Media  Global Economy  2018.08.15

Trump's bailout of agriculture having the opposite effect - 12 billion US dollars for farmers as a trade war measure, triggering an outpouring of criticism even from within his own party

The article was originally posted on Webronza on August 1, 2018

The Trump administration announced a support measure of 12 billion dollars for American farmers affected by the trade war. This measure contains compensation for farmers affected by price declines, the government's buyback of unsaleable excess agricultural products (intended to raise prices), and development of new export markets. This measure is arousing criticism in the United States.

The US government's "miscalculation" causing an agricultural downturn

The Trump administration initially advocated that American farmers wouldn't be affected even if China raises tariffs.

When I participated in a symposium co-hosted by the Food and Agriculture Organization of the United Nations (FAO) and the International Center for Trade and Sustainable Development (ICTSD), held in May in Geneva, Switzerland, I heard from a person who used to be in charge of agricultural negotiations in the US government that US Commerce Secretary Ross advocated the following:

Commodities such as agricultural products (undifferentiated goods) won't be affected even if the Chinese market is closed and other countries' exports to China increase because the United States will export the amount to markets other than China.

Indeed, in case supply and demand are balanced at 10 million tons in the global market, even if a certain importing country restricts imports from a specific exporting country, prices won't change unless global supply and demand change.

For example, in the global soybean market, where the two major exporting countries the United States and Brazil compete, even if Brazil reduces exports to other markets and increases exports to China, Brazil's exports will decrease in markets other than China, and the United States can increase exports.

However, if carrying an inventory in the country, Brazil can increase export volumes to the world by reducing the inventory. The decline in inventory can be compensated by increasing production for the next period.

In this case, if global supply is constant, the United States' export volumes will decrease by Brazil's export increment. If global supply increases by Brazil's export increment, the price will decline considerably. The reality will settle down somewhere in the middle, or both a drop in United States' exports and decline in price.

Even if not thinking this way, you know that provided China, importing two-thirds of the global trading volume, restricts exports of American soybeans, unwanted American soybeans will decline in price. Actually, since the Trump administration raised tariffs against China and China took a retaliatory measure by raising tariffs on American agricultural products etc. in June, the Chicago market soybean price that had stably fluctuated has declined by as much as 20% and dropped to its lowest level in the past decade. Now a situation has arisen where American soybeans declined in price compared to Brazilian soybeans, and importing countries including Egypt and Mexico are taking advantage of this rare opportunity, which could be beneficial, to go on a buying spree of low-price American soybeans.

A similar situation arose in the past. As a sanction against the Soviet invasion of Afghanistan, the Carter administration of the United States imposed a grain embargo against the Soviet Union. Indeed, exports of American grain to the Soviet Union disappeared, but other countries looking at this, increased exports to the Soviet Union. The grain embargo against the Soviet Union not only had no effect, but also made unwanted American grain drop in price to cause a serious agricultural downturn in the United States.

Although the causes are different: embargo of an exporting country (the United States) and import restriction of an importing country (China), it yields the same end result that exports decline from the United States to a specific country, which leads to an adverse result for the United States.

"Why farmers alone?": Criticism even from within the President's own party

It is obvious that this agricultural support measure is intended to secure votes from farmers in the midterm election this coming fall, but the measure is terribly unpopular even among Republican lawmakers from rural counties, being of the ruling party in the Trump administration.

A claim of American lawmakers sensitive to the voices of local constituency can be considered a claim of local farmers. They advocate resumption of exports instead of money. They want not "aid" but "trade." For that reason, they are asking Trump to refrain from raising tariffs against China.

Some lawmakers claim that the agricultural industry has already lost more than 12 billion dollars. Director of Idaho State Department of Agriculture said in an interview on public radio that this measure immediately destroyed committed relationships with importing countries that had been built up by dispatching the state's missions, and farmers feel uneasy about the future, wondering how long this situation will continue.

The Trump administration is trying to persuade farmers to have patience until better trade terms are won through negotiations with foreign countries while this short-term measure is taken. However, it is unclear if other countries will go to the negotiating table, and even if they do go to the table, there is no possibility of instant success in negotiations. China can hardly be expected to submit to Trump and open its market wider to American agricultural products. Farmers are getting more and more concerned.

