Donald Trump Is About To Do Something Really Stupid: Soy Bean Edition

This is a recyclable headline.  However, we need to be aware of the following item from Reuters two days ago:

“WASHINGTON (Reuters) – The U.S. Commerce Department has recommended that President Donald Trump impose steep curbs on steel and aluminum imports from China and other countries ranging from global and country-specific tarifandfs to broad import quotas, according to proposals released on Friday.”

And, of course here comes the response:

“If the United States’ final decision affects China’s interests, we will take necessary measures to defend our rights,” said Wang Hejun, a senior official at China’s Commerce Ministry, according to a report Saturday by state-run news agency Xinhua.

The short article didn’t provide further details on how Beijing might respond. Ross’ recommendations came in the middle of China’s Lunar New Year holiday when government offices and businesses largely shut down for a week.”  [CNNmoney]

The ‘final decision’ is due in April, 2018.  There’s little to analyze at the moment because the proposal isn’t firm, but consists of options presented by the Department of Commerce.

“Ross suggested three options for Trump — impose across-the-board tariffs on steel and aluminum, target select countries with even higher tariffs, or limit the total steel and aluminum coming into the United States.” [CNNmoney]

The steel portion of the proposals advise (1) an across the board 24% tariff on steel from all countries; (2) “Tariffs of at least 53% on imports from 12 countries: Brazil, China, Costa Rica, Egypt, India, Malaysia, South Korea, Russia, South Africa, Thailand, Turkey and Vietnam. These countries would not be allowed to export more steel to the United States this year than they did last year.” [CNNmoney]  (3) decrease imports of steel into the US by 37% from all countries.   In short, there are three options, and from an economic growth standpoint they are all bad. [Report here]

What the administration appears to be gambling on is that the Chinese will not round off their New Year celebrations with the beginnings of a trade war.  The happy clappy analysis would predict China will not retaliate in the semi-conductor sector because too many jobs (Apple) would be lost; and, it will not retaliate against aircraft manufacturers like Boeing because that would give Airbus a monopoly, and thus higher prices and longer wait times for delivery.   So who could be caught up in the squabble?

China imports some $15 billion worth of soybeans from the US each year. $3.4 billion worth of cotton; $3 billion in copper materials; $3 billion in small engine passenger vehicles; $2.2 billion worth of large engine passenger vehicles; then there’s $1.3 billion worth of corn and $1.2 billion in coal. [CBR]

Someone might want to tell Senator Grassley (R-IA) about this Commerce Department proposal and the possible consequences for soy bean farmers because Iowa is the largest producer in the US, followed by Illinois.  Iowa and Illinois account for about 28% of US soy bean production.  Other producing states are: Minnesota, Nebraska, Minnesota, Indiana, Ohio, North Dakota, South Dakota, Missouri, and Arkansas. [B2Lv]  This isn’t the only crop in question.

The Chinese bought an increasing amount of corn last year from the US, but also found a new source of imports — Ukraine.  Ukraine will be the winner in any trade spat, and may be  the ultimate winner anyway.  Most US corn is genetically modified and permits are required in China for the processing of GMO corn; thus Chinese processors started buying more non-modified corn from Ukraine. [Reuters]  Add the GMO issue to a tariff tit-for-tat and Ukraine will be picking up business from — here we go again — Iowa, Illinois, Indiana, the eastern portions of South Dakota and Nebraska, western Kentucky and Ohio, and the northern section of Missouri. [B2lv]

It appears the easiest target for Chinese retaliation for tariffs/import limits would be agriculture, and then there are those large and small engine passenger vehicles.

One of the factors which makes targeting the Chinese a dubious tpoin is that China’s exports of steel have declined in the last few years (although some steel is exported in some form via other nations like Vietnam) and there’s this information on steel importation from the US Trade Representative (pdf)

 Between YTD 2016 and YTD 2017, imports increased from eight of the United States’ top 10 import source countries. Imports from India showed the largest volume increase in YTD 2017, up 209  percent, followed by Russia (up 64%), Taiwan (up 36%), and Mexico (up 23%). The two countries  which the United States had decreases in imports from are Japan (down 9%) and South Korea (down 2%).

Do we see China in this list? No, China is the 11th largest exporter of steel to the US. The top ten are Canada, Brazil, South Korea, Mexico, Turkey, Japan, Russia, Germany, Taiwan, and Vietnam. [USTR pdf]  Exactly how the 11th ranked export source of steel, of which 0.3% by weight is used for military purposes, makes Chinese steel a ‘national security’ issue requires a bit of a stretch, and we’ll probably find ourselves losing the argument with the WTO.  Going the Section 232 route is creative, but not really a very strong platform from which to launch a trade dispute.

Meanwhile it might be a good thing to decide if we want more Chinese assistance with the ever thorny problem of North Korea or we want to slap tariffs on Chinese steel?  Stump speeches which sound good to a crowd of Nucor employees about protecting their industry don’t necessarily make good practical policy when it comes to the point where decisions need to be made about overall economic policy, international trade relations, and diplomatic soft power.  Or, there’s a big difference between campaigning and governing — a not-so-subtle point the current occupant of the Oval Office appears not to grasp with both small hands.

Meanwhile we can only hope the Oval Office occupant doesn’t make a really stupid blunder next April.  Stay tuned, we’re only a little over a year into this E Ticket Ride.

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