Trade Guys Q&A
September 25, 2018
Stream the podcast here.
SCOTT MILLER: I’m Scott.
WILLIAM ALAN REINSCH: I’m Bill.
MR. MILLER and MR. REINSCH: (Together.) And we’re The Trade Guys.
H. ANDREW SCHWARTZ: You’re listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I’m H. Andrew Schwartz. And I’m here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.
We’ve asked for your questions on trade and you’ve sent us some great ones. It’s simple: If you have a question, just drop an email at TradeGuys@CSIS.org or email me at ASchwartz@CSIS.org.
So let’s get to it. On this episode we put your question to The Trade Guys.
Gentlemen, as a result of The Trade Guys podcast, we’re getting a deluge of emails from our listeners who want to ask us questions, and we encourage that. You can always email us at TradeGuys@CSIS.org or email me directly at ASchwartz@CSIS.org.
This is a question that was inspired by our episode with the head of the Missouri Farm Bureau, Blake Hurst. And we had a question from our listener Robert Schulman (sp) who asks, quote, “Why should our tax dollars go towards subsidizing farmers due to a needless trade war started by Trump?” End quote. Trade Guys, let’s answer it.
MR. REINSCH: Well, that’s an easy one. Scott gets to do the hard one; I’m doing the easy one. The answer is they shouldn’t. They shouldn’t go towards subsidizing farmers. And what’s more, the farmers don’t want them to. The farmers have been quite clear in saying what we want are markets, what we want are exports and sales; we don’t want handouts. So I think the answer to your question is that’s the wrong approach.
MR. MILLER: We both agree it’s bad policy. Now, look, farm support is something that is as old as – actually, it goes back to the Dust Bowl, and farm support has been an important thing for many, many growers over the years. The total spending now by the U.S. Department of Agriculture is about $21 billion a year, and since 2014 that spending has been to support an insurance-based system when crop prices fall. So it’s what’s known as a countercyclical program. So there is some baseline spending. A $12 (billion) or $13 billion increase on top of that is a pretty large increment. But it has real questions of whether it’s efficient and whether it gets to the people who are actually harmed. If you’ll recall, Blake was skeptical on both those counts.
MR. SCHWARTZ: Well, so this question – just to probe a little further – question’s got some pretty tough wording – quote, “a needless trade war started by Trump,” end quote. Is it a “needless trade war”? I mean, I don’t think we would say it’s a totally – it’s a little more nuanced than that, isn’t it?
MR. REINSCH: Well, I think a lot of business reaction has been some of the problems that he has identified, particularly with respect to China, are genuine problems and they’re serious problems that need to be addressed. I don’t think you can find many people that would say a trade war is the best way to address them, that they’re not – it’s not the best way to solve the problem.
MR. MILLER: Well, and whether or not it’s “needless” –
MR. REINSCH: You say tomato, I say tomahto, right? (Laughter.)
MR. MILLER: Right. And we’re talking about a president who campaigned on this as a remedy, so we shouldn’t be surprised. We bought the ticket. It’s time to take the ride.
MR. SCHWARTZ: Bill, we have a question from our listener Ben Perkins (sp) on the timing of auto tariffs. Ben writes in, quote, “I had a question on the most recent podcast regarding the timing of the auto tariffs.” Ben goes on to say, “My understanding is that the Department of Commerce has 270 days to put together a recommendation for the president, and then the president has 90 days to make a decision. On the steel and aluminum tariffs, Commerce took the full 270 days before submitting their proposal. Two hundred and seventy days from Trump’s announcement of the investigation is February 17th, 2019, well after the midterm elections. If Secretary Ross wants, I believe he could rush the investigation to conclude early and force the president to make a politically unpopular decision before the midterms. I had hoped that that possibility, or the timeline at least, would be discussed, and I would love to get some insight into that possibility.” Bill, can you give him some insight?
MR. REINSCH: I can try. It’s a good question, Ben. It’s not really a question; it’s sort of a discussion topic.
First, you’re right on the timing. The law provides for 270 days and then 90 for the president. And you’re right that on steel and aluminum Commerce took the full time. The president took a little less than a full time. But it played out – despite statements early on that it was going to be truncated and there was going to be an early decision, that didn’t happen. In the case of the auto ones, you’re exactly right that if they take the full time it will be well after the midterm elections.
