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The High Cost of Tariffs

eye on the news

The High Cost of Tariffs

Protectionism imposes a host of problematic economic and political consequences. June 21, 2018
Economy, finance, and budgets
Politics and law

Evidence suggests that voters penalize incumbent politicians for acts of God, like droughts and other exogenous events, and penalize (or reward) them even more for the quality of their response to the adversity. If so, voters in the farm belt could penalize President Trump and congressional Republicans twice over in November’s midterm elections. Benign weather and improved technology have led to years of surging global crop production, depressing agricultural commodity prices. Farm income was projected to fall to a 12-year low entering this year. After crop prices appreciated in the first quarter of this calendar year, they began a decline in April, and then fell more recently, owing to acts of God and acts of the president.

Wet spring weather in the Midwest has unavoidably increased the anticipated size of the new crop. But President Trump has decreased anticipated demand by threatening or imposing tariffs on Canadian, Mexican, European, and—most importantly—Chinese imports, thus risking retaliatory tariffs on key American exports. Last week, the administration announced that it would implement a previously proposed 25 percent tax on $50 billion of goods imported from China. The Chinese government responded in kind the next day, with tariffs of equal size, mostly targeting U.S. energy and agricultural exports, including soybeans, corn, wheat, sorghum, ethanol, pork, and beef.

According to Bloomberg, agricultural commodities prices have dropped to their lowest level this century. The Chinese government, as Trump has pointed out in the past, is savvy, retaliating against strategic and politically sensitive U.S. exports in an election year. Agriculture is not a flashy industry, and many people take for granted that farmers are among America’s preeminent exporters. The U.S. is the breadbasket of the world, raising and exporting more bushels of wheat, soybeans, cotton, and coarse grains (like corn) than any other nation. But the sector is also disproportionately reliant on China, so new trade barriers will hit farmers hard.

The U.S. produced more soybeans last year than any other country and exported about 60 percent of them to China; Beijing accounts for 65 percent of the world’s soybean imports, according to Reuters. Now, China is deliberately shifting its buying program to South American beans. The CEO of Bunge, one of the world’s largest agriculture traders, said on a conference call that China is “very deliberately not buying anything from the U.S.” Almost half of sorghum produced by the U.S. last year was exported to China. Forward prices of U.S. pork and ethanol, both of which rely partly on Chinese demand, also fell on announcements of retaliatory tariffs. And while only a small portion of the U.S. corn crop gets shipped to China, its biggest export destination, Mexico, now threatens to impose tariffs on shipments in response to tariffs that the Trump administration has levied on Mexican goods.

Hundreds of millions of people in the developing world will soon become even bigger buyers of foodstuffs as they move to cities and join the global middle class. America’s export portfolio relies heavily on its ability to facilitate trade with these nations. While smart people often speak of the geopolitical importance of oil, the nation that exports the largest food surplus to a growing and urbanizing world population holds tremendous leverage as well.

Comparative advantage determines international trade flows more than government policy does. Economies will specialize in producing what they’re good at and export the surplus in exchange for products that they make less efficiently. In this way, international trade and specialization, like the division of labor, make all nations richer in the long run. So, while foreign tariffs on U.S. exports are bad, retaliatory tariffs impose extra pain by making the American economy less productive.

If the economic and geopolitical costs of trade barriers don’t raise the alarm for the protectionist wing of the GOP, then the electoral risks should. Republicans already face significant headwinds to maintain their majorities in Congress. To expand their low-energy 51-seat Senate majority in the midterms, Republicans must unseat either Claire McCaskill or Joe Donnelly, incumbent Democrats from Missouri and Indiana, respectively—red states that have moved right. Both states are major agricultural producers that will be hit disproportionately hard by the new trade barriers. Both races are tossups.

Missouri is America’s sixth-largest soybean-producing state, the seventh-largest pork producer, the ninth-largest corn producer, and 13th-largest ethanol producer. Indiana is, coincidentally, the fifth-largest producer of soybeans, pork, corn, and ethanol. Soybean crops alone amount to 1 percent of the total economy of these states. When corn, ethanol, pork, and the ancillary industries these trades support are included, the hit to local economies will be tangible.

The trade conflict will have electoral consequences in energy states, too. Texas Republican senator Ted Cruz, facing a competitive reelection bid, and GOP congressman Kevin Cramer, running to unseat Democratic senator Heidi Heitkamp of North Dakota, could be hindered by Chinese tariffs on American oil and refined-products exports, just as Beijing becomes a vital buyer of American oil. Higher domestic steel prices from U.S. tariffs could also make it too costly to build new pipelines, which are vital for Permian, Eagle Ford, and Bakken frackers seeking a better price for their oil. The complex global supply chain will be disrupted in numerous ways by trade barriers.

But there an opportunity to salvage the situation still exists. Ideally, the U.S. and China can agree to reduce tariffs to levels lower than before. Perhaps Trump can also convince Beijing to stop stealing American intellectual property and violating the rights of American business in other ways by imposing costs directly on Chinese businesses like ZTE, a telecom firm, instead of on American families buying cheap manufactured goods. America’s prolific farmers, and others exposed to global trade flows, understand that they’re paying the price of trade disputes. If the president changes course, he and his party’s candidates across Middle America will have a more appealing record for voters to consider in November.

Photo by Scott Olson/Getty Images

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