First Tariffs, Then Subsidies: Soybeans Illustrate Trump's Wrongfooted Approach on Trade

Chad P. Bown (PIIE) and Eva (Yiwen) Zhang (PIIE)

July 30, 2018 1:15 PM
Photo Credit: 
REUTERS/Joshua Roberts

The Trump administration’s trade wars, which President Donald Trump has said are “easy to win,” encountered a setback in July in what might be called the Battle of the Soybeans. Suddenly the administration was scrambling to find new markets for soybeans in Europe, a dubious proposition, and to spend federal funds to protect American farmers from the retaliation provoked by the administration’s reckless tariffs. The soybean skirmish illustrates the utter wrongheadedness of the president’s approach to trade.

Two policy wrongs illustrate the point. First, on July 24, the administration announced plans to subsidize American farmers for up to $12 billion for their suffering of lost export sales resulting from the president’s own escalating tariff actions. Trump’s 2018 tariffs-to-date on steel, aluminum, and China have caused the European Union and five other major trading partners to implement retaliatory actions affecting $27 billion of US agricultural sales to the world. Trump’s tariffs suddenly put 20 percent of total American agricultural exports at risk.

Second, on July 25, Trump made an unexpected insert at a press conference with European Commission president Jean-Claude Juncker, proclaiming a truce in the European trade confrontation and announcing renewed trade negotiations. There, Trump took great pains to highlight American soybeans now largely shut out of the Chinese market. Without any mention of how, he stated “soybeans is [sic] a big deal and the European Union is going to start almost immediately to buy a lot of soybeans…from our farmers in the Midwest primarily.”

There was more than grammar that was wrong with Trump’s statements. The potential “truce” involved no pullback on trade by either side. More specifically, it did not lead to the lifting of Trump’s tariffs on steel and aluminum imports from Europe. Neither did the European Union lift its newly imposed tariffs on $968 million of American agricultural exports. And how Trump expects the European Union to suddenly sop up all of those American soybean exports shut out of the Chinese market is unclear. European countries are market economies. That means that purchasing decisions are mostly made by businesses and consumers and are not directed by heavy-handed, central-planning governments.

Soybeans are indeed a “big deal.” They are widely consumed around the world by humans and livestock. Lost soybean sales to China may be the biggest blow to American farmers, but they are far from the only agricultural product caught up in Trump’s trade war. His policy has led to retaliatory tariffs against $13 billion of other agricultural exports covering dozens of other farm and fishery products. Besides China and Europe, four other partners are also retaliating against his steel and aluminum tariffs. And tens of billions of dollars of additional retaliation loom if the administration follows through with threats to slap additional trade restrictions on automobiles, whose “national security threat” investigation continues.

American agricultural exports subject to foreign retaliation thus far

To date, six different trading partners are retaliating against US agricultural exports in response to Trump’s 2018 binge of tariffs imposed on steel, aluminum, and China. A total of $27 billion of American agriculture exports are being affected. While farm exports to China account for nearly 75 percent of the total, Canada, the European Union, Mexico, India, and Turkey have also whacked a combined $7 billion of American agricultural exports in response to Trump’s tariffs on steel and aluminum.

Figure 1 begins by tallying up the status of the major animal-based export products. Newly imposed foreign trade restrictions are now hitting a significant share of total American exports of dairy ($812 million), fish and shellfish ($1.3 billion), as well as pork ($2.4 billion). Importantly, not all meats have been targeted yet—few of the retaliatory tariffs have hit poultry or beef, for example. There is therefore ample scope for other agricultural products to get caught up in the fray of Trump’s trade war.

Figure 1 US exports of major animal-based products, 2017

Figure 2 indicates a similar story for major crop exports. American exports of soybeans were $21.7 billion in 2017, and 64 percent ($13.9 billion) have been targeted with retaliation thus far.

But nearly $1 billion each of annual exports of nuts, sorghum, and fruits have also been impacted by the tariffs arising in response to Trump’s policies. This is particularly problematic for a product like sorghum, where 89 percent of foreign sales have been hit with tariffs. It has developed few other foreign markets to send its lost exports.

