Well…the U.S. is in a trade war with China. But if the U.S. complaint is about Chinese subsidies for state-backed enterprises, overcapacity in steel and other basic industries, and on the practice of forcing investors to hand over valuable technology, why are Culpeper soybean farmers being punished?
America is a vast continental economy that produces a multitude of goods and services. Post-war WWII trade agreements focused on creating opportunities for free trade and market access. Trade disputes are not uncommon as one economy adjusts to its role in the world and seeks a balance of accommodations from its trading partners. Usually delegations meet back and forth and over time reach those negotiated accommodations.
These days, however, America is playing its hand differently. Rather than enter negotiations, the current administration started out by imposing tariffs on steel and aluminum imports. This blunt tactic is an unusual way to start negotiations, it is is equivalent to a union calling a strike and shutting the plant down, before negotiations begin.
This blundering tactic took everyone by surprise. Confusion continues as presidential tweets mischaracterize the role of tariffs and who pays. As we learned in Economics 101, a U.S tariff is a tax on the U.S. economy. It raises the price of all the parts used to make a product. In a free enterprise economy, all businesses are cost sensitive. Hence, steel users such as Harley-Davison and General Motors reacted in a manner that any economist could predict. They moved to offset the tariffs’ new costs by announcing they would move production to a location with cheaper material and labor costs, or close plants.
A student of an International Relations 101 class could predict China’s initial response. Seeing the tariff move as heavy handed and heading an economy that is the second largest GNP in the world, it is difficult to see that China would just knuckle under. Its vast holding of U.S. Treasury Bills would also give it confidence to resist. Academic observers note that the list of U.S. demands and deadline presented to China at Buenos Aires read like the terms for a surrender rather than a basis for negotiation.
The Chinese leadership also could take confidence in the response of the American stock market. Earlier this week when the administration announced a Buenos Aires agreement, the American stock market soared. Later in the week when it was realized that Trump’s assertions of success were lies, the stock market fell 800 points.
China responded to the blunt U.S. move by instituting its own tariffs. But for Culpeper, the Chinese soybean tariffs are key. American farmers sold more than $12 billion worth of soybeans to China last year, the world’s largest buyer of soybeans.
From the perspective of a Culpeper soybean producer, the trade war with China has depressed prices, because there is now considerable stock that can’t be sold. Farmers are looking at loans they assumed under a steady market. Storing the harvest requires money and capacity for silage. There is limited silo capacity in Culpeper, so crops will need to be stored in the open, on the ground. There will be spoilage. The Nebraska farm bureau reports losses of $1 billion so far. Farmers shouldn’t be victims of government-caused market disruptions. The government should let free enterprise work.
We often think of the high pursuit of diplomacy as something that happens over the horizon. Rarely do we think foreign policy could jeopardize the family farm. The stakes in the trade war between China and the United States could be that serious, and that local.