From late 2017 to early 2018, trade tensions between the United States and China escalated. In April 2018, the Chinese government increased tariffs on imports of sorghum (a grain widely used as livestock feed) from the United States by 25 percent, after the U.S. considered raising its own tariffs on aluminum and steel from China. The economic consequences of these tariffs could be significant, considering that the United States exported almost 10 million tons of sorghum (worth around $2 billion) to China in 2016 and 2017.
A traditional way to measure the economic consequences of changes in tariff policy is to develop the appropriate economic model, collect years of trade data, and analyze the resulting information in a complex spreadsheet. However, this is a laborious process that may only provide an answer after the crisis has passed. Public and private sector stakeholders could benefit from a rapid but reliable means of determining the economic effects of a tariff hike that would allow timely insight about the likely impacts of different scenarios.
To help the U.S. Department of Agriculture estimate the economic effects of tariffs, RTI International is developing a tool called the USDA Trade Impact Model (USDA-TIM). Building on a model already used by the U.S. Food and Drug Administration, USDA-TIM will allow USDA analysts to insert a proposed change in trade policy on a given agricultural product into a software model. The model then generates a detailed table of possible economic consequences, including changes in domestic prices, quantity of goods supplied, and net surpluses, among other measures.
An Efficient Model to Estimate the Consequences of Trade Policies
The model we developed for the USDA allows users to analyze the economic impact of changes in trade policies made by the United States and its top 23 trading partners for 50 agricultural products. These products range from major U.S. exports like soybeans and sorghum to more specialized items like shelled walnuts and roasted coffee. The model relies on data from a number of sources to analyze two types of trade policies: tariff rates between countries and import bans.
USDA-TIM’s interface is easy to use. Users choose an agricultural product, enter the trade policy adjustments that will be analyzed (e.g., how much a particular country plans to raise or lower tariffs on another country, or whether it threatens to ban imports from that other country altogether), and run the model. The tool then estimates the impact the proposed change would have on several economic indicators:
- Domestic prices
- Domestic production
- Trade flows between countries
- Tariff revenues
- Producer and consumer well-being
USDA-TIM in Action: Calculating the Effects of a Brazilian Tariff Increase
Here is a hypothetical example that can help illustrate the value of the tool. Say that Brazil imposes a tariff on imports of maize from the United States. Before this happens, the price of maize is the same in the United States, Brazil, and the world market. After the tariff is enacted, the price that importers pay in Brazil increases and the price that exporters receive in the United States decreases.
The consequences of this tariff differ for each country. In Brazil, higher prices lead to consumers being worse off, because they can consume less maize than before. On the other hand, higher prices lead Brazilian producers to be better off, because they are able to sell more maize (however, there is a net efficiency loss, because this maize is more costly to cultivate than what could have been purchased on the world market). Finally, the Brazilian government is better off, because it is able to collect more revenue from the tariff.
What about the United States? Here, the situation is reversed: the tariff leads to lower prices domestically, which leads consumers to be better off, because they can consume more maize than before. Naturally, these same lower prices will leave producers worse off, because they are selling less maize than before, and at a lower price. USDA-TIM will also be able to show the “ripple effect” of this miniature trade war between Brazil and the United States, as maize prices fluctuate in other countries.
USDA-TIM promises to improve the flexibility and forecasting abilities of the USDA and other government bodies in response to unexpected tariffs, bans, or other trade barriers—and this model may eventually be used for a variety of issues pertaining to international trade.