Trump's tariffs and subsidies | The Daily Star
12:00 AM, August 06, 2018 / LAST MODIFIED: 01:08 PM, August 06, 2018

Trump's tariffs and subsidies

There is a popular saying in America, “You don't have to be a rocket scientist to understand politics.” However, I have never heard anyone disparage economists in such a fashion except only recently during the Trump Era. When President Trump started threatening China, Europe, and even neighbours Canada and Mexico with tariffs to attain some political or commercial goals, Americans became angry and mocked the Trump Administration for flouting economic principles.

It has been alleged that Donald Trump and his advisors ignored all economic logic when he started a trade war to reduce US trade deficit. All this is old news, but recently, as the trade war escalates and US producers and consumers start to see the painful effects of the ongoing trade war, or skirmish if you like, the Trump Administration appears to be paying some attention to economics. It was announced in end-July that the US government would offer USD 12 billion in subsidies to the agriculture sector to mitigate the harmful effect of reduced exports and disrupted trade relations following three months of open warfare. But, as they say, “Don't put good money into bad causes!”

For my readers who must have by now got bored by endless bickering about “trade war” on TV talk shows and felt that the World Cup Soccer on Masranga was more fun to watch, let me bring you up to date. US tariffs on some Chinese imports kicked in last month. And after a few months of “feint, bluster and desultory attempts at compromise,” China retaliated by slapping tariffs on US imports of agriculture goods, particularly soya bean, pork, and grains. China has also allowed the yuan to fall against USD to boost exports, and imposed non-tariff measures such as stricter inspections on US agricultural products at Chinese ports.

China imported about USD 24.1 billion in agricultural products from the US last year, accounting for about a fifth of total farm imports in 2017, according to Chinese data. China now buys roughly 30 percent of all the soya beans produced in the US, and a recent Purdue University study predicts that Chinese tariffs would result in a 65 percent cut in US exports. The US agriculture sector is a big exporter and ships overseas USD 150bn in agricultural products each year. The trade war has already started to hurt the farmers, and Trump and the Republicans are nervous about its political ramifications just before the mid-term elections in November.

When the Trump Administration initially launched the idea of a trade war, Democrats and academicians advised caution and the US media was taken over by outraged columnists baffled by Trump's total disregard for economic principles. World media went full-throttle and pronounced how tariffs by the US would harm global trade, and headlines such as “Trade war hurts everyone” were everywhere. Some economists working with the White House, notably Gary Cohn, resigned and Congress warned of the dire consequences of a full-blown trade war with US allies, who were threatening a tit-for-tat response.

It now appears that the economists who were silenced by the “pro-tariff” group have now been brought in by more cool-headed advisers in the White House to formulate a plan to minimise the cost on farmers. Even before the trade war broke out, there were accounts of farmers struggling to stay afloat. Prices of farm products were on a downward slide and farm property values have declined in the last four years. Usually, the farm sector and rural America strongly support Trump and his policies, but they signalled that they can't be with him in the coming elections should they suffer financially as a consequence of the trade war.

At this point, Trump's advisers finally opened their economic textbooks and found a simple economic solution: subsidies. Last week, it was announced that farmers who are hurt by the trade war would receive cash compensation from the US government. US Secretary of Agriculture Sonny Perdue and other US Department of Agriculture (USDA) officials said that the aid will be available in three forms: direct payment to producers of soya bean, sorghum, wheat, cotton, dairy and hogs; government purchases of fruit, nuts, legumes, and some meats for distribution to food banks; and development of new export markets. The emergency bailout from taxpayers will become available in September, and does not need approval from Congress.

But here is the catch. While some farmers will get direct payments, part of the money will also go to fund a programme already in place to purchase surplus farm products distributing them to food banks. Marketing efforts to promote US agricultural products overseas may also get more funding. Therefore, administering the subsidy will involve various government departments to hand out the money, procure and distribute the surplus farm products, and to boost exports by finding new markets for US agricultural products.

Many critics of this “bailout” or subsidy have opined that it will temporarily silence the farm sector and secure the votes that the Republicans need in the November elections, but subsidies have been considered a nightmare by economists. According to them, while subsidy is the right economic tool to use, the US agriculture sector might depend on it for years to come. Taxpayers for Common Sense, a US advocacy group, called the announcement by the USDA "a recipe for disaster that would undo decades of progress toward weaning agriculture from financial dependence on federal subsidies."

Unfortunately, there is no end in sight to the “trade war”. China understands that Trump is hostage to the farm lobby and there is no easier target than the US farmers to reverse his trade policy. While Trump has threatened to put tariffs on all of the USD 500 billion Chinese exports to the US, China has vowed to hit back with “qualitative and quantitative” measures. It has allowed the yuan to fall, to the tune of 6 percent against the dollar since May 30 to USD 1=7 yuan on August 3. 

Trump has some hawkish advisers in his team who are now asking him to raise the tariffs to 25 percent for USD 200 billion of imports from China, up from the original proposal of 10 percent. They are counting on this threat to force Chinese officials to the negotiating table, and justify this escalation with the argument that the higher rate will compensate for the depreciation of yuan which made Chinese goods cheaper even in the face of tariffs.

The White House won't make a final decision until late August on those tariffs which are likely to target consumer goods and food as well as machinery components. It also appears that Chinese policymakers, many of whom are graduates of American universities, are using a very potent combination of economics and politics to beat a powerful adversary in this strategic game of “Trade War”. So, stay tuned.

Dr Abdullah Shibli is an economist, and Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA. His new book Economic Crosscurrents will be published later this year.

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