Why Trump needed the $12B farm aid bill
The cornerstone of President Trump’s trade negotiations is economic strength. A growing U.S. economy helps muscle through much of the negative impact from our nation’s ongoing trade disputes – a luxury our trade adversaries don’t have.
But also crucial is President Trump’s willingness to absorb the political fallout. His oft-heated rhetoric has gained detractors on both sides of the political aisle and he has drawn the ire of America’s economic allies, many of which lie in the crosshairs of his tariffs.
On a national level, the amount of tariffs imposed against the U.S. is moderate in context of the sheer mass of a $24 trillion U.S. economy. Furthermore, the latest economic data and corporate earnings suggest the expected punishment from these trade disputes is still being muted by a surging American economy.
But within specific industries and geographic regions, the impact is taking a more visible toll. Retaliatory tariffs imposed by China, Canada, Mexico and the European Union are not as random as they appear. Instead, much of their strategy is targeting goods produced in states and congressional districts that are politically sensitive to President Trump.
It is little surprise the U.S. agricultural and manufacturing industries are the primary targets in these trade disputes. Looking at the 2016 Presidential election map, America’s heartland and rust belt is loaded with traditional swing states in presidential, congressional and gubernatorial elections.
President Trump is starting to feel the heat from economic sectors and voters facing the brunt of these trade disputes. In response to President Trump’s imposed tariffs on $34 billion of Chinese imports, China responded with tariffs on $34 billion of agricultural – primarily soybeans – and manufactured products. Within days of China’s July 6 announcement, soybean prices continued a downward spiral to reach a 10-year low.
Thus, it was little surprise when President Trump announced $12 billion in federal aid to farmers besieged by foreign tariffs on their products. The financial relief, administered through the U.S. Department of Agriculture (USDA), does not require congressional approval and is expected to go into effect in September. The aid would consist of payments to farmers of soybeans, sorghum, corn, wheat, cotton, dairy and hogs. The USDA would also purchase excess surplus of fruit, nuts, rice, legumes, beef, pork and milk. The combined result would subsidize farm income and help stabilize commodity prices.
Though President Trump remains committed to what he believes is rebalancing America’s trade agreements, he realizes the patience of those on the receiving end of retaliatory tariffs is not without end. Thus, the agricultural relief. The $12 billion in aid matches estimates of the $11 billion impact of tariffs on the U.S. agricultural industry. But anecdotal evidence suggests the $11 billion impact is highly undervalued – Chinese buyers began cancelling their orders for soybeans well before China’s tariffs even went into effect.
Yes, a strong U.S. economy is President Trump’s cornerstone, but a growing frustration among specific industries and Americans bearing the impact might be his Achilles’ heel.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
