In 1869, the Union Pacific Railroad and the Central Pacific Railroad were joined at Promontory Point to establish the first transcontinental rail line. At that time, only 37 states were part of the American republic and much of the West was still uninhabited territory. By connecting the vast geography of America, the achievement of private enterprise opened the floodgates for expansion west that would rapidly change the fabric of our country.
This Manifest Destiny was precipitated by government action as well. In 1862, the Homestead Act passed by Congress granted 160 acres of free land to anyone willing to work it and gave every citizen a fair chance to pursue the American dream.
In this well-chronicled part of America’s history, the government was able to create a framework that rationalized and incentivized settlement of a large, open resource that combined with private enterprise’s ingenuity and innovation swiftly propelled settlement and cultivation of the West. The prosperity created by these two forces set the stage for American success in the 20th century.
The Bigger Picture
You are not being deceived… this article isn’t a history lesson. It is about international trade and its ramifications for American agriculture. However, when discussing the numerous headlines about today’s trade wars, it’s easy to get lost in the details and lose sight of the overarching forces that shape where we will ultimately end up. Drawing on the parallels between the late 19th century and now provides some context to where we are going and what is possible.
Prior to the Sixteenth Amendment (the income tax) in 1913, the government was primarily funded by tariff s. Most estimates attribute at least 90% of federal government funding during this period to tariff s on foreign imports. In the late 1800’s, party politics revolved around the issue of tariff s, and presidential election outcomes were determined by it. After the advent of the federal income tax, tariff issues largely receded into history, until now.
Under the Trump administration, tariff policies have been revived. Numerous motivating factors have contributed to this, both economic and geopolitical. Despite whether you agree or disagree with those policies, the effect of them is undeniable. Everything from mortgage rates to the price of an iPhone fluctuate based on the current state of several concurrent trade deals. To say the least, commodity prices have also been significantly affected (more on that later).
It is unlikely the administration’s goal is a return to funding the government through tariff s. Rather, taken at face value, the aim is to return America to an equal footing with its trading partners and reenergize domestic manufacturing production. By reexamining the static trade policies of the last century, the administration has sought to establish a new trade framework that is more beneficial to American
companies and workers.
The careful balancing act now underway is the level of government intervention necessary to bring that about versus the ability of private enterprise to continue competing in markets around the world.
Trade In Turmoil
The first signal the administration was going to shake up longstanding trade policy began nearly the moment President Trump was inaugurated. One of the first major policy decisions of the new administration was withdrawal from the Trans Pacific Partnership, an agreement of 12 Pacific Rim countries. Shortly thereafter, the president used an executive order to initiate renegotiation of the North American Free Trade Agreement. He then imposed 25% steel and aluminum tariff s, compelling Canada and Mexico to renegotiate NAFTA. In 2018, the president launched the first salvo of tariff s against China, beginning with solar panels and washing machines, eventually increasing tariff s on imported Chinese goods totaling more than $550 billion.
What has transpired since then sheds light on the efficacy of those actions. Regarding the TPP, after the U.S. pulled out, consummation of the trade deal among the remaining eleven countries stalled for a period of time. In 2017, those countries resumed trade negotiations under a new, longer acronymic trade treaty, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP. Those countries formalized the agreement in 2018 without inclusion of the United States and are trading to one another with nearly zero trade barriers in the form of tariffs. The signatory countries to this agreement did not include China among their ranks.
Toward the end of 2019, in part to make up for lost ground from the withdrawal of the TPP, the U.S. entered into a bilateral trade agreement with Japan. Th e Trump administration has stated it would pursue similar bilateral agreements with several countries instead of becoming part of larger, comprehensive trade deals such as the TPP.
NAFTA is nearing the final stages of replacement. The United States-Mexico-Canada Agreement, or USMCA, has been signed by the three participating countries and is awaiting ratification by Congress. In May of 2019, six months after the signing of USMCA, the administration lifted the steel and aluminum tariffs against both countries.
Despite the dark clouds circling and the feeling that the world trade stage is the Wild West, there are factors at play that bode well for American producers if we can capitalize on them.
