September 02, 2018
The other 49 states have a massive trade deficit with Michigan in cars because of the terrible trade deals that our stupid trade negotiators signed with Michigan. Thankfully, Trump is going to impose a 25 percent tariff on cars from Michigan going into the other 49 states to set things right.
That is pretty much how we should understand Trump’s complaint about the trade surplus that Canada has with the United States. (Yes, the United States actually runs a trade deficit with Canada, when properly measured, even including services.) Canada has a trade surplus for pretty much the same reason that Michigan has a trade surplus in cars. It has historically set itself up as a good place to manufacture goods.
Note that Canada’s trick is not low-cost labor. Its workers get comparable wages to workers in the US and they enjoy considerably more labor rights than do workers here. That is the same story with Michigan’s auto industry where workers are more likely to be unionized and get somewhat higher wages on average than workers in the other 49 states. (There can be currency issues with Canada, but we’ll skip that for now.)
Suppose we did put 25 percent tariffs on cars going from Michigan to the other 49 states. Would that mean more jobs in the auto industry in the other 49 states?
The answer to that is not clear. To some extent, the auto manufacturers that have operations in Michigan may just keep their factories going and split the tariff with their customers. This will mean fewer Michigan cars will be sold in the other 49 states. Since Michigan cars include many parts from the other 49 states, that will mean fewer jobs in the auto industry in the other 49 states.
Some of the people who don’t buy Michigan cars will buy cars produced in the other 49 states. That will be a gain. But some will buy cars produced in Japan, Korea, and elsewhere. That will be a loss of jobs. Of cours,e higher car prices will mean somewhat fewer car buyers overall.
Long and short, it is not easy to say for sure when we have a highly integrated car industry whether imposing a tariff on cars produced in Canada or Michigan will mean more auto jobs in the domestic or non-Michigan domestic industry. We do know for sure it means that people will pay more for cars.
But let’s get to the real fun, Donald Trump’s battle over Canada’s tariffs on milk. As many news stories have pointed out, the issue with Canada is actually an import quota, not the tariffs. The high tariffs are the mechanism for enforcing the quota. But let’s say we join Donald Trump’s crusade and demand Canada ends all protection for its dairy industry. What would be the benefit for our dairy farmers? Let’s bring in Mr. Arithmetic and check the numbers.
First, let’s get an idea of the value of Canada’s dairy market. Our farmers produced $35.5 billion worth of dairy products in 2012. If we up that by 15 percent for growth and inflation, we get $39.7 billion for 2018. But we have a trade surplus in dairy products of roughly $2.0 billion, which leaves us with domestic consumption of $37.7 billion.
As a first approximation, let’s say that the size of Canada’s dairy market is proportional to its GDP, which is 8.8 percent of the size of the US GDP. That comes to $3.3 billion annually. Suppose that Justin Trudeau realizes that he just can’t compete with Donald Trump’s prowess as a negotiator and agrees to eliminate all barriers to US dairy products.
In that world, suppose this concession gives US dairy producers half of Canada’s dairy market. This would mean annual sales in Canada of $1.65 billion. But we can’t write this all down as a gain for the US industry. The US already has a trade surplus of $650 million on dairy products. This means the net gain from Donald Trump’s big victory is an additional $1 billion annually in dairy sales to Canada, an amount equal to a bit more than 2.5 percent of current production.
But wait, dairy farmers can’t celebrate this big bonanza just yet. It is not only Canada that has supply management in dairy, the US does as well. In 2012,the direct cost to the government of its dairy programs was $222 million, which increased by 15 percent for growth, gives $257 million. With 46,000 farmers that comes to $4,600 per farmer, roughly twice the maximum annual individual food stamp benefit.
But the direct cost is only a fraction of the total cost. The purpose of supply management is to prop up the price. Most of the subsidy is in the form of the higher prices paid by consumers. It would take a while to go through all the arithmetic on this, but one analysis put the total cost to US consumers at $20 billion a year or $430,000 per farmer (more than 200 times the maximum individual food stamp benefit).
The long and short is that even in this big Trump-wins scenario, US dairy farmers are unlikely to see much benefit. Instead of the US government propping up milk prices, increased sales to Canada will prop up milk prices. There will be a saving to the US government in this story of the $260 million a year or so it spends in direct subsidies. This is equal to roughly 0.005 percent of federal spending. That is probably enough to cover the cost of Donald Trump’s golfing vacations, but not much more.
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