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Whack-a-mole

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Whack-a-mole

Robert Eisenbeis is Cumberland Advisors' vice chairman and chief monetary economist. Prior to joining Cumberland, he was executive vice president and director of research at the Federal Reserve Bank of Atlanta. He is a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. The views and opinions expressed in this piece represent only those of the author and are not necessarily those of S&P Global Market Intelligence.

In the latest on U.S. trade policy, we are now starting to see the economic consequences of starting a tariff war. Farmers have been complaining that they are being hurt irreparably by the imposition of tariffs in retaliation for the tariffs imposed on China and our allies. The Trump administration is now proposing to deploy $12 billion in emergency funds from the Department of Agriculture to subsidize losses of U.S. farmers resulting from the imposition of retaliatory tariffs, specifically on soybeans, pork, sorghum, corn, wheat, cotton and dairy products, just to name a few. What is clear is that the expenditures are not subject to congressional approval. The administration is employing the Depression-era facility called the Commodity Credit Corporation (CCC) established to fund payments to farmers as part of a three-part program that includes direct assistance, the purchase of surplus agricultural products and trade promotion of agricultural products.

Two things are missing so far from the discussion of the bailout program. First, there is no mention of when payments will be made or the process by which these payments will be apportioned and paid. Second, since the funding authorized under the CCC is capped at $30 billion, we don’t know if this is just the first tranche of future draws.

Congressional approval should be sought for such a program, as this is only the tip of the iceberg. The administration has imposed tariffs on many other products, such as steel, autos and electronics, whose producers will also be hurt. Will a life raft be given to Harley-Davidson? Where will the additional emergency funds come from to help those companies, if they come at all?

We now see that not only will taxpayers pay for the misguided approach to adjusting trade barriers in the form of higher prices of goods at home, but this use of taxpayer funds to rescue farmers shows the administration’s willingness to divert funds from other priorities to fund its trade war. To be sure, the payments to farmers smell of pure politics, since those hardest hit live in states that supported the president in 2016. Does this imply that help will only be extended through the midterm elections?

Given that only emergency funds are being used on what the administration claims to be a one-time expense, the political claims of others who are being or will be hurt can’t be far behind. And because funds are limited, the administration will be picking winners and losers as it subsidizes some products but not others that have been targeted for retaliatory tariffs. Will funds to support Detroit automakers and U.S. steel producers be available on the same terms and in as timely a fashion?

A more measured strategy to rationalizing trade relationships, one that permits affected parties to adjust, would involve first working with allies to resolve differences there and then to identifying and addressing critical issues, such as the restrictions China has imposed that have transferred U.S. intellectual property to their domestic industries. The meeting President Trump had yesterday with European Commission President Jean-Claude Juncker and the kind of process and organization that appears to have been agreed upon as a path forward is exactly the kind of baby step that should be taken first. Negotiations that are coordinated with and supported by our allies are sure to be more powerful and less disruptive than attacking both allies and abusers alike and then backfilling with bailouts. We can only hope that this most recent turn represents a more considered strategy in the future.