To shield US farmers from his trade war, Trump is giving taxpayers’ money to China

Go ahead, take it.
Go ahead, take it.
Image: Reuters/Jonathan Ernst
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Donald Trump’s trade war has only just begun, and it’s already hurting American farmers. Prices on top exports like pork and soybeans have tanked as a slew of countries hit back against US tariffs by hiking duties on American agricultural exports.

Inconveniently for the US president, many of these farmers happen to be in politically powerful states like Iowa, Missouri, and Wisconsin. But fear not, midwestern voters—cough—farmers. Trump is sending help, in the form of bailouts paid for by the American public.

The administration is set to announce $12 billion aid to farmers later today (July 24), according to media reports. The aid package will be rolled out in September. But US farmers aren’t really benefiting from the aid: Trump is merely compensating them for the losses created by his trade war.

So who does win out? Ultimately, the Chinese government—and other countries with tariffs on US farm products.

To understand how this works, consider China’s soybean imports. China imports more soybeans than any country in the world, with the majority of the product coming from the US. Last year, American soybean farmers sold around $12.4 billion worth of soybeans to China—nearly three-fifths of the total US soybean exports.

On July 6, China retaliated against US tariffs with a 25% tariff on American soybeans. In effect, this means that when a Chinese pig-feed processor orders US soybeans, he has to pay the Chinese government 25% of the value of his import order. The pig-feed processor doesn’t want to pay that extra money. So instead, he’s going to buy cheaper soybeans from Brazil or Argentina, or maybe start making feed from domestically-grown corn instead.

For US soybean farmers, finding alternative buyers is tough: China is far and away their biggest market. And so, in order to compete with other countries for Chinese buyers, US farmers slash their prices enough to offset the cost of the tariff. To get back to their pre-tariff market price, they’d need to cut their soybean prices by enough to offset 25%. All else equal, Chinese buyers wind up paying the same price for their soybeans as before, while US farmers lose a chunk of their income to Chinese government.

So how does Trump’s bailout change things? The price distortion created by China’s soybean tariff is still there. The Chinese government is still pocketing 25% of soybean imports from the US. But instead of farmers taking the hit, Trump has simply assigned the cost to someone else: the American taxpayer.

By handing $12 billion to farmers, Trump is essentially reimbursing them for cost of the tariff. So American farmers are basically no better or worse off than they were before the tariffs, while US taxpayers fork over a bunch of money to the Chinese government.

Obviously, this is a cartoonish simplification. The decrease in prices is unlikely to translate one-to-one with the Chinese tariff rate. For example, as Latin American soybean farmers cash in on higher prices in China, they’ll open up markets for US soybeans in other countries, which could help buoy US prices somewhat. There are also a slew of external factors that could change this dynamic, not least of which is the fall of the Chinese yuan against the dollar (which, all else equal, amplifies the losses to US farmers).

There’s also the offsetting impact of US tariffs to consider. As Americans buy exports that Trump has placed tariffs on, US businesses either pay the cost of those tariffs to the US government, or pass that cost on to consumers. To the extent that these tariff payments collected by the US Treasury fund the $12 billion in aid to farmers, it’s not US taxpayers left footing the bill. Rather, it’s US consumers and businesses.

Whoever it is and however it’s split, though, the point holds: The American people’s “piggy bank” is indeed being robbed. By Trump.