- Reuters/Jonathan Ernst
- If the US gets into a trade war with China and the Trump administration helps American farmers in the process, it could pull the entire world into the conflict.
- Once farmers in the US get subsidies, farmers around the world will want them too. That in turn will create massive distortions in price.
- What it will do to trust around the world is even worse.
It’s hard to put one’s finger on exactly what is going on with the Trump administration’s strategy in its trade spat with China, but one idea that’s been bandied about is handing out assistance to farmers impacted by any retaliation from Beijing.
Again, we don’t know the details. Trump just told the farmers in an interview, “We’ll make it up to you.”
The problem is, helping farmers could actually turn this conflict between US and China into a worldwide trade war. It’s like this, once American farmers get help in the form of say, a subsidy for producing soybeans (one of the biggest products targeted in China’s proposed retaliatory tariffs) then they’ll start producing more.
“All of a sudden, agricultural sectors in trading partners like Australia, Brazil, Canada, Argentina and Europe will be upset that American farmers are receiving new subsidies that put them at a disadvantage,” said Chad Bown, a trade economist and senior fellow at the Peterson Institute for International Economics.
“They will seek retaliation or subsidies of their own. This is one important way that – what up until now in the Section 301 [intellectual property theft] case has been confined to a US-China conflict – could turn other trading partners against the US as well.”
Once other countries start subsidizing their farmers, the natural dynamics of supply and demand will go out the window – and with them the ability to discover price accurately. Everything will be uncertain, traders will go into fight or flight mode, and the market will continue giving us whiplash on a stop-and-go ride to the bottom.
Life without rules
What we’ve left out of this entire equation is the legality of an attempt to aid farmers in terms of international trade law. According to World Trade Organizations rules, there are limits on the amount of subsidies a government can give to its farmers.
To a certain extent, though, this is hardly here nor there because the Trump administration couldn’t really care less about legality. Yes, it opens the door for more retaliation against the United States, but Trump has ushered in an area of “deal-based trade” rather than “rules-based trade” – at least, that’s what the trade wonks in Washington are calling this new paradigm.
Take your personal understanding of Trump’s dealmaking acumen (poor, in my case) out of the equation, and consider the implications of a world without rules. One in which there is no standard, and everything is fought tooth and nail. Where relationships are strained and there is no trust.
Trade, after all, is the economic expression of cooperation between nations, and history has shown us that nations that trade together don’t fight each other.
“Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair competition with war,” said Cordell Hull, the US Secretary of State from 1934 to 1944. “It is a fact that war did not break out between the US and any country with which we had negotiated a trade agreement.”
This is not a view confined to circumstance, or the experience of one world leader in a particularly perilous time in human history. This is how economists gauge where we are in our human cycle of trust – in our unceasing swing from non-cooperation to cooperation, from war to peace.
“Economic activity is the root of cooperative activity,” Dylan Grice, a portfolio manager at Aeris Capital, wrote in a note to clients back in 2014. Even back then he was predicting a trough in our global cycle of trust, certain that it would express itself in trade and economics.
“We all consume things that others have conceived, designed, manufactured, and delivered. Frequently these people will inhabit other lands and speak other languages and almost universally, they will be complete strangers who you don’t know and who won’t know you. In effect we are exchanging our own skills for the skills of unknown others. The global economy of which we are all part is a global network of trust and cooperation between strangers so profound it’s taken for granted.”
The Trump administration is not simply taking this for granted, it’s setting it on fire and watching it burn.