U.S. Secretary of Agriculture Sonny Perdue has released a detailed accounting of how the U.S. Department of Agriculture (USDA) calculated estimated damages from trade disruptions, including a six-page report from USDA’s Chief Economist on the Market Facilitation Program (MFP) payments to producers.
According to USDA’s Office of the Chief Economist, they developed an estimate of gross trade damages for commodities with assessed retaliatory tariffs by Canada, China, the European Union, Mexico, and Turkey to set commodity payment rates and purchase levels in the trade mitigation package announced by USDA on September 4, 2018. USDA claims to have employed the same approach often used in adjudicating World Trade Organization trade dispute cases.
“We have pledged to be transparent about this process and how our economists arrived at the numbers they did,” Perdue said. “Our farmers and ranchers work hard to feed the United States and the world, and they need to know that USDA was thorough, methodical, and as accurate as possible in making these estimates. It was a large and important task, and I thank Chief Economist Robert Johansson and his staff for their hard work.”
According to USDA, they modeled the trade damage estimates for the 2018 retaliatory tariffs by Canada, China, the European Union (E.U.), Mexico, and Turkey based on:
- Step 1: Trade value without the retaliatory tariff from a particular country (Exports1).
- Step 2: Trade value with the retaliatory tariff from a particular country (Exports2).
- Step 3: Take the difference of the two as the “trade damage” due to the tariff (Delta).
According to the USDA report, actual trade figures from 2017 were used as a proxy for the expected value of trade without the retaliatory tariff using import data from Canada, China, the E.U., Mexico, and Turkey.
The model estimated bilateral trade flows for each of the commodities with assessed tariffs. As a general rule, a given tariff will increase the cost of that commodity in the importing country, leading to lower demand for the commodity from the exporting country.
“This method reflects the level of the tariffs and the sensitivity of the retaliatory partner’s import demand to the higher prices caused by the additional tariff. Availability of substitute suppliers on the one hand (for the retaliating importer) and substitute demanders on the other hand (for the U.S. exporter) are also reflected in this approach,” according to the USDA report.
The USDA’s report also noted that gross trade damages only reflected direct export losses due to the retaliatory tariff imposed on the U.S. commodity. Indirect or secondary effects from the tariff, such as cross-commodity effects were not reflected in the gross trade damage estimate.
In determining the amount of assistance that USDA would make available to producers to facilitate marketing of crops affected by these retaliatory tariffs and to assist in the development of alternative markets under the Market Facilitation Program (MFP), USDA divided that estimated trade damage level by 2017 crop year production to calculate a per unit rate.
“We used 2017 trade and production data because 2018 data are not final and are months away from being complete. Moreover, the 2018 trade data will show a biased impact because of the tariffs,” according to the report.
“Because the goal of the MFP is to provide assistance to producers of commodities that have been significantly impacted by the retaliatory tariffs, the MFP per unit rate is applied to a producer’s actual 2018 production levels to generate a producer’s total payment amount.”
Saying the retaliatory tariffs may be removed at some point through trade negotiations that ultimately help mitigate the trade damage to U.S. producers, USDA felt compelled to creating an interim step to calculate payments.
“That interim step led USDA, in consultation with the Office of Management and Budget (OMB) and other White House offices, to split a producer’s 2018 production into two parts. The first part was announced on September 4th and payment calculation follow the steps above,” USDA said. “The second part will be announced, if necessary, in December and may account for other factors, such as new tariff levels, regional basis effects, or other market conditions that may have mitigated some of the trade damages calculated above.”
MFP Calculation Example: Corn
- Step 1: In 2017, China and EU combined imported $309 million of corn from the United States.
- Step 2: With additional 25% tariff from both countries, the combined imports from the United States is estimated to be $117 million.
- Step 3: Estimated gross trade damage = $117 million - $309 million = -$192 million
- Initial MFP rate = $192 million/14.6 billion bushels = $0.01/bu.