Dynamic Tarriffs: A Peachy Proposition


Tariffs are common political fodder. Candidate Donald Trump called for punitive tariffs on goods from China and Mexico.[1] Both Trump and Candidate Hillary Clinton attacked the Trans-Pacific Partnership,[2] a free trade agreement negotiated during President Barack Obama’s presidency that, if ratified, would have united 12 Pacific Rim countries, accounting for 40% of world trade, under common trade rules and (almost) no tariffs.[3]

 

              Tariffs are also the core of trade negotiations. For decades, trade negotiators pursued the policy of tariffication, whereby non-tariff trade barriers were converted to tariffs. Changing qualitative national policies into quantitative import taxes allowed negotiators to barter ‘apples for apples’ in trade negotiations. While it is doubtful that decades of work towards tariffication actually reduced the prevalence of non-tariff barriers,[4] there has been a consistent and successful effort to reduce tariffs.[5]

 

              Remaining tariffs often protect sectors with special economic or social importance. It should be no surprise that agricultural products are some of the most contentious and difficult areas in which to generate international cooperation. The United States maintains punitive tariffs on sugar.[6] Mexico has similar import taxes on poultry.[7] Canada protects dairy production with high tariffs on butter, cheese, and other dairy products.[8] Negotiators have struggled for most of the 21st century to reach meaningful agreements on agricultural barriers to trade.[9]

 

              Tariff schedules are somewhat static documents. Negotiators sit down at the table representing one tariff schedule and leave the table clutching another tariff schedule. Once the new tariff schedule is ratified by a negotiator’s government, those tariffs remain in place until the countries reconvene to negotiate new tariff schedules. A tariff schedule generally represents a country’s bound tariff commitments, the highest rates that the country will apply to any particular import. Therefore, countries retain the right, through unilateral action, to reduce tariffs.

 

              Now to the peaches. The 2017 peach harvest in the United States is far short of pre-season expectations. South Carolina and Georgia, America’s second and third largest producers after California, are set to grow just 10-25% of last year’s crop.[10] California, responsible for about 75% of America’s total peach yield in 2015, is also having a down year.[11] According to the California Cling Peach Board (CCPB), 2017 peach tonnage to-date is 40% of last year’s total.[12] The CCPB’s data is incomplete for two reasons: it only reports data from three processors and also only represents peaches destined for canning. Despite these shortcomings, the data is probably indicative of a larger shortfall in California yield. The supply squeeze is evident in pricing. Farm prices for peaches have increased over 40% between July 2016 and July 2017.[13] Consumers have been spared the pain of higher prices because grocers have internalized lower margins, decreasing from about 200% in 2016 to 100% in 2017.[14]

 

              The domestic peach market is distorted by tariffs during harvest season. Any peaches imported between June 1 and November 30 are subject to a tariff of either $0.002 or $0.011 per kilogram depending on its origin.[15] These tariffs disappear during the rest of the year, opening up the U.S. market to imports during domestic producers’ off-season. Some countries are exempt from the peach tariffs because they benefit from U.S. free trade agreements or unilateral trade preference programs. However, none of the major peach producing countries: China, Italy, and Spain, have zero-tariff access to America’s peach market during harvest season.[16]

 

              Maintaining tariffs when domestic production is suffering from natural causes is bad policy. Tariffs in this environment do not protect growers in any meaningful way. Georgian and South Carolinian growers, whose crops have been devastated by natural causes, must rely on insurance payments, rather than market sales, to get through the year. Tariffs do them no good. Meanwhile, any tariff-free imports of fresh peaches would probably only serve to fill out the supply base to satisfy demand at retail, rather than displacing California growers. It is quite likely that California peach growers are cost competitive at the farm level and are cost advantaged compared to imports after transportation is factored in. Therefore, without the peach tariff in place this year, Californian producers would make a little less per peach relative to what they are making in the market today, but their rents to not justify maintaining the tariff. Without the tariff in place this year, California growers would receive a price similar to what they expected if Georgia and South Carolina were producing at full capacity, meaning that they would not lose any revenue relative to their pre-season expectations. Meanwhile, grocers and consumers would be protected from domestic supply disruptions because of the increased availability of imports. In sum, eliminating the peach tariff this year would only impose a small actual marginal revenue loss on California growers, and no revenue loss against pre-season expectations, and would have no impact on Georgia and South Carolina growers. On the other hand, maintaining the peach tariff this year hurts downstream customers by increasing the price of direct supply substitutes. In the case of the 2017 peach harvest, grocers’ profitability suffers, and the financial pinch could just as easily have been passed directly on to end consumers.

 

              Despite the access to nearly real-time market data, freedom to lower tariffs at-will, and a strong policy case to do so, there is surprising little dynamism to the application of tariffs. The most common mechanism through which tariffs are temporarily eliminated is when Congress passes Miscellaneous Tariff Bills.[17] These bills usually suspend tariffs on various products for a renewable period of two or three years. There is no mechanism for Congress, the President, or the United States Trade Representative to react in real time to non-trade related market disruptions.

 

              This inflexibility can be remedied. Congress can delegate responsibility for tariff deviations to the USTR or Commerce Department, identifying specific situations, such as when natural causes decimate commodity crops, when the agency may lower tariffs, thereby saving American consumers from higher prices without reducing producers’ pre-season expectations. There are already established administrative processes, such as those used in the context to anti-dumping investigations, which are designed to apply real-time market data to tariff rates. Generally, these processes are used to revise tariffs upwards and protect domestic production interests. However, these same processes can be adapted to drive consideration of market data in pursuit of lower tariffs. The biggest barrier to implementing such an adapted process is a classic public choice problem: producers monitor their economics closely and organize to protect their interests, while consumers do not track the impact of particular tariffs on their cost-of-living nor do they organize to fight them. At least in the case of peaches, we have a good example through which to build awareness about the costs of an inefficient system.


[1] https://www.marketplace.org/2016/01/15/world/reality-behind-trumps-call-tariffs
[2] http://www.politifact.com/truth-o-meter/article/2016/jul/22/comparing-economic-agendas-hillary-clinton-and-don/
[3] http://www.bbc.com/news/business-32498715. No tariffs is not entirely true. For example, the United States’ tariff schedule included import taxes on various chocolate products that were only to be completely phased out, in some cases, over twenty years after the TPP went into force. See Tariff Schedule of the United States, available at https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text.
[4] https://s3.amazonaws.com/academia.edu.documents/39687165/A_Preliminary_Analysis_on_Newly_Collecte20151104-10363-g03i9y.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1502819112&Signature=Wfu0vNzX0yoMOokaHOe9MUrQtv0%3D&response-content-disposition=inline%3B%20filename%3DA_PRELIMINARY_ANALYSIS_ON_NEWLY_COLLECTE.pdf
[5] https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm2_e.htm
[6] http://wtocenter.vn/sites/wtocenter.vn/files/err176.pdf
[7] Id.
[8] Id.
[9] https://www.wto.org/english/tratop_e/agric_e/negoti_e.htm
[10] https://www.nytimes.com/2017/05/30/dining/peach-crop-georgia-south-carolina.html
[11] https://www.statista.com/statistics/193929/top-10-peach-producing-us-states/
[12] http://calclingpeach.com/crop-statistics/
[13] http://www.producepriceindex.com/
[14] Id.
[15] https://hts.usitc.gov/?query=peach
[17] https://ustr.gov/issue-areas/industry-manufacturing/industrial-tariffs/miscellaneous-tariff-bills

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