Now, the question is, can they speed it up, and is it a good idea to speed it up? Can they speed it up? Yes. Sure, because, you know, the 270 days is a maximum. They can take what they want. Don’t forget, though, regardless of whether you think the answer is precooked here or pre-decided – and some people do – but the document that is going to be produced is going to be an important document, because if the president does anything he’s going to be sued. He’s being sued on steel and I can guarantee you he’ll be sued on cars if he takes any action. And one of the questions that the court will look at, and certainly one of the questions the WTO will look at – because it’s going to go there too – will be, what is the basis for the president’s decision that national security was threatened by automobile imports? Because in order to have tariffs or whatever, he has to – he has to say that. He has to say there’s a national security threat. Now, that gets tested.
Now, there are people who will say, you know, courts will just defer to the president and say it’s a question of judgment. I think as the president’s judgment gets farther and farther away from reality, courts may very well ask the question: Is this really, you know, a sound, well-researched, well-thought-out, examined judgment based on facts, or is it just something that he pulled out of the air? And that’s why this paper is important. It can’t be a shoddy product because it’s going to be examined later on.
So I think the answer is, can he speed it up? Yes. But you’re going to have a shoddy product if you do, and that’s something that they have to weigh.
The second part was, do they want to move it up? And here I think I kind of disagree with your – well, I don’t disagree with your premise. I think the president would disagree with your premise because you suggested that this would force the president to make a politically unpopular decision before the midterms. The president seems to think that this would be a popular decision, and he’s said so. He’s told people that he thinks that it would be good politically to impose auto tariffs before the election. Now, I don’t think he’s right about that. I agree with you, Ben, that this would be a political mistake. And we’ve talked about that here, that, you know, this is a case where there’s going to be a clear-cut consumer impact. If the price of your car goes up $6,000, you’re probably going to notice. The president seems to think it’s a good thing.
So it’s not really an issue of forcing Ross into a corner or giving him the opportunity to make an unpopular decision. It’s more a question of the president pushing Ross to hurry up and get it done because he think it’s a smart decision. I think, if that’s what happens, you now, we will know only in the election whether it turned out to be a smart decision or not.
MR. MILLER: And we have another question, from Jeff Kahler (ph), who asks: “Trade wars impose tariffs on imports. The exporting country does not pay the tariff; the tariff is paid instead by the importing country” through – “ and it translates to higher prices for raw materials and finished goods. Given that the world is a global trading market, what could possibly motivate a rational individual to start a trade war?”
Well, Jeff (sp), my compliments on, first, thinking like an economist; and, second, perceiving correctly the effect of tariffs, and starting with a point that first free markets are ultimately a benefit to consumers and create the highest consumer welfare. So any trade barrier will reduce the maximum consumer welfare, as economists would say. So good point there.
Second, you’re also correct that tariffs on imports are paid by the importing firm or individual and ultimately borne by the final consumer of the product. It’s no different than a sales tax in that respect. So consumers of the – of the home market pay the tariff that’s been put on by the home market.
Now, your question about trade wars is, so why use this tool at all if it’s – if it’s bad for consumers? Usually the logic has to do with what’s called the instrumentality of tariffs. In other words, there’s a situation with a trading partner that you’re concerned about as a – as a government and you want to get the attention of the other party so you can find a way to resolve that – your concerns with the party. And sometimes to get their attention or to start the discussion or to show your seriousness, you raise tariffs. That’s been what’s happening in the U.S. in the Trump administration. It’s happened before. It happens in disputes that are adjudicated by the World Trade Organization and not – where a party loses the dispute and yet does not comply with the resolution as intended, other parties can suspend concessions.
You’re quite right that it is harmful to domestic consumers. It sort of seems like you’re saying to the other nation, hey, you need to do what I want you to do or I’m going to blow up some of my own bridges and tunnels. You’re sort of – you’re just – you’re making your own economy less efficient and hurting your own consumers by doing it. That said, it’s an instrument that is commonly used. And it may or may not work in all circumstances, but it’s one of the options that countries keep in their – in their toolkit for resolving disputes.
MR. SCHWARTZ: Another question we received from an anonymous listener, a listener who wants to remain anonymous, and we will honor that. He or she says, quote, “I don’t understand why it’s important for us to protect the export market for our farmers. I know farming is important and we rely on our farmers to make our food, but shouldn’t our farmers be able to stay in business and make a profit by selling their products on the U.S. market without needing to also sell abroad?” What do you think?
