The self-inflicted economic damage to American agriculture

The self-inflicted economic damage to American agriculture
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Agriculture is so fully integrated into world markets that consumers everywhere take for granted that ripe peaches will be available to everyone, everywhere in January, while Zinfandel, Shiraz and Prosecco are universally available. Likewise farmers all over the world use tractors made in America, and tomato processors use equipment from Italy.

Of course, not all trade flows freely. Governments here and elsewhere still respond to special pleading and favoritism and try to block competition, or at least tax it, in their home markets. It is natural for governments to tax and regulate and it seems especially tempting to tax and regulate at national borders. But, make no mistake, the high taxes and burdensome regulations are just as costly to the economy when placed on trade as anywhere else.

But, for agriculture, using the World Trade Organization (WTO) and a long list of Free Trade Agreements, imports and exports flow far more freely now than 30 years ago.

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Agricultural trade now generally follows rules that, while imperfect, are far better than no rules at all. So when, for example, the U.S. imposed labeling rules that severely disadvantaged Canadian and Mexican cattle and pigs, those countries had a place to make their case and get relief. Or when Indonesia blocked importation of fruits, vegetable and meats from the United States and New Zealand, the WTO ruling caused those restrictions to be lifted.

 

So against this background, what is going on with the U.S. plan to place new tariffs on steel and aluminum? There is no need to rehash the basics, which have been in the headlines for weeks now. Nor is it news that representatives from just about every industry, except steel and aluminum, have expressed sentiments from frustration to outrage. Economists, including those in the administration, have been universally negative, and so far their voices largely ignored. 

But, what do steel tariff have to do with agriculture. First, farms use steel too. Whether in tractors, trucks and other equipment or in building materials, farms are customers and customers pay more when taxes rise. Unlike Commerce Secretary Wilbur Ross who occasionally buys a can of soup, farm businesses must consider costs carefully. So one effect of higher steel prices will be that some farms will decide to work even more hours keeping an old combine operating rather than buy the new one that is sorely needed. It is axiomatic that the impact of such decisions then ripple back through the rest of the economy, including in higher food prices.

Second, farm commodities have been top line picks for retaliation lists when the U.S. has tried to pursue trade actions that violate international rules. Florida oranges were famously on the list for EU retaliation in 2003 after the steel tariffs imposed then were found in violation of WTO rules. A couple of years ago when Canada and Mexico presented preliminary lists in the Country of Origin Labeling WTO case, California wine, for example, was high on the list of U.S. items to which big tariffs would apply.

Third, and perhaps the most serious consequence for the farm economy, is that other countries, which have their own trade troubles and grudges, may follow the U.S. lead with ill-disguised unilateral efforts to block imports such as farm trade from the United States.

Farm interests are often effective in getting protection, so whether it is rice and citrus exports to Korea, wine and berries to Canada, or tree nuts to the European Union, U.S. farms are right to be concerned. The U.S. exports two-thirds of our almonds and walnuts and large shares of California wine and dairy products. That makes these items along with alfalfa and beef, for example, particularly vulnerable.

The EU released a list of candidate productions for retaliatory tariffs that included such food and agriculture items as rice, kidney beans, orange juice and cranberries. Other countries would like target other farm products.

The worst feature of these negative potentialities is that they do not even have to be implemented to have real economic consequences. Agricultural markets, like others, operate on expectations and increasing the chance of trade disruptions in the future affects markets now. 

That is one reason that calming voices are so important. WTO Director-General Roberto Azevêdo, took the right approach by urging members to show restraint. The appropriate response to U.S. tariffs that targeted trade partners think are inappropriate is for them to make their case in the WTO and use legal tools to cause the U.S. to remove any measures found to be in violation.

Measured policy responses may be less emotionally satisfying than knee jerk reactions, but there are now well-established procedures that can lead to resolution.When it becomes clear that other countries are not going to respond rashly, markets are likely to maintain calm as the legal and economic issues are resolved. 

Of course, a measured international response will not eliminate self-inflicted economic damage to agricultural and other industries in the United States. The best action now would be to revise the tariffs to include the smallest possible list of countries (zero is best) and to refocus the any trade action toward those countries that committed offences for which an economic and legal case can be made in an appropriate forum such as the WTO.

Agriculture is at the front of the long and broad line of those objecting to this latest attempt to coddle the steel industry. The reason is based on data and history. Perhaps one upside of this latest outbreak of naked crony-capitalism is that it is so egregious and ill-considered that it illustrates clearly the deep and widespread economic benefits of letting markets work. And, it is still not too late to learn the lesson and avoid most of the economic pain.

Daniel A. Sumner is the director of the University of California Agricultural Issues Center and a professor of agricultural economics at UC Davis. He was assistant secretary for Economics at USDA in the early 1990s and previous served on President Reagan’s Council of Economic Advisers.