Farm aid: Foolish tariffs beget foolish subsidies

Farm aid: Foolish tariffs beget foolish subsidies
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President TrumpDonald John TrumpEsper sidesteps question on whether he aligns more with Mattis or Trump Warren embraces Thiel label: 'Good' As tensions escalate, US must intensify pressure on Iran and the IAEA MORE’s foolish and potentially destructive trade war with the rest of the world has triggered yet more foolishness — the president’s proposal to provide $12 billion of government financial assistance to U.S. farmers harmed by retaliatory tariffs other countries are imposing on U.S. agricultural exports.

Trump’s aid proposal, if ever implemented, will not offset the easily foreseen consequences of a trade war that will harm agriculture, rural America and the GOP. 

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The tariffs' negative hit on farmers will come on top of projections that net farm income in 2018 will drop to a 12-year low. From a peak of $123 billion in 2013, net farm income was forecast to be about $60 billion this year due to declining prices on a broad range of farm commodities. 

 

Reduced farm exports will drive agricultural prices and farmers’ income even lower. That negative impact will hardly be offset by the $12 billion in farm aid the president promised on Tuesday.

Reportedly, the farm aid “would include direct payments to farmers, efforts to promote U.S. goods abroad and an expansion of a program that purchases surplus farm output and distributes it to food banks and other anti-hunger programs.” Who actually gets this aid will be politically contentious.

Despite this proposed assistance (likely to be much costlier than $12 billion) and possibly increased farm exports to countries not levying retaliatory tariffs, American agriculture, and by extension rural America, will suffer both short-term and long-term harm.

Reduced farm income will lead to a rise in financial distress among farmers. While conditions are unlikely to become as severe as the ones farmers faced during the agricultural crisis of the 1980s, we can expect a rise in farm bankruptcies and foreclosures.

That, in turn, will lead to further consolidation within agriculture as smaller farms are swallowed by larger farming operations.

Both this consolidation and the overall decline in farm income will spill over into farm towns, leading to a further decline in off-farm business activity and employment, especially among businesses directly serving farmers as well as farm input suppliers and downstream processors of farm and ranch production, such as feedlots and pork producers.

The longer retaliatory tariffs depress American agricultural exports, the more sustained and irreversible will be the damage to farmers and rural America as agricultural exports from other countries rise to offset the decline in American farm exports.

For example, Brazil, which has been steadily increasing its soybean production, may soon exceed the United States as the world’s largest soybean producer. That event will come even sooner if Brazilian soybean exports to China replace U.S. soybean exports.

Russia will be another beneficiary as other countries levy tariffs on imports of American agricultural products and Russia exports more of its rising wheat production, especially to China.

Brazil, Russia and other food exporters will not easily surrender the export markets they have been developing once retaliatory tariffs on American agricultural exports have ended. America’s trade deficit will worsen as a result.

Republicans will pay politically, both in the short-term and the long-term, from tariffs other countries levy on American farm exports.

A sharp decline in net farm income this year attributable to retaliatory tariffs, coming on the heels of the income decline of recent years, could cost Republicans seats in the House of Representatives this November and possibly even in the Senate. 

Longer term, population losses in states substantially dependent on agriculture and the industries it supports could lead to a loss of House seats in largely rural states due to reapportionments in 2020 and 2030. During this era of “Trumpian” politics, those lost seats are more likely to be held today by Republicans than Democrats.

As many have stated in recent weeks, farmers need trade not aid. The sooner the president realizes the economic and political truths of that statement and scales back the trade war he has launched, the better it will be for farmers, rural America and the Republican party.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system, and the growing federalization of credit risk.  He also consults and speaks on issues related to agricultural finance.  Prior articles by Ely can be found here. Follow Bert on Twitter: @BertEly