Short-Term Pain, Long-Term Gain?
March 18, 2019
Last week I participated in a panel discussion at the Consumer Federation of America on the subject, Casualties of Trade Wars. Having been involved in trade wars, or skirmishes, of various kinds over the past 40 years, I suggested that perhaps I was just such a casualty, but the audience, of course, was much more interested in the role of food and agriculture as a pawn in the many trade struggles that have occurred over the years, dating back—in recent times—to the chicken war of the 1960s.
In that oldie but goodie, the United States responded to French and German tariffs on U.S. chicken with a 25 percent tariff on brandy, light trucks, and some other things. While the tariffs hurt French brandy producers and German carmakers, as intended, they eventually had a bigger impact on Japanese and Korean small trucks. More than 50 years later, the truck tariff is still with us—as are EU restrictions on our chickens.
More recently, of course, we have the steel, aluminum, and China tariffs. More than 800 U.S. food and agricultural products have been targeted by retaliatory tariffs from China, the European Union, Turkey, Canada, and Mexico. U.S. exports of those products to the retaliating countries totaled $26.9 billion in 2017, accounting for 18 percent of the total U.S. food and agricultural exports.
The administration’s argument for these tariffs has consistently been short-term pain, long-term gain. As it turns out, many farmers appear to be buying that argument, downstream steel and aluminum users less so. While there does not seem to be much debate about the short-term pain, which is palpable in affected sectors, there are not one but two other issues that need to be addressed: whether the pain is only short term, and whether there really is a long-term gain.
On the first question, the answer appears to be that pain is long term as well as short term, at least in agriculture. Once a company loses market share, it is very hard to regain it because buyers quickly develop alternative supply sources. For example, China is already importing more soybeans and pork from Brazil and the European Union. Once those new relationships are established, it is much harder for U.S. companies to regain their customers. Even if tariffs are lifted, some buyers will continue to avoid U.S. products out of fear that tariffs will come back. In other words, the unpredictability, which the president thinks is a negotiating asset, actually turns out to be a liability in the real world.
Uncertainty is the real killer. When they don’t know what is going to happen next, food and agricultural producers are likely to delay expansion plans, and thus create fewer jobs in the United States. This is exacerbated by the fact that other countries are moving in the opposite direction and taking U.S. market share in the process. Unlike the 1930s when countries responded to Smoot-Hawley by imposing tariffs on each other, this time other countries are only retaliating against the United States and deepening their other bilateral and multilateral trade commitments. The European Union and Canada, among others, have signed several free trade agreements, including one with each other (CETA), but we are also facing the CPTPP, the EU-Mexico free trade agreement, and the EU-Japan free trade agreement—at the same time the United States has not only withdrawn from the TPP and abandoned the TTIP but also imposed tariffs on all its major trading partners. By doing so, the United States undermines both its reputation as a reliable trading partner and risks losing export markets to other major economies that can export their products tariff-free.
So, “short term” may be a bill of goods with restoration of the status quo ante being an unrealistic dream.
The question of whether there is a long-term gain is hard to answer in the absence of an actual agreement to study, and even then, uncertainties over compliance and enforcement will leave doubts about how much things will actually change. That will certainly be the case with any Chinese agreement. They are masters of fine print, and it will take some time to search for loopholes in any completed text. If the recently enacted new law on foreign investment is any precedent, we should not be too optimistic, as it leaves Chinese authorities plenty of room to restrict inbound investment.
Even if the agreement is reasonably tight, it will still leave open the question of compliance. The path to long term success for the president is very narrow. If he can get a strong agreement, which China implements, he wins. If he ends up with a weak agreement or one China ignores, he gets a short-term victory—greatest ever, of course—but a year from now we are right back where we are now with renewed talk of tariffs to deal with noncompliance and one year closer to the election.
For our farmers, that’s a scenario of short-term pain, long-term pain, and no gain. Not the one we are hoping for, but certainly a strong possibility.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jonas Heering is an intern with the CSIS Scholl Chair.
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