The so-called “phase one” agreement was signed on January 15 to mark a partial, temporary truce in the U.S.-China battle of retaliatory tariffs (taxes on imports). IATP doubted that the commitment to increase U.S. agricultural exports to China by $40-50 billion above the 2017 export baseline could be achieved. Already by February 5, U.S. Department of Agriculture Secretary Sonny Perdue said that the United States should be “understanding” if China did not meet its commitments due to the economic impact of the COVID-19 epidemic in China. Secretary Perdue noted that the two-year agreement contained a “disaster clause” that China had not then invoked.
President Donald Trump’s racist and misleading characterization on March 18 of the COVID-19 global pandemic as the “China virus,” echoed by Secretary of State Mike Pompeo and Fox News, is part of Trump’s strategy to deflect attention from his administration’s COVID-19 preparation and management failures. Predictably, this re-election tactic has caused Chinese-Americans to fear for their safety. Nevertheless, the Trump administration has indicated it will import Chinese medical masks and other medical equipment to fight COVID-19 although it still wants the Chinese government to admit its delays in controlling the epidemic there lead to the global pandemic.
In addition to risking public health and safety, the “China virus” re-election gambit very likely will come at a high trade and investment cost, although White House officials insist that the January 15 agreement is “on track” for implementation. For example, the U.S. Trade Representative Robert Lighthizer and Secretary Perdue have praised China’s steps to implement non-tariff measures of the agreement, such as speeding up review of applications to commercialize genetically engineered crops and animals. (Inside U.S Trade, March 24, 2020. Subscription required.) Particularly vulnerable to retaliation are U.S. farmers dependent on USDA Market Facilitation Program (MFP) payments. That program partially compensates them for estimated decreased income, due to the impact of China’s counter-retaliatory tariffs on U.S. agricultural exports.
The MFP and related trade loss compensation payments come from the Commodity Credit Corporation (CCC), which Congress replenishes and reauthorizes. The Trump administration trade wars have left the CCC coffers bare. On March 22, Senator John Hoeven (R-ND), chair of the agriculture committee, proposed to replenish the CCC with $30 billion, increase the CCC’s borrowing authority by an additional $20 billion to respond to COVID-19 economic impacts and use CCC funds to “assist livestock producers.” This proposal is stuck in the midst of negotiations of a $1.8 to $2 trillion Senate economic stimulus bill opposed by Democrats partly because of nearly $500 billion in almost unconditional relief for Wall Street and large corporations already bailed out by taxpayers in 2008.
Another sticking point, according to Politico, concerns a brutal trade-off between Democrats’ proposals for oversight of CCC use and for an increase in the Supplementary Nutritional Assistance Program (SNAP) vs. Republican insistence that SNAP increases be conditioned on allowing Secretary Perdue alone decide how to use CCC funds. (See IATP’s “Federal food assistance during the pandemic”.) As the Senate prepares to vote on the final bill, we do not know the result of this and many stimulus package battles.
Whatever is finally in the Senate stimulus bill, inclusion of Senator Hoeven’s proposal is likely because without CCC replenishment, export dependent farming collapses in the absence of agricultural supply management proposed for the 2015 Farm Bill. However, will $50 billion be enough to compensate farmers for trade related income lost due to the trade war, now compounded by the “Chinese virus” re-election tactic?
During the first two rounds of the MFP, about 50% of payments went to 10% of the MFP qualifying “farming entities,” including “alternative agricultural lenders.” Chapter 12 farm bankruptcies in 2019 increased by 20% over 2018, despite MFP payments, while agricultural lending declined. Will the MFP payments keep the 90% of farmers receiving the other 50% of MFP payments from bankruptcy in 2020 or 2021? Or should smaller farming operations follow Secretary Perdue’s euphemistically phrased advice to get big or get out of farming?
What is ailing U.S. agriculture and trade policy will persist after COVID-19 is brought under control and COVID-19 related economic damage has been mitigated. IATP contrasted Secretary Perdue’s leadership of USDA with that of Secretary Orville Freeman during the Kennedy and Johnson administrations in a lecture given on February 12 at the Freeman Center of the University of Minnesota.
Secretary Freeman managed both short term and long term crises, according to former IATP Board Treasurer Rod Leonard, who served on Secretary Freeman’s staff and wrote a short political biography about Freeman’s tenure at USDA. One of Secretary Freeman’s great successes was an agreement negotiated in three days in 1965 with the agriculture minister of India to vastly increase U.S. food aid, especially from the price-depressing oversupply of U.S. wheat, to avert widespread famine. The agreement also provided for long-term expansion of Indian agricultural capacity. One of the heroic failures of Freeman’s tenure was the rejection by Congress by a single vote of supply management in the 1961 Farm Bill.
One consequence of the chronic vast U.S. production oversupply is low prices paid by agribusiness to farmers, often below the cost of production, as illustrated by a 2019 Federal Reserve Bank of Minneapolis chart. This grim cost price squeeze contributes to U.S. agribusiness export dumping, i.e., the unfair practice of trading at below the cost of production. IATP has been calculating this dumping price for five row crops since 1997, mostly recently in a 2019 fact sheet based on a peer-reviewed article.
