The Tariff and Trade War Two-Step – One Step Forward, Two Steps Back

Weekly WastebasketThe Tariff and Trade War Two-Step – One Step Forward, Two Steps BackMixed messages from the White House and G-20 Summit continue to take a toll, on the taxpayer’s dime.

Agriculture,  | Weekly Wastebasket
Dec 7, 2018  | 6 min read | Print Article

President Trump loves making deals. After a meeting with Chinese President Xi Jinping at the G20 Summit in Argentina last weekend, Trump announced a 90-day delay in escalating tariffs from 10 to 25 percent on $200 billion of goods from China. That’s only a deal if you don’t look too closely at the details. Well, we do.

The Devil, And Tariffs, Are In The Details

In the official – and ambiguous – White House statement on not increasing tariffs, China agreed to purchase a “very substantial” amount of agricultural and other products from the United States to reduce the trade imbalance, with no further detail. The statement also says the 90-day stay on raising tariffs would begin negotiations on changes to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft. The problem is, China’s official statement  never mentioned the 90-day halt on tariffs or the increased purchase of goods coming from the United States. The net result was a set of mixed signals and a roiling market that dropped 800 points after Trump announced that he loves tariffs and thinks they work.

This tariff two-step, where we take one step forward just to take two steps back is two things markets don’t like – unpredictable and expensive. For two years now we’ve been stuck in President Trump’s twilight-zone trade war with nothing to show for it but incoming deals on ever moving horizons and increased costs for taxpayers.

One such deal is the USMCA, or NAFTA 2.0 – since the new agreement is basically a modernized version of the 24-year-old deal. The three heads of state for Mexico, Canada, and the U.S. signed the new agreement at the G20, but we’re still a long way off from final passage. The Mexican Congress and the Canadian Parliament both have to approve the new deal. Oh, and the 116th Congress, newly split between a Democratic House and Republican Senate, will have to give approval. We’ll see how all these chips fall.

Retaliatory Tariffs

There have been some gains in market access in Canada and Mexico for U.S. agriculture, but they are offset by retaliatory tariffs from Canada and Mexico on steel and aluminum. The Farm Foundation recently reported that NAFTA 2.0 will expand U.S. exports by $450 million while retaliatory tariffs by Canada and Mexico, due to the U.S. steel and aluminum tariffs, will cause American agricultural exports to decline by $1.8 billion.

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The retaliatory tariffs currently in place have already disrupted the U.S. agricultural sector. The Farm Bureau calculates that retaliatory tariffs from China have led to a $2 billion net decrease in exports. U.S. exports of soybeans, the U.S.’ largest agricultural export, dropped 47 percent in October. All this leads the USDA to project that the agricultural trade surplus will reach its lowest level in 12 years. To ease these losses, the Trump Administration is handing out $12 billion in unbudgeted funds to buy the silence of farmers and ranchers. Meanwhile, the disruption caused by Trump’s self-inflicted wound is being cited as justification for a $900 billion farm bill that will do nothing to tame the trade war.

The disruption may escalate even further as the auto industry is the next likely target of President Trump’s tariff trigger finger. The president has repeatedly threatened to impose tariffs on the $350 billion in automobiles and auto parts imported every year. The Commerce Department has a draft report into the national security threat of these imports, and the president’s eruption after GM’s announcement regarding laying off 14,000 employees in North America makes it all the more likely tariffs will be imposed.

If tariffs were imposed on imported vehicles the results could be disastrous. Imports of vehicles as a share of total U.S. sales rose to 48 percent in 2017, compared to 41 percent in 2010. And all U.S. auto manufacturing plants, both those owned by U.S.-based companies and the domestic plants for Asian and European manufacturers, use foreign produced parts in their automobiles. Analysts predict this could raise the costs of automobiles anywhere from $2,500 to $10,000. As has been seen already, foreign countries are likely to respond with their own round of tariffs on areas of the U.S. economy where they think they can get leverage.

Getting To Yes – Efficiently, And Without Bailouts

Getting better trade deals is important. But we’ve had a lot of churn without any final product. We must create trade deals efficiently, rather than taxing American consumers and businesses with tit-for-tat tariffs. Congress must reassert its authority and legislate an end to the trade war to get better deals that don’t cause unnecessary disruptions to markets and don’t use taxpayer dollars to bailout bad policy.