach, Undersecretary of Agriculture for Marketing and Regulatory Programs, said in a statement.

Other items of note:

  • Rahm Emanuel, the former mayor of Chicago and Obama administration official, will join the investment bank Centerview Partners as a senior counselor.

  • In another “show vote,” House Democrats hope to roll back limits on deductions for state and local taxes.

  • President Xi Jinping of China landed in Moscow yesterday for meetings with Russian officials, underscoring the countries’ ties amid China’s trade war with the U.S. The South China Morning Post notes that, “Moscow and Beijing could be about to upgrade their relationship to something close to an alliance as both try to fend off pressure from the West.” “The decision to upgrade bilateral ties to ‘comprehensive strategic partnership of coordination in new era’ was announced by Chinese President Xi Jinping and Russian President Vladimir Putin following their summit in Moscow on Wednesday, state-owned Xinhua said in a brief report.”

  • Trump struck a conciliatory tone towards Europe’s approach to Huawei Technologies, the Chinese company that he has been targeting with various punitive measures. After meeting U.K. Prime Minister Theresa May, he dismissed the idea of cutting intelligence ties with the country.

  • The U.S. Department of Defense has started looking for alternative sources of rare earths as part of a plan to find diversified reserves outside of China. It has held talks with Malawi’s Mkango Resources Ltd and other rare earth miners across the globe about their supplies of strategic minerals.

  • U.S. lawmakers introduced a bill to force Chinese companies listed on American stock exchanges to comply with financial oversight. In a statement, Sen. Marco Rubio (R-Fla.) said, “Beijing should no longer be allowed to shield U.S.-listed Chinese companies from complying with American laws and regulations for financial transparency and accountability.”

  • Amazon drones will be making deliveries in "months," beginning test runs of toothpaste and household goods weighing as much as five pounds. "From paragliders to power lines to a corgi in the backyard, the brain of the drone has safety covered," said Jeff Wilke, who oversees Amazon's retail business. Where will the program start? It's not known yet, but the devices will make deliveries within 7.5 miles of a company warehouse and reach customers within 30 minutes.

  • Here we go again... Sen. Kevin Cramer (R-N.D.) is launching a Northern Border Caucus to focus on U.S.-Canada issues like grain grading, which was “approached” but not resolved under the new USMCA deal.

  • Senate Agriculture Committee will hear from USTR and USDA trade officials for a hearing on ag trade set for the morning of June 13.

  • Senate confirmed Heath Tarbert’s nomination for CFTC chairman on an 84-9 vote. Tarbert will leave his post as acting undersecretary for international affairs at the Treasury Department and take the helm of CFTC on July 15.

Markets. The Dow on Wednesday rose 207.39 points, 0.82%, at 25,539.57. The Nasdaq was up 48.36 points, 0.64%, at 7,575.48. The S&P 500 moved up 22.88 points, 0.82%, at 2,826.15.

U.S. oil sinks into a bear market, falling more than 20% below their April peak, as the global-growth worries gripping financial markets were compounded by fears of a supply glut. Oil closed down 3.4% at $51.68 a barrel but recovered some ground today. The sudden downturn in oil prices is another reason some analysts say they are worried about the global economic picture. Fuel inventories in the U.S. are rising, when supplies usually tighten for the summer driving season. Supplies of crude were up by nearly seven million barrels for the week, their highest level in two years. Petroleum-producing states like Texas and Louisiana will suffer. And oil companies can’t absorb another big price drop, according to Raoul LeBlanc at the data provider IHS Markit: “If it goes below $45, it’s unsustainable.”

The International Monetary Fund (IMF) fears that active and potential tariffs between the U.S. and China could hinder global economic output by 0.5% in 2020. President Trump again pushed for concessions from China, reiterating his promise to place tariffs on another $300 billion of imports.

Growth impulses have weakened significantly, the Reserve Bank of India said as it cut its benchmark interest rate for a third time this year and the lowest in nine years, to support an economy growing at the slowest pace since 2014.


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