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19 May 2019

About Those Tariffs

Introduction

Given all the noise (and little light), we thought it might be useful to dive into the tariff situation for better understanding. While emotions will rule the markets in the short term, longer term rationality will prevail.

Recognizing that China has aimed the majority of its retaliatory tariffs at American farmers, we will take a closer look there.

Background

Over 40 years of inept leadership in Washington cannot be undone simply by wishing it so. There will be pain for the American people rectifying years of scandalous behavior on the hill.

Americans have already suffered through the years of betrayal. As Congress sent jobs and manufacturing overseas, factories in the US closed; Americans lost their jobs; Americans lost their homes; American families were shattered and scattered.

Congress was successful in creating a very large number of Chinese and Japanese millionaires, however, leading to China and Japan holding the number one and two spots for largest percentage of American debt.

China, the second largest economy in the world (over 1.5 times larger than Japan at number 3), still operates under concepts designed for emerging market economies. One element of that is tariffs.

In an effort to level the playing field worldwide, the US began targeting China's trade practices in January 2018.

Why Tariffs

The good side of tariffs is that they allow fledgling countries to grow their economies through the initial, inefficient phase into a self-sustaining phase of innovation and improved economies of scale. It is quite difficult for a new economy to compete with established economies in the world.

This lack of competitiveness, without some type of leveling, will leave the new economy so overshadowed and weak that it cannot grow and prosper.

From the consumer perspective, spending is a choice which tariffs may influence. Taxation, however, does not influence consumption behavior in such a granular way.

In any human endeavor, no good deed goes unpunished: there are countries that inappropriately implement tariffs to create a competitive advantage in local, regional or global markets.

The bad side of tariffs has a few dimensions:

Creating advantage where competition would strengthen the world economy;
Protectionism beyond the start-up period that can both close markets to others while enfeebling the local market by removing competition.

Current Tariff Situation

Not that easy to find, here are the listings of the tariffs China has imposed on the US. We would very much like to see a breakout of value by category, e.g., automotive, agriculture, meat/fish/poultry, raw materials, etc., but have yet to find that.

What we do know is that China has only been able to find about $101 billion in imports vs. the $500 billion for the US.

The really short story is that agriculture is the main target across the lists.

China 232 Retaliation List Additional 15% tariff, April 2018

Largely characterized as agricultural, e.g., coconuts, pistachios, plantains, figs, pears, strawberries, some wines, ethyl alcohol, hams (25%), swine livers (25%), etc.

Materials such as some stainless steel pipes, iron or steel pipes, some drill pipe, some casing and production tubing, and aluminum waste (25%).

China 301 Retaliation List Additional 25% tariff, July 2018

Includes beef, pork, chicken, turkey, duck, geese, ornamental live fish, salmon, halibut, tuna, tilapia, squid, lobster, shrimp, crab, oysters, mussels, snails, yogurt, buttermilk, cheese, and a variety of agricultural products such as mushrooms, celery, eggplant, beans, potatoes, etc.

It further adds hybrid electric vehicles, pure electric cars, gearboxes and parts for motor vehicles.

China 301 Retaliation List 2 Additional 25% tariff, August 2018

Adds to the 301 list coal, aromatic hydrocarbons, motor gasoline, aviation gasoline, kerosene, lubricants, natural gas, other petroleum based raw materials and products, wood, sawdust, cork, many waste products like yarn waste, cotton waste, gold waste, waste stainless steel, nickel waste, tractors, buses, golf carts, snow mobiles, cars, trucks, motorcycles and mopeds, bycycles, baby carriages and some medical equipment.

China 301 Retaliation List 3.4 Additional 5% tariff, September 2018

Adds to the 301 list are gases, nitrogen, oxygen, lithium, silicon, copper oxides, many other chemicals, salts and acids, fertilizer, photographic film, insecticides, polymers, plastics, hardwood, softwood, freesers and refrigeration equipment, printing equipment, microcomputer, typewriter, CRT monitors, light bulbs, fire engines, trucks, tractors, telescopes, medical equipment and seats for motor vehicles.

Farmer Impact

Given the large retaliatory tariffs on agriculture, we will look into the farmer's plight. On the one hand we have significant farm subsidies provided by the American taxpayer. On the other we have increasing tariffs by China, reducing the competitiveness of American goods in China.

Subsidies

There have been farm programs since 1862, from land grant colleges to research and education; the government sponsored Farm Credit System has more than $280 billion in assets.

Congress has tried several times to enact a central planning philosophy and failed; more importantly, they have failed to learn that such socialist policies always fail to deliver value.

As subsidies have grown, farm incomes are much higher than the incomes of most Americans: essentially, welfare for the well-to-do paid for by working Americans.

The general concept is to protect farmers from the vagaries of their business. The subsidies support conservation efforts, insurance coverage, marketing, export sales, research and other activities.

We are confident that given a choice, Boeing, Intel, Walmart and others would very much like to participate in such a program.

Upside

Protection from price changes, revenues and yields.

