Farmers deal with a great deal of uncertainty by the very nature of their business. Will it rain? Will prices go up or down? Will pests or diseases destroy my crop? The combined forces of agronomic, meteorological and economic uncertainty are no doubt factors in the declining number of farmers in the U.S., and the contemporaneous increase in the size of the average U.S. farm.
One thing about which we are certain: free trade has been a very good thing for the U.S. farmer. Soybean farmers are oft quoted as saying that one of every three rows of beans they plant is destined for consumption abroad. Similar stats exist for a grab basket of commodities. As the office of the United States Trade Representative notes, farm trade has quite the ripple effect on the U.S. economy:
U.S. agriculture has posted an annual trade surplus for well over 50 years. Agricultural exports support more than one million American jobs, with roughly 70 percent of these jobs in the non-farm sector (processing, manufacturing, etc.). In 2017, agricultural domestic exports reached $138.4 billion and created an estimated $177.2 billion in additional economic activity, for a total economic output of $315.6 billion. In 2018, the Administration will continue to open new markets for safe, wholesome U.S. food and agricultural products to be enjoyed by consumers around the world.2018 Fact Sheet: USTR Success Stories: Opening Markets for U.S. Agricultural Exports
Those trade surpluses, not to mention the one million American jobs, are in grave danger due to the escalating trade war sparked by a series of protectionist moves by the Trump Administration. The University of Illinois noted that through the end of July, corn prices fluctuated over a five-month period from a high of $3.78 to a low of $3.09. In the same period, soybean prices declined $2.50 from a high of $10.34, to a low of $7.84.
That is a great deal of uncertainty.
With all of this uncertainty, and the attendant volatility in U.S. commodity prices, it’s little wonder that farmer sentiment, as measured by the Purdue University/CME Group Ag Economy Barometer, plummeted over the past six months.
The barometer found that two-thirds of producers now expect lower farm income due to the Trump Trade War, and more than 70% of those farmers expect a decline in net income of 10 percent or more. “Not surprisingly, the percentage of producers that think a trade war is likely increased in July compared to both April and March 2018,” the Purdue report stated.
Tariffs are bad, actually…
One observation from social media chatter related to the Trump Trade War is that the average citizen understands very little about trade economics. I observed one Twitter conversation in which a Twit lamented rising U.S. steel prices after the Administration implemented tariffs of 25% on imports of foreign steel. When someone with a modicum of understanding pointed out that this was precisely what tariffs are designed to do – to drive up the domestic price of the commodity in question, that is – the Twit responded that they had hoped U.S. steel companies would, flying in the face of their own rational self interest, “do the right thing” rather than raising prices.
Earlier in the week, I talked with a friend who works in marketing at an Ohio-based equipment manufacturer. In chatting about steel prices, I asked how much of the increased cost of steel his firm had passed on to their customers. Without hesitating, he replied, “All of it. Every last dime.”
The longer explanation is that the company has a set margin it needs to earn to stay in business. [Quick reminder: the purpose of a business is for the owners of said business to earn a return on their investment, something we generally refer to as a profit. Profit, keep in mind, is not a four-letter word.] So if the firm doesn’t pass on its increased costs to the customer, the firm no longer generates the margin it needs to operate, and perhaps the firm ceases to do business.
Keep in mind, this situation is a feature, not a bug in the system. Tariffs are in fact designed to prop up domestic industries, and the entire catalog of academic research on trade economics boils down to the reality that tariffs are in aggregate a bad thing for the economy.
Trade economist Scott Lincicome put it this way:
“Tariffs not only impose immense economic costs, but also fail to achieve their primary policy aims and foster political dysfunction along the way.”Twitter/@ScottLincicome
Last fall, Lincicome published an analysis of the cost to consumers of past U.S. protectionism. On average, he found, protectionist measures annually cost U.S. consumers $620,000 (in 2017 dollars) per job allegedly saved in the industry at hand. Worse yet, in an age when concern over inequality is at an all-time high, protectionist measures on items ranging from clothing and sugar to automobiles were “the equivalent of a 23% income tax surchange for the lowest income American families.”
Looking at the economist’s Twitter mantra, it’s not at all difficult to see the immense economic costs he discussed. Let’s look at the second part: what about the primary policy aims behind these tariffs?
In his various Twitter rants on the subject, President Donald Trump seems to indicate that the established rules-based system of international trade liberalization is unfair, and that several U.S. industries – steel and automobile manufacturers among them – have been harmed by that allegedly unfair system.
Are the tariffs already announced having any effect in that regard? Well, as I was typing this post, China announced it would impose its own tariffs on an additional $16 billion of U.S. goods, including automobiles, coal, grease, plastic and asphalt. The two countries are playing tit-for-tat in the trade war, with each side levying tariffs in direct response to the other’s.
For farmers, this back-and-forth has already led to a $12 billion bailout of sorts from the U.S. Department of Agriculture, which announced last month a package of aid programs designed to soften the blow caused by the Trump Trade War. In other words, the Administration intentionally lobbed a grenade at the rules-based system of global trade, sparking a trade war, and attempting to smooth over the damage with a taxpayer-funded aid package.
As I wrote a month ago, the importance of this rules-based international order, including the World Trade Organization, cannot be overstated. The rules-based order that arose from the ashes of two world wars and evolved over the latter half of the 20th Century was the result of good policy, and the Trump Trade War is a huge step backward.
Lincicome said it well – nothing good will come from this trade war, and we have enough political dysfunction in our lives as it is.