Trade gap closes but trade wars heating up

The US trade deficit declined greater than expected this month. With a lower value of the dollar and stronger growth in the rest of the world, an improvement should be expected. However, some of the issues behind the scenes are what could be a potential worry. Trade wars can reduce the flow of good and services around the globe which is a key driver in overall economic success. Two new stories provide information on potential trade problems, the issue of importation standards and unfair trade practices.

Last week, Chinese officials stated that some health supplements and raisins imported from the United States did not meet Chinese safety standards and had to be returned or destroyed. Increasing health and safety standards has become a growing issue in China. By itself this may not seem to be a global problem, but the safety failure comes after US inspectors have rejected a number of Chinese exports for contamination. While safety standards are paramount, there could be a tit-for-tat type of gamesmanship going on.

The more important issue is with a Canadian request for a WTO panel on US farm subsidies. The complaint by the Canadians, who are asking the WTO for a dispute settlement panel, is that the farm subsidies provided by the US government were greater than allowed. US subsidies are capped at a fixed value of $19.1 billion. The Canadians are charging that the US has exceeded that number by billions. This issue has increased importance as the US reviews the farm subsidies bill this year. The US has lost a cotton subsidy case in 2004. The farm subsidy issue is the major hold-up with the Doha trade talks.

These issues are relevant because they can have an impact on overall trade. They are also important because a change in subsidies will have an impact on the volatility of prices for commodities. More volatile commodity prices provide for greater trading opportunities but also changes the behavior of both buyers and sellers. Watching trade closely is an important indicator of a change in regimes.