U.S. claims that China was dumping both its industrial and agricultural exports formed a principal reason that the Trump administration launched the current trade war with China. Counter-retaliatory tariffs by China lead to a decline from about $20 billion in U.S. agricultural exports in 2017, the beginning of the trade war, to about $8 billion as of August 2019. IATP summarized some of the provisions in the agricultural chapter and other terms of the 91-page “phase one” trade agreement in the Freeman Center lecture, “Structural frameworks for U.S.-China negotiations: beyond tactical tariffs.”
It will be difficult to evaluate the deal and Trump administration claims about it because product specific details about the deal will not be released “to prevent market manipulation,” according to Politico. This explanation all but concedes that the deal is trade distorting in the products it covers. Nevertheless, the lack of agreement to allow a set volume of tariff-free exports (tariff rate quota, or TRQs) for soybeans (Chapter 3, Annex 14, paragraph 1), the single most valuable U.S. export crop to China, along with China’s insistence that all WTO members be allowed to export on those terms, persuades IATP that the two year deal will not compensate U.S. farmers for the income lost to the trade war. China has issued a tariff waiver that allowed an increase in late 2019 U.S. soy exports, but not to 2017 baseline levels because China has diversified its sources of soy imports from South American countries.
The current collapse in U.S. net farm income (cash payments plus government payments), e.g., as analyzed by University of Minnesota Extension Service economists, predates the onset of Chinese tariff counter-retaliation by four years. The median net farm income in Minnesota in 2018 was $26,055. In other words, for half of Minnesota farms, net farm income was barely above the federal poverty level of $25,750 for a family of four in 2019. The “easy to win” Trump trade war exacerbated a net farm income collapse that had begun in 2013.
China and other World Trade Organization members have proposed a framework for negotiating part of the differences that triggered the retaliatory tariffs. (Inside U.S. Trade, December 14, 2018.) China and other members would reduce their subsidies for industrial goods if the United States, European Union and Japan would reduce their agricultural subsidies. The U.S. rejected the proposal. The Cairns Group of agricultural exporting companies has called for a 50% reduction in production and “trade distorting” agricultural subsidies by 2030. (Inside U.S. Trade, January 27, 2020.) In the Freeman Center lecture, IATP argued that since some portion of agricultural export dumping was enabled by subsidies, some reduction would be required if WTO members wanted to reduce agricultural export dumping, just as they claim to want to reduce the dumping of industrial goods.
IATP outlined two other negotiating frameworks, one concerning climate change and trade policy, and the other on cross border financial regulation and U.S. demands to be able to own parts of the Chinese financial services industry.
While trade rules are mandatory and climate change government commitments are voluntary, the trade related climate crisis will continue to worsen. There is an urgent need to incorporate mandatory climate change relevant measures into trade and investment agreements rather than continue agreements, such as the new NAFTA, which accelerate climate change impacts. The U.S. and China, as the world’s leading emitters of greenhouse gases, should lead negotiations on mandatory climate change rules within trade and investment agreements, for example, in the WTO Agreement on Agriculture.
Climate change is every bit as remorseless as COVID-19, but its economic and public impact is not as immediate or as personal. As a result, trade-related measures concerning the pandemic come from industry groups that had sought relief from Trump administration tariffs prior to the pandemic. They can now somewhat legitimately use the trade and public impacts of the coronavirus to push for tariff and export control relief that is likely to be extended well after public health experts declare the pandemic reduced to manageable portions. (IUST, March 16, 2020. Subscription required.)
The global pandemic collapsed a global economy inflated by $16 trillion in U.S. corporate debt alone, much of it owed by “zombie companies” in the fossil fuels industry without hope of repaying the debt enabled by ultra-low Federal Reserve Bank interest rates. Effectively implemented public health measures to reduce the health impact of the pandemic will be necessary for the economy to begin to recover. But, as IATP wrote on March 16, the current deregulation or self-regulation of globally important financial institutions can make the financial system an amplifier, rather than an absorber of non-financial shocks, such as the pandemic.
In the Freeman Center lecture, we proposed that compliance with cross border financial rules must be a precondition for negotiating any trade and investment agreement demanding market entry for financial services. Chinese academics, having analyzed the financial contagion that migrated from unregulated U.S. markets to their markets in 2008, are likely studying the impacts that would result in Trump administration deregulation of the big banks. A lobbyist for these banks, the Bank Policy Institute, has called for further deregulation to combat COVID-19, which one financial scholar called “transparently opportunistic.”
IATP has joined family farmer and anti-hunger advocates to propose immediate actions for Congress to take in response to the economic consequences of COVID-19. There is much more to be done, including beating back the lobbyists who are seeking massive unconditional bailouts for Wall Street, and highly conditioned smaller scale help for the rest of the U.S. In the longer term, IATP will continue to research and propose policies to resolve persistent trade, agricultural and environmental problems, such as the impacts of uncontrolled oversupply of agricultural commodities that Secretary Freeman battled in Congress more than a half century ago.
Watch the February 12 Freeman Center of the University of Minnesota lecture here, and download the presentation slides here.
