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Trade wars are costly and, sooner or later, end up increasing unemployment in all of the countries engaged in the conflict. The consequences of the trade war President Trump is starting with China could be particularly severe for U.S. farmers. But compensating them for losses, as the president has suggested might happen, would be wrong.
China is the No. 1 market for U.S. agricultural producers, accounting for over one-fifth of all farming exports. Soybeans are the top export crop, averaging over $12.3 billion in annual shipments to China. Soybeans grown on one out of every four U.S. acres are shipped to China. If China raises tariffs on U.S. soybeans in response to tariffs the U.S. imposes on Chinese goods, U.S. farmers will have to find new buyers and offer them lower market prices.
The effects of China’s tariffs on U.S. soybeans aren’t likely to be felt immediately. Traditionally, China looks south to Brazil and Argentina to meet its needs for soybeans between March and October. But instead of turning to U.S. supplies when farmers here are harvesting their crops in the fall, the higher tariffs would make Brazilian and Argentine crops more attractive, and China would continue to buy from farmers there.
While some U.S. soybean producers may be able to sell to markets from which Brazil and Argentina have diverted exports to meet China needs, Brazil has the capacity to ramp up soybean production to meet all, if not most, of China’s needs. U.S. soybean producers would then risk losing a large share of the global export market.
While it is easy to sympathize with U.S. farmers who are likely to be damaged by the administration’s trade proposals, and dangling the possibility of aid might placate the farm lobby, compensating farm businesses through subsidy programs for losses imposed on them as a result of a trade policy folly is not the way to go.
First, almost all U.S. soybean farmers are already protected against unexpected drops in revenue through a heavily subsidized federal crop insurance program. They are covered also by additional direct price and income support systems that provide additional protection against lower prices and revenues. Declines in prices will likely increase taxpayer costs for these programs—at a time when fiscal pressures are compelling Congress to find savings and not increase expenditures.
Second, ad hoc assistance may temporarily aid farmers but does nothing to address the potential long-run damage to trading relationships caused by trade wars. Farmers still remember the impacts of the Nixon soybean embargo (which helped launch the growth of the Brazilian soybean industry) or the Carter grain embargo against the former Soviet Union (which disrupted U.S. grain exports).
Brazil has the capacity to ramp up soybean production to meet all, if not most, of China’s needs.
Third, increasing support to U.S. farmers will increase the level of trade-distorting domestic support that the U.S. must report to the World Trade Organization, thus exposing U.S. farmers to potential adverse trade actions such as the successful challenge of the U.S. cotton program by Brazil more than 10 years ago.
In addition, should the compensation be included in the new proposed farm bill, the result will be a long-term increase in farm subsidies. Those subsides are likely to be funneled through programs that distort production incentives away from market signals.
Finally, and perhaps one of the most worrying concerns, is the real possibility that by “buying off” one group with compensation, the administration will open the door to trade wars with other countries. Up to now and with good reasons, U.S. farmers have been a vocal and effective voice for free trade. Compensating them (and possibly other sectors) for their losses in the administration’s trade war with China, could silence their free trade voices. This could encourage the White House to pursue other unilateral trade actions.
Trade wars are costly and, as the lessons of the past have demonstrated, can spread quickly as they did in the 1930s following the imposition of the Hawley-Smoot tariffs. Since that time world leaders have worked hard to avoid them. Over the past 24 years, disputes have been largely resolved using the multilateral rules-based system established by the World Trade Organization.
Today, the adverse effects of a trade war should not be made worse by the administration’s attempt to buy off affected parties through government-funded compensation schemes. While the schemes may ease the trade war pain for a few politically influential groups in the short run, it would be at a considerable cost to taxpayers, and do little or nothing to ameliorate the painful effects on the U.S. economy as a whole. Such policies set a dangerous trade relations precedent for the future.
Joseph W. Glauber, a former chief economist at the U.S. Agriculture Department, is a visiting scholar at the American Enterprise Institute; he is also a senior research fellow at the International Food Policy Research Institute. Vincent H. Smith is an AEI visiting scholar and a professor of economics at Montana State University.
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