And there is still scope for more pain. Other major export crops such as corn, wheat, and rice have been less directly caught up in the tariff war—they also could be hit if Trump continues on his trade offensive.

Figure 2 US exports of major crops, 2017

Table 1 provides a longer list of major American agricultural exports, many of which are also caught up in the retaliation. Take apples, orange juice, coffee, ketchup, and mineral water. More than a third of each products’ exports to the world are now caught up in foreign tariff actions.

Table 1 Top US agricultural products subject to retaliatory tariffs by country (2017, thousands of dollars)
Products Chinaa Canada Mexico EU-28 India Turkey Subtotal Subtotal as share of US exports to world by product (percent) US exports to world by product
Meat and dairy
Beef 25,001 0 0 0 0 0 25,001 0.4 6,204,504
Pork 1,159,453 0 1,244,024 0 0 0 2,403,477 44 5,439,844
Fish and shellfish 1,315,211 0 0 0 0 0 1,315,211 24 5,383,716
Dairy 426,094 2,646 383,239 0 0 0 811,979 18 4,482,580
      Cheese 60,235 0 383,239 0 0 0 443,474 30 1,455,235
Poultry 4 0 0 0 0 0 4 0 3,626,618
Crops
Soybeans 13,934,014 0 0 0 0 0 13,934,014 64 21,657,927
Corn 159,882 0 0 143,566 0 0 303,448 3 9,565,881
Nuts 345,102 0 0 0 652,628 0 997,730 12 7,989,456
Fruit 420,941 0 276,497 0 96,452 159,137 953,027 14 6,880,150
      Apples 47,681 0 276,497 0 96,452 0 420,630 37 1,129,858
Wheat 390,935 0 0 0 0 0 390,935 6 6,125,690
Vegetables 25,916 0 0 71,677 73,853 0 171,446 4 4,781,953
Sugar 0 290,532 0 0 0 0 290,532 14 2,014,027
Rice 9 0 0 39,972 0 0 39,981 2 1,773,035
Grain sorghum 956,179 0 0 0 0 0 956,179 89 1,074,761
Other
Sauces 0 630,133 0 0 0 0 630,133 36 1,729,484
      Tomato ketchup 0 203,298 0 0 0 0 203,298 55 366,881
Whiskies 8,934 47,678 10,720 645,283 0 0 712,616 54 1,318,025
Coffee 0 404,926 0 0 0 0 404,926 46 873,069
Orange juice 700 127,331 0 17,334 0 0 145,365 37 391,181
Mineral water 0 195,085 0 0 0 0 195,085 51 382,301
Other 544,286 699,122 613,134 50,375 25,299 68,876 2,011,092 5 40,062,547
Agriculture imports from US (targeted) 19,722,661 2,397,453 2,527,614 968,208 848,232 228,013 26,692,181 20 131,756,749
Agriculture imports from US (total) 21,213,858 19,483,955 16,762,304 11,824,027 1,341,764 533,873 71,159,781 54 131,756,749
a. Agricultural products subject to China's retaliation include those from Sections 301 and 232 retalitaion lists. Products retaliated under both lists are counted only once. 
Note: Product categories are defined using Harmonized System (HS) sections as follows: pork (0203, 020630, 202641, 202649), beef (0201, 0202), poultry (0207), fish and shellfish (03), dairy (04), cheese (0406), fruit (0803-0813), apples (0808), nuts (0801, 0802), coffee (0901), corn (1005), wheat (1001), grain sorghum (1007), soybeans (1201), rice (1006), sugar (17), vegetables (07), orange juice (200911, 200912, 200919), sauces (2103), tomato ketchup (210320), mineral water (220210), whiskies (220830), and other (everything else in 01-22).
Sources: Authors' calculations using country import data from Statistic Canada (Canada), Eurostat (EU-28), and Trademap.org (China, India, Turkey, and Mexico), and using US export data from Trademap.org.

Particularly illustrative is the challenge facing a product like whiskey, frequently tagged with Mitch McConnell—the Senate majority leader from Kentucky. Four different partners have targeted whiskies with their tariffs, thereby hitting more than half of American exports of the product. Whiskey being shut out of multiple foreign markets all at once makes it even more difficult for it to find viable alternative destinations for its sales.

