There is a big difference between negotiating fair trade dealsand engaging in trade wars. With the latest round of tariffs (this time on goods imported from Mexico) set to take effect this week, it might be a good time to examine the effects of tariffs on American consumers and producers, particularly in Iowa.
In his state of the union address in February, President Donald Trump declared that recent tariffs on Chinese goods resulted in the U.S. Treasury “receiving billions and billions of dollars” and created a resurgence in manufacturing jobs. In fact, tariffs imposed in early 2018 ignited a trade war that raised prices to consumers, hurt American manufacturing and suppressed agricultural exports and prices.
Let’s take a look at the “billions and billions of dollars” that are flowing into the U.S. Treasury as a result of the tariffs. A tariff is a tax on imports. Consumers who purchase imported goods that are subject to the tariff pay a price which includes a tax that is collected by the government. Domestic producers of the good can now charge a higher price (without paying a tax) and compete with imports. Either way, consumers lose and the dollars flowing into the U.S. Treasury come from the pockets of consumers.
But what about American manufacturers? Aren’t they better off with protectionist policies?
In March of 2018, the United States imposed a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum. The purpose was to make imported steel more expensive and allow domestic steel producers to raise prices. As expected, steel prices increased by almost 9 percent. Certainly, U.S. steel manufacturers benefit from the tariffs, but other firms, companies that rely on steel for manufacturing, are faced with higher prices and lower profits. According to a report by the Peterson Institute for International Economics (PIIE), U.S. steel firms will be $2.4 billion richer next year as a result of Trump’s protectionist policies. Meanwhile, the PIIE report estimates that the tariffs increased the cost of steel by $5.6 billion per year. This cost is imposed on manufacturers (including manufacturers of farm equipment) as well as end-users (consumers who purchase anything from automobiles to washing machines). As for creating or protecting jobs in the domestic steel industry, the report estimates that the tariffs created an additional 8,700 jobs which amounts to $650,000 per job.
What does this mean for Iowa? The effects of the trade war on Iowa farmers is a devastating double-punch. While the cost of farm machinery has increased due to the steel tariffs, China (as well as Mexico, Canada and the European Union) has retaliated with tariffs on U.S. exports. Tariffs will make Iowa farmers’ crops, such as soybeans and corn, less attractive to consumers in foreign countries. China, the world’s largest importer of soybeans, cut off all purchases last year; the resulting surplus sent the price of soybeans plummeting to $8.09 per bushel in May. This is compared to a price of $10.24 per bushel in May of last year. As the president of the combine equipment manufacturer CLAAS Global Sales America said in a recent AgFax newsletter, “How can we go out in the market right now and ask for higher prices from the farmers when their income is going down?”
And the situation may not improve if and when the trade war ends. According to the Iowa Soybean Association, Chinese companies are developing plans to find substitutes for Iowa soybeans including importing product from Brazil and Argentina, encouraging Chinese farmers to increase soybean production and using alternative protein sources for livestock feed. In short, there are no winners in a trade war. The proposed payouts and cash subsidies to agricultural producers adversely affected by tariffs are an inadequate response to a very dangerous and destructive policy.
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• Marianne Ley Hayek is a faculty member in the economics department of the University of Wisconsin-Whitewater, College of Business and Economics. She and her husband, Hal Hayek, live in Cedar Rapids. Comments: email@example.com