Thursday, 14 June 2018

Tariffs Alone Are Only A Small Part Of International Trade Imbalances

            President Trump’s recent shallow, sound-bite tirades about trade tariffs, as usual, miss the much larger point that tariffs, by themselves, are merely the smallest weapon in the powerful armoury of schemes used by several nations to protect and promote their own companies.

            In fact, there are few more mind-numbing, dizzyingly complex subjects than foreign trade. To get a clearer picture of the realities of international trade I highly recommend a book called The Travels of a T-Shirt in the Global Economy by Georgetown professor Pietra Rivoli. She says Chinese T-shirts may flood the American market, but the vast majority of the cotton used in those T-shirts comes from the United States, West Texas to be precise. Indeed, the United States is one of the leading cotton exporters in the world. Rivoli notes the impotence of tariffs to stop world trade by pointing out that “Though only about 2 percent of Americans’ clothing is made in the United States, tariffs remain among the highest of any manufactured goods.”

Much to be learned from the the humble T-shirt
            Rivoli notes that in addition to the ingenuity and incredible hard work of the West Texas cotton farmers they have been very adept at utilizing the vast array of research support from nearby Texas Tech University and the bright people at Monsanto who develop varieties of cotton seeds that can withstand the harsh climate of that part of Texas.

            But it is in rallying the political support for millions of dollars of federal subsidies in the form of disaster relief, price supports, insurance, export credits, and many other details that give American cotton a huge advantage in the world trade. Some of America’s poorer competitors in Africa have complained to the World Trade Organization  (WTO) that American cotton subsidies amount to more than their entire GDP. These subsidies and technological advantages help explain why fabric manufactures in countries like Turkey prefer to import American cotton rather use local cotton grown just a few miles from their factories. "It's cheaper and better," one of them explained to me.

West Texas cotton - a powerful force in global textiles
            Brazil, another large sophisticated cotton producer, had a unique and successful response to what it termed unfair cotton subsidies. Rather than institute countervailing higher tariffs that would ultimately punish Brazilian consumers, the clever Brazilians won permission from the WTO to impose other penalties on other American goods. Brazil won the right to suspend normal intellectual property protections – a subject dear to American companies – for goods such as pharmaceuticals and engineered seeds, and to institute trade protection for Brazilian service firms. This cross-retaliation shifted the cost of American cotton subsidies to other companies like Microsoft, Monsanto, and Intel. Not surprisingly, the day before these measures were to take effect a settlement was reached with Brazil on the issue of cotton subsidies. The European Union might want to think about this Brazilian approach rather than simply slap higher tariffs on various American goods.

            These subsidies are part of $500 billion Farm Bill that covers several types of agriculture as well as nutrition programs like Food Stamps for low-income Americans. This farm bill is due to expire in September 2018, and its replacement is a ticking time bomb for politicians running for re-election in November. The replacement faces a very hard road, and it is by no means clear that Congress will be able to draft something that will please one of Trump’s constituencies – the farm belt. The nutrition part of the bill is one of the more contentious items as many of the die-hard conservatives hate the idea of using federal subsidies for low-income families. And many Blue State members of Congress won’t agree to any farm bill that doesn’t include such subsidies. This fight will rival the noise of the health care debate.
            This federal largesse is by no means limited to agriculture as a wide swath of American business benefits from federal, state, and local assistance. A report published by Good Jobs First highlightsthe scope of these benefits.

            Topping the list of those receiving federal grants, tax credits, or cash payment in lieu of tax credits is not an American firm at all. The Spanish energy company Iberdrola has invested heavily in wind farms in the United States, and now bills itself as the second largest wind farm operator with more than 40 projects from California to New England. Iberdrola has collected $2.2 billion in federal grants and/or tax credits. This staggering sum raises the question of whether renewable energy like wind power can exist without these handouts.

            American tax payers should have no fear, however, because the champion for federal, state, and local subsidies is Boeing. Boeing has received $457 million in non-repayable federal grants, $64 billion in federal loan guarantees, and $13 billion in state and local subsidies. This is a very bi-partisan effort. In 2014 the Democratic governor of Washington signed a bill giving Boeing an $8.7 billion tax break over the next 27 years in an attempt to keep the 777X production in Washington state. This has become a hot issue as Boeing returned the favor by continuing to ship jobs out of state despite all the local assistance.
Took off with the massive help of U.S. taxpayers
            These types of tax-payer give-aways are by no means an American invention, however. The European Union has a huge program of agricultural assistance – similar to the American farm bill -- known as the Common Agricultural Policy (CAP) that takes about 35% of the entire EU budget. A French farmer friend grumbles that those payments are directed primarily at large industrial farms and omit smaller operations like his. And Airbus, like Boeing, receives considerable subsidies.

            The conclusion, as Pietra Rivoli points out, is that so-called ‘free trade’ is a myth that many love to talk about but no one really dares to practice. Uncle Sam doesn't just put his thumb on the scales. He puts his entire heavy leg. If Trump is really serious about levelling the playing field he would address all these federal, state, and local handouts instead of focusing merely on tariffs. But don’t hold your breath.

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