Tariffs May Impede Growth, But Politics Often Trump Logic

May 2019 – Tariffs are an issue across America now, and those affecting the produce industry are no exception. Whether it is tariffs on Chinese goods leading to retaliatory measures that impact American exports of fruits and vegetables, or tariffs on Mexican tomatoes threatening to raise costs for American consumers while hurting Mexican exports, tariffs are front-and-center in public policy disputes.

This is interesting, because tariffs have not been a major focus for many years, as there is a broad consensus among economists that tariffs raise consumer costs and impede growth. If Mexico has resources — say less expensive labor, land and water — which allow it to produce tomatoes inexpensively, then mutual prosperity is gained by letting Mexico produce all the tomatoes, while the United States deploys its land, labor and water in ways to optimize its own output. This might be another agricultural crop or luxury hotels or something else. It is called “comparative advantage” and is not really in dispute as a matter of economics.

But what if a country is using “unfair trading practices” to overwhelm a U.S. industry? Well, by definition, no one can be in favor of something that is “unfair,” but the concept doesn’t really make much sense intellectually and certainly not with a perishable product. Imagine that the government of Japan wanted to thank Americans for being steadfast allies and beneficent in the aftermath of World War II. Imagine it did so by donating a Japanese-made car — free of charge — to every American with a driver’s license. While certainly this would be hard for the U.S. auto industry to compete with, most Americans would consider it quite a gift and feel appreciative.

Yet, the allegation of subsidizing exports is the same thing. Just imagine that instead of giving the cars away for free, Japan gave its domestic car makers $20,000 per car in subsidies for each vehicle they exported to the United States. Should we consider this a crime? Or something you send a thank-you note for?

The allegations against the Mexican tomato growers hinge on an allegation of dumping. The problem is that, with perishables, the whole concept of dumping rarely makes sense. Typically, dumping has two definitions: If a product is sold below the cost of production or if it is sold below the price in its domestic market, it is deemed to be dumped.

But produce, domestic and imported, is sold below cost every day. Because of its perishable nature, this is not a product that one can store in a warehouse until one gets a profitable sale. A homebuilder may keep an unsold home on the market for years until a buyer willing to pay a profitable price appears. But a produce marketer must sell, or he will have rotten produce. I can’t tell you how many perfectly good honeydew melons I sold to fruit salad producers because it was better than nothing.

The domestic-market test also makes little sense. Many large exporting countries, such as Chile, grow for the export market. The price in Chile of table grapes is irrelevant, because that market is infinitesimal compared to the export market.

So why the focus on tariffs? Because economists aren’t answering the questions that are being asked.

The Chinese tariffs implemented today address a political question with economic impact: How do you move a country on issues such as intellectual property rights, forced technology transfer, the role of government-owned entities, etc.? President Trump is basically saying that discussions of these matters with China have had no effect, and that tariffs will move China to act. The President may be right, or may be wrong, but economists don’t have much to contribute here.

Besides, income maximization is not really something one can figure without knowing the endgame. If mutual trade produces mutual benefits, but China uses those benefits to develop better nuclear weapons and we are forced to spend more to defend ourselves or we suffer an attack from those weapons ­— well, maybe, the trade benefit was a chimera.

Indeed, the tomato issue is perhaps most vulnerable on assessment of these kinds of secondary effects. Let us say tariffs were successful, and the Mexican industry shrinks. That means fewer jobs in Mexico. So, either we bring in more Mexicans to work in U.S. fields or these Mexicans will be unemployed, and many may seek to come to the United States to find work. Is either outcome what American policy planners are seeking?

When Amazon was planning to build a big complex in Queens, NY, there was a huge outcry politically, and Amazon withdrew its plans. There were many reasons, but you see here a similarity with the scenario of tariffs on Mexican tomatoes and the policies of Alexandria Ocasio-Cortez, the left-wing Congresswoman who opposed the deal.

Amazon promised 25,000 jobs, which would each pay over $150,000 a year. It was transformative for the area. But it would not have been the current residents of that neighborhood who would get those jobs — most being unqualified as the jobs required high level degrees in specific high-tech fields. So, what makes for political success? Would a mayor who saw his city’s average wage triple be a success if the current residents have to leave because rich people move in and the city becomes gentrified and current residents can’t afford the place anymore.

So, with his focus on Midwest industrial output and, now, U.S. tomato farming, Trump is asking the same question: How can his policy increase the prosperity for the people who live here? It is not clear that economically he is on the right track. How can you make American citizens more prosperous by increasing what they must pay for tomatoes? It may be an avoidance of hard truths. Maybe we should look closer at our own public policies on labor, environment and more that make it difficult for farmers to compete.

But, maybe, President Trump knows a thing or two about politics, and what he thinks people want is a fighter — someone who is on the side of American tomato growers or American industry bullied by Chinese policies. Lectures on comparative advantage are fine and may even be true — but, maybe, what the people want is someone who will disregard the theories and just be on their side. If so, look for Trump to be victorious in 2020.   pb