U.S. Department of Agriculture details trade damage estimate calculations

Carol Spaeth-Bauer
Wisconsin State Farmer
In the tariff battle, Chinese are preparrf retaliatory penalties on American soybeans — an economically vital export of Midwestern farmers.

WASHINGTON D.C. - Fulfilling the pledge to be transparent about about how economists arrived at estimated damage from trade disruptions, U.S. Secretary of Agriculture Sonny Perdue released details of the process used by U.S. Department of Agriculture (USDA) on Sept. 13.

“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," Perdue said in a news release. "It was a large and important task, and I thank Chief Economist Robert Johansson and his staff for their hard work.”

Johansson and his staff developed an estimate of gross trade damages for commodities with assessed retaliatory tariffs by Canada, China, the European Union (EU), Mexico, and Turkey to set commodity payment rates and purchase levels in the trade mitigation package announced by USDA on Sept. 4. 

Using the same approach that is often used in adjudicating World Trade Organization (WTO) trade dispute cases, a three-step process was followed: Step 1: Trade value without the retaliatory tariff;  Step 2: Trade value with the retaliatory tariff; Step 3: Take the difference of the two as the “trade damage” due to the tariff, report from the USDA’s Office of the Chief Economist.

A ship hauls containers at a container port in Qingdao in eastern China's Shandong province Friday, July 6, 2018. The United States hiked tariffs on Chinese and Beijing immediately retaliated in a dispute between the world's two biggest economies.

Trade value without retaliatory tariff

Actual trade in 2017 was used as a proxy for the expected value of trade without the retaliatory tariff using import data from Canada, China, EU, Mexico and Turkey, according to the report. Since constraints of implementing a timely program to respond to retaliatory tariffs didn't allow for collecting data after observing lower rates of trade resulting from the dispute, a global trade model was used to estimate the expected value of trade after the imposition of the tariffs. 

Data from 2017 was used because final data from 2018 is months away from being complete and would show biased impact because of the tariffs, the report stated. 

Trade value with retaliatory tariff

"The model estimates 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," the report stated. 

The method also, "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," according to the report.

Trade damage estimate

The difference between Step 1 and Step 2 determines the measure of gross trade damage.

"The gross trade damage only reflects 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 are not reflected in the gross trade damage estimate," the report stated. 

According to the report, the Food Purchase and Distribution Program’s purchase values that were announced "were set at the same level of gross trade damage to each affected commodity, using the trade model outlined above and reflecting the amount of commodity surplus resulting from the gross trade losses."

The full description of the Trade Damage Estimation for the Market Facilitation Program and Food Purchase and Distribution Program is available on the website of USDA’s Office of the Chief Economist.