Trump subsidies are a Band-Aid for farmers, not a solution

Soy milk, soy flour, soy protein, tofu and soy-based animal feed are worth billions of dollars in protection, according to the White House.

On the heels of the $12 billion agricultural aid packet that President Trump announced on July 24, the U.S. Department of Agriculture (USDA) is now providing details on the spending of $4.7 billion of those funds. 

{mosads}Soybeans appear to be the winner so far, with about $3.6 billion in subsidies to help offset trade-conflict losses in the soybean industry. Pork, cotton, sorghum, dairy (milk), wheat and corn make up the bulk of the remaining $1.1 billion in direct-payment aid. 

The soybean subsidy is targeted to offset tariff-related barriers that have been part of inflicting a 23-percent decrease in the soybean price since President Trump took office in January 2017. Soybean exports are also down 6.9 percent in 2018 compared with last year, and soybean futures are at a decade low, down some 18 percent since May. 

The combination of tariffs from China and the European Union, among others, and the bumper crop of soybeans this year has created market pressures not seen in decades.

On the positive, industry experts are hopeful that renewed trade talks with China can create a solution. Last year, China imported 63.7 percent of U.S. soybean exports, but this year, China’s soybean purchases are down 21 percent.

Another positive could be the United States–Mexico trade agreement that was reached Monday. Perhaps this agreement can help reinvigorate overall North American Free Trade Agreement (NAFTA) talks involving Canada.

In the meantime, Mexico is an important ally in soybeans as well, accounting for almost 6 percent of U.S. soybean exports. 

Mexico, so far in 2018, has increased its stakes of U.S. soybean purchases by almost 10 percent. Could it be as simple as countries “playing ball” with the U.S. first before receiving favorable trade treatment in return?

In either case, the exposure that the U.S. has in the global market becomes unusually pronounced when one country (China) has such leverage over one industry (soybeans) — essentially a $26 billion power leverage.

Unfortunately, some of the U.S. trade negotiations with single countries seemingly take on a win-loss mentality instead of a win-win focus.

As a result, for the first time in seven years, we expect the global efficiency ratio for international trade to go down. In large part, tariffs and subsidies make the globe less efficient and more win-lose oriented. 

That said, regardless of the initial win-lose negotiation tactics, perhaps the end-result can ultimately be the same if a fair trade agreement can be struck for the countries involved. It is very clear that trade agreements drive international commerce across country borders.

For the agricultural industry, the short-term wins are the direct subsidy payments to farmers. But this includes the soybean-heavy subsidy that is soon to be released by the U.S. Department of Agriculture. Sadly, for this year’s soybean crop, it may be a lost cause, and that’s a significant problem for the $41 billion U.S. soybean industry.

At some point, we may also see wrangling among factions of the agricultural industry. Corn growers, for example, are only receiving $96 million of the initial $4.7 billion, but estimates from the National Corn Growers Association indicate that $6 billion is needed to make them whole.

Let’s see what kind of lobbying farmers do between now and December — when we will find out about the second wave of subsidies — regarding the remaining $7.3 billion that may be available.

Moving forward, the United States typically allocates about $20 billion in agricultural subsidies annually. Adding potentially another $12 billion to the $20 billion that the country normally uses for market-competitive subsidies has serious long-term budget implications.

Alternatively, opting to instead allocate part of the normal $20 billion to the newly targeted farmers can cause potential bullwhip effects in other industries. 

Ultimately, the answer to trade-conflict losses is not more subsidies or reallocation of existing subsidies to preferred areas by this White House. The focus needs to be on fair regional and bilateral trade agreements that facilitate the opening of global markets.

Making farmers whole by direct-payment subsidies or buying up excess produce is not a viable long-term solution that tax paying Americans or politicians are likely to stand. 

At minimum, we really don’t know the potential bullwhip effects that may be the result of trade wars that involve such large subsidies and selective tariffs.

Instead, it is time that the U.S. engaged in more than its current 14 trade agreements to take advantage of market opportunities in a more direct way, open up markets for the country’s already-competitive farmers, and leverage the country’s traditional trade standing in the world. 

Data really tell the trade story. From 1958 to 2018, the world saw 299 regional trade agreements go into force (and roughly 300 bilateral agreements). The U.S. being part of just 14 agreements limits our companies global market potential across the globe’s 195 countries and more than 60 territories.

Just to clarify, there is no doubt that the contribution of the U.S. to the world economy is immense. There is also no doubt that the share of U.S. influence has declined — from some 40 percent of the world’s production output in 1960 to less than 20 percent today.

There are tremendous “global efficiencies” and U.S. production potential to be realized by engaging in more free and fair trade agreements — with a focus on opening up markets — instead of elevating tariffs and subsidies.

Tomas Hult is professor in the Broad College of Business at Michigan State University and executive director of the Academy of International Business. In 2016, Hult was selected as the Academy of Marketing Science Distinguished Marketing Educator, as the top marketing professor worldwide for scholarly career achievements.