Tariffs: The Social Costs of Trade
Jul 13, 2018
Tariffs are a big topic of conversation these days in ag. Some are questioning how this might impact farmers' opinion of the current administration after giving Donald Trump tremendous support as a voting block. Here is one possible answer:
“As midterm elections loom, administration officials have tried to reassure farmers, saying they are considering the use of Depression-era programs, which permit borrowing of as much as $30 billion from the Treasury, as well as other tools to shield farmers from trade-related losses” - From WSJ Trade Fight Threatens Farm Belt Businesses
But how will this work? How do we decide who gets what and how much? Is this really the direction we want to go with farm policy? What other choices do we have. These are questions best answered by the market. It's what the market does best. To think we are considering long outdated 'depression era' policies in the year 2018 is surreal. Recalling also, that tariffs are often one of the top reasons cited for being a cause of the Great Depression or at least a precursor to it.
In a Masters in Business podcast with Barry Ritholtz a few years ago Gary Shilling offers some interesting thoughts on trade:(paraphrasing not quoting).
Basically globalization has led to income polarization, with 8 years of zero to no real income growth for a segment of the population and this frustration has been expressed politically through Bernie Sanders and Donald Trump. With regard to Trump, when you strip away the blustering, he may actually be more like an old school centrist politician. When you take the impacts of globalization, the recession, and the slow recovery, conventional politicians don't know how to react.
Additionally, NYU finance professor Aswath Damodaran touches on this: (again paraphrasing)
In the aggregate, trade and globalization can be good for the country, but the 55 year old steel worker in Pennsylvania gets little consolation out of the fact that free trade is going to create more world wealth when he says where the heck am I going to get my paycheck next month.
"We are paying a price for almost deliberate blindness in the financial capitals of the world to the kind of costs that are being created sometimes."
I think this is the kind of environment in which it was possible for the 'blue wall' on the electoral map to crumble.
This has me thinking....how much of the farm vote can the president 'afford' to lose? One might argue that, at the margin, the electoral votes that put president Trump in office were from some of those upset states that otherwise would have been captured by Hillary Clinton. While farm states may have been 'winners' in global trade, many workers in other states may not have felt that way. And in a world where politicians want to characterize trade in terms of 'winners' and 'losers' in a zero sum game, it might be that the president is trying to shore up those marginal votes even if it means losing some of the rural vote. I'm not favoring or defending tariffs or a trade war, but some folks from the rust belt who vote might be expecting the president to throw a few punches after taking a beating these last few years. At least that could be the way some are seeing this, even though it is not the way I learned to think about trade from economics classes I took years ago.
How many rural votes can or will be lost from this administrations trade policy? For a politician, is it worth risking some of the rural vote in order to keep those blue state electoral votes (if that indeed is the tradeoff)
We are looking at ways to compensate ag producers who are being asked to take this on the chin, but looking back, should we have considered more aggressive policies to assist those in the 'blue' states whose economies and work force have been impacted by the China factor? If we make it out of this mess, what is the best way to embrace the power of markets and international trade while also recognizing and answering to the social costs of trade?