Downside

Costly to taxpayers
Discourages farmers from innovating, reducing costs, diversifying land use and taking other actions to prosper in a competitive economy
Overproduction
Inflation of land prices
Harm to the environment

Some interesting facts about farm subsidies:

One of the largest subsidy elements is for insurance, averaging over $8 billion per year. Because of the subsidy, where the USDA pays an average of 62 percent of the premium, many farmers make money as they pay less for insurance than they claim in damages.
Two other programs, Agriculture Risk Coverage and Price Loss Coverage, provide similar benefits to insurance subsidies, generally to the same farmers, and total another $6.9 billion per year.
The USDA runs numerous farm conservation programs at the rate of $5 billion per year. Some pay farmers to improve lands in production; others pay farmers to take land out of production.
The USDA pays out more than $3 billion per year to employ thousands of scientists for food research, something other industries do on their own nickel.
The Agricultural Marketing Service spends $1.2 billion per year on farm and food promotion activities, something other industries do for themselves.

In 1984 New Zealand, four times more dependent on farming than the US, ended farm subsidies.

Farm productivity, earnings, and output rose in the years after reform. Farmers cut costs, diversified land use, sought non-farm income, and developed niche markets such as kiwi fruit.

The Poor Farmers

With over $20 billion per year in farm subsidies, how poor are our farmers compared to the rest of Americans?

Here are some statistics:

There are over 2 million farm households in the US.
Subsidies mainly go to high-earning farmers. The average income of all farm households was $118k in 2016, 42% higher than the average American household.
Over 60% of subsidies from the three largest programs go to the largest 10 percent of farms. The difference is that the largest 10 percent receive $29 per acre vs. $12 per acre on average for smaller farms.
Just 2 percent of farm households fall below the poverty line compared to 14 percent of all households.
Less than one-third of farms with less than $100k revenue received federal subsidies; more than three-quarters of the farms above that level received subsidies.
Although precise numbers are hidden due to a lack of transparency in who receives the insurance payments, more than 50 people on the Forbes 400 list of wealthiest Americans receive subsidies.

Such a skewed distribution must cause wonder in the real value of subsidizing with taxpayer dollars an industry that appears to be doing well.

As a shopper we may enjoy some lower prices; as a taxpayer we are forced to make up the difference without regard to our consumption.

US Debt

2019 will contribute $1.1 trillion to the $22 trillion national debt ($3.645 trillion in revenue; $4.746 trillion in spending). If math serves, that is over 30% in the red. For one year.

The Department of Veterans Affairs is included in the 'Discretionary' budget. Social Security, Medicare and Medicaid are included in the 'Mandatory Spending' budget. Strange.

About that debt. Would it be so large if Congress had learned to manage spending? There is absolutely no legitimate reason to run 30% annual deficits. And, it is not about taxing the rich or corporations: there are not enough of the former and the latter pass through the costs to consumers. It is all about managing spending.

We have a trillion dollar infrastructure problem in the US. Roads, bridges, dams, electrical infrastructure, airports, you name it. And yet there is no plan from our political elite to take any action.

Estimates are that we have a trillion dollar education problem. Student debt exceeds $1 trillion. There are plenty of American issues to resolve.

Where are the real leaders and visionaries? Teddy Roosevelt creating the US Forest Service with National Parks, Monuments, Reserves and Preserves in excess of 230 million acres. Or, Ike Eisenhower's National Interstate and Defense Highways Act that kick-started our national highway system. Or, Jack Kennedy's reach for space.

It strikes me that our idiot leaders spend so much time worrying about and spending on other countries that Americans are getting the short end of the stick. Any marginally responsible person would look first to take care of their family and only then consider providing charity to others.

Congressional leaders commented that eliminating the $1.8 billion in foreign aid "... wouldn't do much to reduce the $1.1 trillion budget deficit".

That $1.8B does not appear to account for $6.3B for humanitarian crises or $6.3B more for global health. A billion here, a billion there, pretty soon we're talking real money.

Conclusions and Actions

It feels like the impact to American farmers is way overblown. There will be a definite impact yet taking some action rather than looking for another handout might be a better plan.

Where other countries are inappropriately enacting tariffs that disadvantage Americans, employing tariffs to protect American interests is precisely the right approach. If necessary, redistribution of those tariffs to American businesses may be justified.

A better alternative would be using those tariffs to reduce overall taxes. Giving taxpayers more control over their income and spending habits can never be a bad idea unless you think you are superior to them in some way.

What is the real impact? We will not know until implementation as market forces can be counter-intuitive. It could well be that increasing the export price of American produce raises prices overall in Asia.

Or, crafty farmers may find new markets. Or, a clueless Congress may give farmers another $15 billion to cover perceived losses.

One thing we know for sure: the world eats. Additionally, with over 7.7 billion people and growing at the rate of 82 million per year, food will find a home.

Short term, the panic and volatility can be played to our advantage. When affected industries take an inexplicable drop, pick them up at a discount for the long term.

"The income tax is a twentieth-century socialist experiment that has failed. Before the income tax was imposed ... only sales, excise, and tariff taxes were allowed" -- Alan Keys