It was reported on July 25 that Juncker, President of the European Commission, promised to expand the EU's import of soybeans at the request of Trump. However, the EU's tariff on soybeans has been zero for years, and it is not clear how the EU, which has no state trading enterprise unlike China, can expand imports of American soybeans. Also, at the press conference, no concrete method was mentioned.

Even if the EU increases imports, the EU's soybean consumption is not much more than one-sixth of China's. In addition, the EU already imports 85% of its consumption, so that it has little leeway for increase, which means a drop in the bucket. Come to think of it, the Financial Times on July 27 presented an EU official's statement saying "It is impossible for market-economy countries such as the EU to increase purchasing purposefully like the Soviet Union. As American soybeans have declined in price, private companies in the EU have been increasing imports of the soybeans. Juncker just mentioned the situation." The deal won by Trump doesn't extend beyond this.

If this measure is not limited to one time but has to be taken for as long as Trump's trade war continues or until foreign markets are opened, a lot of burden would be imposed on taxpayers on a long-term basis. That would infringe on the principles of the Republican Party: "small government" and "reduction in tax obligation."

Republican lawmakers claim that Trump's own goal or self-injurious behavior should not be resolved by placing further burden on taxpayers and that Trump should refrain from raising tariffs because tariffs are also tax, whose burden is imposed on consumers and industries.

In particular, they criticize more strongly that Trump utilizes the law of Section 232 (raising tariffs for the purpose of national security), which was as good as dead, to raise tariffs on steel and aluminum as well as automobiles without consultation with Congress, though Congress has authority over tariffs constitutionally. A lawmaker says "Is the Honda ACCORD I've driven 11 years a security threat to the United States?"

It is considered more problematic why farmers alone are to be supported, though farmers are not alone in being affected by Trump's trade war, which is a fair criticism.

A lot of companies including Harley-Davidson have closed their factories or transferred them overseas. Many employees have been laid off. A Republican senator from Alaska claims "Why are fishermen not being supported? They are sea farmers." The feeling of being discriminated against can generate anger.

How will this be reflected in the midterm election? If it compounds the problem, the Trump administration will suffer a major setback.

"Subsidies" against which the WTO takes measures

No matter how many expectations of increased access to a country's market are given by promising a tariff level, if domestic companies or farmers receive a subsidy, their competitiveness will improve and imports won't increase. The same is true of exports.

Therefore, GATT and the WTO have disciplined subsidies as well. The United States claimed that China's agricultural subsidy ignored the WTO rules and disciplines, and Brazil filed a complaint against the United States' cotton subsidy to the WTO to win the case.

The WTO Agreement on Agriculture classified subsidies into those which are unlikely to distort markets and may be given freely (green in a traffic signal) and those against which counter-measures can be taken when the limit is exceeded (amber in a traffic signal). This support measure falls underamber subsidies because it is related to price and affects production and markets.

The limit of the United States' amber subsidies is 19.1 billion dollars. The actual grant amount of amber subsidies fluctuates every year, but subsidies given by the existing systems are likely to increase as well in the current situation where prices were lowered. If the actual grant amount for this fiscal year is 10.0 billion dollars, the limit will be exceeded by adding 12.0 billion dollars for this measure.

The United States may claim that it observes the limit. However, the provision on subsidies in the Agreement on Agriculture legally lost effect in 2004, and the WTO Agreement on Subsidies and Countervailing Measures applies to agricultural subsidies as well. Therefore, even if the United States observes the limit in the Agreement on Agriculture, countries thinking that they were affected by the United States' subsidies (e.g. Brazil, which would be affected by recovery of the United States' export competitiveness, etc.) can file a complaint against the United States to the WTO dispute settlement body and take retaliatory measures against them.

This measure is intended to compensate farmers for their loss resulting from the United States' action ignoring the WTO and China's retaliation, which is worse than lowering international prices simply because of good harvests.

Of course, both the United States and China are conducting a trade war while ignoring the WTO, so that it may be meaningless to discuss whether their measures conform to the WTO. However, it would be effective for presenting the injustice in the Trump administration's trade policies to international opinion.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on August 1, 2018.)