Trade Disruption and the Continuing Economic Threat to California Agriculture

By: Daniel A. Sumner

***Editor’s Note: The following article is one viewpoint on President Donald Trump’s tariffs. On May 23, another viewpoint was published in the article “ Trump’s Tariffs Bring Trading Partners to the Negotiating Table.”

California agriculture has become so fully integrated into world markets that we ship our exports all over the world, and likewise have access to imports from almost everywhere. Economists like to say trade is a two-way street, but it is more than that. Trade flows in all directions with California exports heading to more than 100 destinations. Those places ship back to us and back and forth with each other. Trade customers are also competitors.

Of course, governments here and elsewhere still respond to special pleading and favoritism and try to block competition, or at least tax it. It seems especially tempting to governments to tax and regulate at the border. But, make no mistake, the high taxes and burdensome regulations are just as costly when placed on trade as anywhere else. Fortunately, due to the World Trade Organization and many free trade agreements agricultural markets are now far more open than they were a few decades ago.

Agricultural trade now generally follows rules that, while imperfect, are far better than no rules at all. So when, for example, the U.S. imposed labeling rules that severely disadvantaged Canadian and Mexican cattle and pigs, those countries had a place to make their case and get relief. And when Indonesia blocked importation of fruits, vegetable and meats from the United States and New Zealand, the WTO ruling caused those restrictions to be lifted.

Recent trade complaints of the United States have little direct connection to agriculture but agriculture has been caught in the middle. For example, hundreds of millions of dollars of California farm exports are now subject to higher tariffs for shipments into China.

California agriculture exports total about $25 billion per year, led by tree nuts, grape products and dairy products, and disrupting this trade would mean a major hit to prices and farm incomes.

The worst feature of all the trade turmoil is that tariffs do not even have to be implemented to have real economic damage. Agricultural markets, like all other markets, operate on expectations and increasing the chance of trade disruptions in the future affects markets now.

Efforts to calm the trade turbulence are crucial to agriculture. Recently we have heard good news on updating the Korea-US Free Trade Agreement, NAFTA negotiations are still moving forward slowly, and just in the past few days negotiated movement in trade disputes with China seem to be in the offing.

The bottom line is to use the trade institutions that have served the US well and keep agriculture out of trade fights designed to protect other industries.

Daniel A. Sumner is the director of the University of California Agricultural Issues Center and a professor of agricultural economics at UC Davis. He was assistant secretary for Economics at USDA in the early 1990s and previously served as a senior economist at President Reagan’s Council of Economic Advisers.The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Treasurer, his office or the State of California.