A China and U.S. trade deal remains in a constant state of flux. Chinese growth has recently dropped to its lowest level in nearly three decades, spurring China to negotiate a multiple phase approach. Under that negotiation umbrella, the U.S. will begin rolling back tariff s as China agrees to intellectual property provisions and purchase of agricultural commodities.
One trade agreement not garnering much media attention domestically, most likely due to the fact that the U.S. was not considered for participation in it, is the Regional Comprehensive Economic Partnership or RCEP. Made up of 15 Asia-Pacific countries, including China, the RCEP would represent nearly one-third of the world population and world gross domestic product. The countries are moving quickly and expect to reach a formal agreement in 2020.
This is not an exhaustive list of trade agreements the administration is reexamining or being kept out of. That summary would fill an entire article. The point to be made here is the Trump administration upturned years of stationary global trade policy, the consequences of which have reverberated worldwide and acted as a catalyst igniting a torrent of trade activity.
Agriculture Bearing The Brunt
Far from being immune to the effects of the trade wars, U.S. agriculture has suffered significantly. For most countries, the primary imports from the U.S. are agricultural products. In retaliation for import tariff s on products ranging from steel and aluminum to printer ink, foreign countries have increased tariff s on American agricultural products.
A breakout of net farm income statistics since these retaliatory tariffs were established illustrates the effects. In 2019, the United States Department of Agriculture expects net farm income to reach $88 billion. Nearly 40% of that is comprised of trade assistance, disaster assistance, and insurance indemnities. At the same time, working capital amongst America’s farmers is down over 30%, and farm bankruptcies have increased 24% since last year.
Repercussions of trade have also created a change in farming behavior. In 2019, planted acres of soybeans are projected to decrease by 6.6 million acres, the largest year over year decline since the renewable fuels mandate in 2007. That is directly attributable to the decrease in Chinese purchase of soybeans, which was down 97% since the trade war with China began.
Not to place too fine a point on this, but without trade assistance in the form of direct payments to offset retaliatory tariff s, American farmers would be in even worse trouble than they already are. Those payments, currently being dispersed through the second round of the market facilitation program, are not a guarantee. After the first tranche of payments under the program in 2018, USDA Secretary Perdue said that no trade assistance would be available in 2019, so farmers should plan accordingly. With the overwhelming effect of trade wars still being felt by U.S. producers, the administration reversed course and implemented a second round of payments for 2019 and has already hinted at a possible third round of payments to buoy the patience of farmers while trade deals are reached.
On The Horizon
Despite the dark clouds circling and the feeling that the world trade stage is the Wild West, there are factors at play that bode well for American producers if we can capitalize on them.
For one, like the West in the late 19th century, there is a vast, open market out there. The world population continues to swell at the same time that world poverty rates have been cut in half in the last 20 years. That means there are not only more people but people with means to afford imported American agricultural products. We’ve seen this occur already with the growth in Chinese incomes and the country’s increasing demand for U.S. agricultural products.
Secondly, equivalent to the railroaders of yore, private enterprise has made the American producer the most efficient and competitive in the world. Through continued innovations, such as precision agriculture,
we continue to be the most productive producers in the world by a wide margin. We have laid the track, so to speak, to produce the goods that can feed the world.
What we need is a government framework to rationalize and incentivize trade the way the Homestead Act unleashed Manifest Destiny. There is work being done on this front, but it must happen quicker. The longer we wait, the longer the road to recovery will be. Tariff s may be a short-term and useful tool to negotiate for a better bargain. But ultimately, they are a thing of the past and should not be employed as a long-term strategy. In the absence of American engagement, we are witnessing the development of trade agreements
and markets that exclude us. No amount of trade assistance can make up for that.
We are in need of a seminal moment that will set the stage for American agricultural prosperity in the 21st century. Striking the golden spike at Promontory Point was that moment 150 years ago. Today, striking an agreement to open trade for American producers could be its modern counterpart.
Article Written By Eric Wareham
ERIC WAREHAM is the Vice President of government affairs for the Western Equipment Dealers Association. He is a graduate of the Willamette University College of Law and Augusta State University. Eric may be reached by writing to ewareham@westerneda.com.