US law Trump is using to grant the subsidies

Trump’s $12 billion subsidy to help soybean farmers at home invoked a 1933 law devised to assist farmers hit by the Great Depression. While potentially troubling, the move was not unexpected. The president had instructed Secretary of Agriculture Sonny Perdue to come up with such a plan on April 5, shortly after China announced it would retaliate against US agricultural exports in response to Trump’s April 3 statement that he would impose tariffs on $50 billion of US imports from China.

On July 25, the US Department of Agriculture (USDA) released a statement indicating its plans for a three-pronged program intended to provide support for American farmers under the Commodity Credit Corporation (CCC) Charter Act, the 1933 policy created by Franklin Roosevelt’s New Deal.

At this stage, details remain thin on how the Trump administration plans to implement the subsidy scheme. But the most economically significant part of the plan is likely to involve direct payments to producers— the announcement indicates only to soybean, sorghum, corn, wheat, cotton, dairy, and hog farmers— under the CCC’s Market Facilitation Program. The timeframe and mechanism are still unknown, as is whether direct payments would flow to other farmers cut up in the tariff retaliation.

The announcement describes two other actions that are likely more minor. One is a potential food purchase program to buy up unexpected surplus of affected commodities—e.g., fruits, nuts, rice, legumes, beef, pork, and milk—for distribution to food banks. Another is additional spending on foreign sales offices and fairs. This last step is probably the most misguided of all—a feckless attempt to open foreign markets that have been willfully and deliberately shut off as a policy choice because of Trump’s actions. Paying bureaucrats to promote sales of farm products would be an incredibly inefficient means of immediately compensating the American farmers whose incomes are suffering because of lost export sales.

Are these subsidies illegal under international trade rules? They could be. Under the World Trade Organization (WTO), the United States has agreed to limit trade-distorting farm-sector support—as measured by the aggregate measurement of support (AMS)—to $19.1 billion per year. While it may be possible for the USDA to carefully construct a subsidy scheme that is decoupled from market signals—and so is not trade-distorting—Trump’s subsidies will generate skepticism by trading partners and could be challenged under WTO dispute settlement. At the least, Trump’s short-sighted actions will make it more difficult for future American negotiators to convince trading partners—like India or China—to reign in their own agricultural subsidies.

There is the potential for further escalation. Countries could respond with more tariffs—or even subsidies of their own—if they perceive that the new subsidy policies of Trump’s widening trade war pose an additional threat to their farm sectors.

Trump’s bad policy choices are piling up

There is no end in sight for Trump’s trade war.

President Trump’s reckless tariff actions of 2018 have been the direct cause of considerable economic hardship now looming for American farmers. The political problem that this creates has caused his efforts to buy them off by providing payments funded by the American taxpayer.

Two wrong policies don’t make a right. The farmers are being hurt, and they surely prefer to get their old markets back. But the only way for that to happen will be for President Trump to ultimately remove his 2018 tariffs.

Data Disclosure: 

The data underlying this analysis are available here.

Comments

Raúl Martinez

The US farmers were very competitive and now are subject of subsidies that they don’t need in the first place, while the taxpayers are missplacing resources that could be used in a better way.

Stanley Haar

Trump's claim to have opened a new market for soybeans, i.e. the European Union, is also another of his absurd lies. Europe has been among the top 3 importers of American soybeans every year for more than 50 years. Last year the EU ranked second, exceeded only by China. Trump only managed to close a market, not open one, for US farmers.

Rick Stewart

I am the Libertarian candidate for Secretary of Agriculture in Iowa.

I have not met a single Iowa farmer who supports either the trade war, or the subsidies.

Iowa farmers prefer to sell their pork to China, not get it from Washington.

Stanley Haar

US farmers have been exporting soybeans to Europe for decades. The EU countries combined import total has ranked in the top 3 among soybean importers for at least 40 years, and in recent years has been #2 after China. No new markets were opened by Trump.....just another Trump lie.

 

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