An Urban's Rural View

Winning a Trade War, Losing Our Farms

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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"Trade war" is, in some ways, a useful metaphor to describe a tit-for-tat exchange of punitive trade barriers. Just like on the battleground, one country fires a round of destructive tariffs and back come destructive tariffs in retaliation. Just like in a shooting war, it's easy to slide into escalation as each side tries to inflict the maximum possible pain, thinking it will force the enemy to back down. A trade war can feel a lot like a war.

In other ways, though, "trade war" is a misleading metaphor. The big difference is that it's impossible in a trade war to limit the damage to the "enemy" -- and enemy is itself a misnomer when talking about trade. Trade takes place because both sides see benefit from it. Raise barriers to it, and a country hurts itself to some extent even as it's wounding its trade partner or partners. Its consumers pay more, its exporters have a harder time exporting. In this respect a trade war is less like war and more like mutual self-flagellation.

Seeing itself at the receiving end of that whip, agriculture has been justifiably nervous about President Trump's threatened steel and aluminum tariffs. America's trade partners in Europe and Asia have left no doubt that if Trump whacks their metals exporters with heavy tariffs, they'll whack back -- and that U.S. exports of soybeans and other ag products will be prime targets.

Trump promises he won't back down -- if there's a trade war, we'll win it, he says. Yet Canada and Mexico have been temporarily exempted from the new tariffs and European allies are lining up asking for exemptions, as well. Some think Trump's threats are negotiating ploys. The situation is fluid, but increasingly this looks more like the beginning of a trade skirmish than a war.

That's the other problem with the metaphor. Wars are big, broad-based affairs, fought on many fronts and leaving many casualties. Most trade crossfires end up being mere brawls, not that brawls can't do big damage.

The world has had lots of these brawls in recent decades but it hasn't seen a genuine trade war in nearly 80 years, since Congress passed the Smoot-Hawley tariff in 1930 during the Great Depression. Because it's the most recent trade war we have, and because whenever protectionism looms critics invoke it as an example of what can go wrong, Smoot-Hawley and its aftermath is a trade war worth reviewing.

The critics sometimes make extravagant claims. In 2009 Republican Congresswoman Michele Bachmann of Minnesota claimed that President Franklin Delano Roosevelt had turned a recession into a depression by imposing "Hoot-Smalley." Actually, the tariff was called Smoot-Halley and it was passed by a Republican Congress and signed into law by a Republican president, Herbert Hoover, three years before FDR, a Democrat, took office.

Less flagrantly wrong, but questionable, is Bachmann's view of the tariff's responsibility for the Great Depression. A careful historian who is no fan of the tariff, Dartmouth University's Douglas Irwin, assigns it a lesser role in that economic tragedy. In his 2011 book "Peddling Protectionism: Smoot-Hawley and the Great Depression," Irwin quotes big-name economists, from Milton Friedman to Paul Krugman, who say the tariff was a bad idea but did not cause the depression.

Irwin also does a deep statistical dive that supports the economists' point. Between 1929 and 1932 the volume of U.S. imports fell 40% but Smoot-Hawley, he calculates, was only responsible for 10-13% of this decline. Irwin notes that two-thirds of America's imports at the time were duty-free, and they started declining before the tariff was enacted and continued to decline at roughly the same pace as the dutiable imports.

Smoot-Hawley increased tariffs on that dutiable third of America's imports by 15%. Tariffs rose a whopping 47% between 1929 and 1932, but most of this would have happened even without Smoot-Hawley. It occurred because of the interplay of falling prices in a deflating economy with those tariffs -- two-thirds of the tariff-bound total -- that were expressed in dollar terms. As Irwin notes, a $5 duty on a $20 shirt is a 25% tariff but it becomes a 50% tariff when the shirt price drops to $10.

The deep recession became a depression mainly because the Federal Reserve botched monetary policy, holding interest rates high even though the economy was tanking. In Irwin's words, "When set next to a one-third decline in the money supply, even a substantial change in tariff policy would have been unlikely to produce any major macroeconomic effects, particularly when dutiable imports were a mere 1.4% of GDP in 1929."

If exports had stayed level while imports fell, the effect would have been to stimulate the economy. But exports fell more than imports -- 49% by volume between 1929 and 1932, versus a 40% decline in imports, suggesting that "trends in exports and imports worsened the Depression, but only by a small amount."

The decline in exports had several causes. The Depression was worldwide, so foreigners had less income with which to buy American goods. Moreover, the dollar was strengthening.

Still, retaliatory tariffs were one of the reasons, and they hit some American exporters particularly hard because our tariffs were often so much higher than our trading partners' to begin with. For example, the U.S. raised its tariff on eggs to 10 cents a dozen from 8 cents, causing our imports of Canadian eggs to fall to 7,399 dozen from 13,299 dozen. Canada retaliated, raising its egg tariff to 10 cents a dozen from 3 cents, causing our exports of eggs to Canada to fall from 919,543 dozen to 13,662 dozen.

Which brings us back to today and to the nervousness of agriculture. What constitutes "winning" a trade war (or skirmish) in the president's mind isn't clear, but even if the GDP hit is tiny and some industries benefit, the sectors of the economy that bear the brunt of foreign retaliation will suffer mightily. Agriculture is one of the most successful exporting sectors of the American economy. It's a big retaliation target. Low farm-commodity prices have farmers struggling. The last thing farmers need is a trade war "victory" that puts them out of business.

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