The New York Times recently ran an article, “How Much Will the Trade War Cost a Typical American Family? Around $60 (So Far)”, that shows how broad is the misunderstanding of President Trump’s tariffs. Roughly speaking the article added up the cost assuming everybody keeps buying from China. But trade flows adjust to tariffs. This applies both to U.S. tariffs and to the tariffs imposed by other countries.
Yes, tariffs impede growth. The specific fear today is that President Trump’s imposition of broad tariffs against Chinese goods will start a trade war that would not only counter his pro-growth policies, such as tax cuts, deregulatory efforts, etc., but indeed could cause a serious recession or depression. See, for example, the Business Insider piece titled 1,100 economists warn that Trump is repeating one of the biggest mistakes of the Great Depression. The article echoes a famous 1930 letter sent to President Hoover by 1,028 economists urging him to veto the Smoot-Hawley tariffs.
But while it is true that tariffs distort trade and, all things being equal, lead to slower growth, Trump’s tariffs, especially those against China, are different in kind, not just degree, from the Smoot-Hawley tariffs that helped set off a global trade war in 1930. The difference? The 1930 tariffs were generally uniform against the whole world. They imposed, for example, a tariff on all olive oil, sugar, cigars, silk, wheat, butter, and more, imported to the United States from anywhere. This made everyone in the United States poorer, as consumers had to pay more for imported goods or buy more expensive U.S. goods. And there was no advantage in seeking goods from some other exporter—the tariff was uniform and across the board.
Americans are not so dramatically impacted by U.S. tariffs against, say, Chinese goods. Sure, such tariffs raise the price of goods imported from China, but substitutes can be sought elsewhere. If we were buying, say, Chinese farm equipment because it was 5 percent less expensive than Japanese equipment, then the minute the tariff hits that 5 percent margin, buyers will shift to Japan. And what if Japan doesn’t have enough production? Then trade will shift, and the Indonesians who were buying Japanese farm equipment will buy Chinese and the Japanese will sell more to the U.S.
Now, the president’s China tariffs are, indeed, leading China to respond. The trade “war” is on, and the target is mostly farm commodities. The Wall Street Journal recently explained it this way: “The U.S. Farm Belt helped deliver Donald Trump to the White House, drawn to his promises to revive rural America and deregulate industry. Now, the president’s global trade offensive is threatening the livelihoods of many farmers.”
Tariffs, though, have a dramatically different impact when used as weapons against individual countries than when used against the entire world. If China retaliates against, say, U.S. apples, and comparable apples are grown in, say, British Columbia, following the imposition of tariffs by China, the business will shift. The Canadian apples will go to China and the U.S. apples will go wherever the Canadian apples had been going. When dealing with commodities, whether the tariff is 5 percent or 5,000 percent, the impact of the tariff is equal only to the difference in freight between shipping to China from Canada rather than from the U.S
Of course, additional shipping costs can raise prices, and this may depress demand and hurt U.S. farmers. Typically, though, this impact is quite small. A box of apples might contain 88 apples, so even an increase in freight by $2.00 a box only comes out to a bit more than two cents an apple. The image being portrayed in much of the media—of markets closing to U.S. commodities and farmers having to dump enormous volumes of produce—is thus unlikely. The invisible hand of the market will reallocate commodities across the globe to maximize efficiency in the face of any tariff.
Will Trump’s support decline in the agricultural regions of America if farmers and the ag economy start getting hurt by Chinese retaliation. Certainly, it is easier to sell prosperity than struggle. Yet if the Chinese are counting on such a simple response, they are deeply mistaken.
My family has been involved in the produce industry for four generations in this country and countless more back in Europe. I’ve worked with the agricultural community my whole life, and when word gets out that farmers are being targeted in order to hurt the president many salt-of-the-earth farmers will respond by rallying to the side of the president and the country. One thinks of Churchill, addressing Congress in 1941: “What kind of a People Do They Think We Are?”
It is well known that trade with China is not an even playing field. Anyone who has tried to do business there understands this quickly. It is also well known that decades of diplomacy, under Democratic and Republican administrations, has not fixed the problem.
American farmers are not looking for trade wars, but they may conclude that only a president who is willing not to worry about 1,100 economists writing him letters will make progress on fairer trade terms with China. The betting is that such a deal would actually create new opportunities for Americans, including farmers, to trade with China.