MR. MILLER: Well, it’s a fairly big question, but I think it’s important to get back to the basic economics of trade. The reason we trade is so that we can consume things we don’t produce. That’s true in our own lives as individuals. We earn a living from our job, but we spend it on the things that we want to consume, like food and clothing and shelter, but don’t want to produce ourselves.
Now, in agricultural trade, agricultural trade is common and beneficial because of something economists call factor endowments. Factor endowments are what your property or what your land in the farming business is most suitable for producing. So what you have – the obvious examples would be there are certain tropical products – fruits, coffee, cocoa – that only grow in regions near the equator. And so, if you want to consume those products, you’ve got to trade to get them.
But in the case of Blake, his land, as he mentioned, was in the Corn Belt. Well, that might give you a clue as to what his factor endowments are. Blake is able to produce very efficiently productive and – far more soybeans and corn than he or his neighbors can consume. And so Blake is simply selling his surplus beyond what he or his neighbors can consume to others who have different factor endowments, in this case hog farmers who need a source of feed for their animals.
Now, to really think through this question properly, you have to channel John Lennon and imagine –
MR. SCHWARTZ: Oh, I love channeling John Lennon.
MR. MILLER: Imagine there’s no country. Imagine there are no international borders in this transaction and you simply have Blake Hurst, who is good at – whose land is productive for the growth of soybeans and corn, and you have some distant hog producers who don’t have the factor endowments that Blake has and seek to buy it. So that exchange makes sense for both parties. The key is, the reason –
MR. SCHWARTZ: It’s instant karma.
MR. MILLER: The reason for bringing up John Lennon is it really doesn’t matter whether that transaction is a purely domestic one or one which has an international component. Commerce is commerce. The benefits of trade are the same. Both producers and consumers can consume what they don’t produce, and that winds up being something that makes people best able to achieve what economists would call maximum consumer welfare.
Now, it can get confused with political issues like political boundaries But in general, the economist’s view is let people do what they’re best at doing; they’ll make the most of their lives. And this is why Blake was advocating for limited interference with the way he ran his business.
MR. SCHWARTZ: There was a second part of the question. Quote: “Why is it important that our farmers are able to export their food to China? Does it make our country stronger, or does it make our farmers dependent on a foreign market which we have very little control over?”
MR. MILLER: Well, I would argue that it makes our farmers stronger because, clearly, our farmers can produce more than we can eat. I mean, about a third of agricultural output in the United States is exported. And if you look around at your friends and neighbors, we really shouldn’t or can’t eat very much more than we do.
MR. SCHWARTZ: Oh yeah.
MR. MILLER: So it’s good to have a source of consumption for the products that the United States, because of its agricultural bounty and its efficiency of farming, can produce in surplus. So it’s better for Blake, rather than reduce his crop size to only what can be consumed domestically, to produce a maximum amount. That increases his benefit, but it also increases the benefit of those who are consuming the product.
MR. REINSCH: And there’s a philosophical question here, too, that deserves treatment. He asked, does it make our farmers dependent on a foreign market which we have very little control over? I mean, if you think about that, that would be true – that’s an argument you can always use with trade. If –
MR. MILLER: But it’s a political argument, but yes.
MR. REINSCH: Well, yes. If we’re going to be – if we’re going to engage with the rest of the world and we’re going to sell them stuff, then yes, it makes us a little bit dependent on them. But because it’s trade and two ways, they are also dependent on us. If we are selling our surplus agricultural – food to China, they are becoming dependent on our food. We may be becoming dependent on them in other ways. That’s the kind of mutual dependence that, one, leads to peace and growth and prosperity.
MR. MILLER: Because that mutual dependence is mutually beneficial, too.
MR. REINSCH: Yes, exactly.
MR. SCHWARTZ: And to quote John Lennon, we want to hold their hand. (Laughter.)
MR. REINSCH: Yes, we do, Andrew. We want to hold their hand.
MR. SCHWARTZ: All you need is love. Love is all you need.
MR. REINSCH: I’m speechless. (Laughter.)
MR. SCHWARTZ: To our listeners, if you have a question for The Trade Guys, write us at TradeGuys@CSIS.org. That’s TradeGuys@CSIS.org. We’ll read some of your emails and have The Trade Guys react to it.
Thank you, Trade Guys.
MR. MILLER: Thanks, Andrew.
MR. REINSCH: Thank you.
MR. SCHWARTZ: You’ve been listening to The Trade Guys, a CSIS podcast.