U.S. markets shot up and then sank just as quickly last week, responding in part to U.S.-China trade uncertainties. On Dec. 1, President Trump announced a temporary cease-fire in the ongoing trade war. After meeting with Chinese President Xi Jinping during the recent Group of 20 summit in Buenos Aires, Trump agreed to postpone a scheduled tariff increase on $200 billion in Chinese goods.
Given Trump’s tough talk about China, why the sudden shift in the U.S. stance toward China? And what’s the longer-term outlook?
One possibility is that Trump’s economic decisions could stem from electoral concerns about farmers and steelworkers in states that are important in the electoral college. Although we don’t know the reason for the administration’s decisions, my research suggests that leaders may direct benefits to electorally valuable constituencies.
Is Trump afraid of losing rural voters?
American farmers have been caught in the trade war’s crossfire. In response to the tariffs Trump imposed on Chinese goods, including steel and aluminum, China raised tariffs on U.S. agriculture products.
U.S. exports to China subsequently declined. Exports of soybeans to China fell 94 percent through mid-October from a year earlier. Soybean prices dropped to a 10-year low, and the price of other U.S. agricultural goods also decreased, reflecting the weaker demand.
Farm bankruptcies increased sharply in the Upper Midwest, particularly in Wisconsin, according to a recent report from the Minneapolis Federal Reserve. The Trump administration, recognizing the effect on American farmers, announced a new subsidy program in July: The U.S. government will spend as much as $12 billion in taxpayer money to help farmers offset their financial losses from the trade war. In September, the government wrote $25 million worth of subsidy checks to farmers.
Why would a democratically elected government use taxpayer money to benefit a few select producers? I examine this question in my new book, “Spending to Win.” Interviews with government ministers and bureaucrats, as well as parliamentary records, industry publications, local media coverage and new quantitative data, reveal that politicians fund subsidies to win elections.
Votes secured by the new farm subsidies, if they materialize, could be valuable to Trump in 2020 because U.S. farmers tend to live in rural counties in red states. Votes in these areas helped Trump secure key electoral college votes in 2016.
The geographic location of the U.S. steel industry makes for similar dynamics. Many manufacturers are located in a handful of key electoral states, such as Ohio, which has 18 of the 538 electoral college votes, and Pennsylvania, which has 20 electoral votes. This may make the support of steel manufacturers especially valuable for presidential candidates.
During the 2016 campaign, Trump promised assistance to the steel industry. After coming to office, he began an investigation of foreign steel imports to fulfill his campaign promise — then imposed 25 percent tariffs on foreign-made steel, with further tariffs and quotas announced on June 1.
Incentives for tariffs and subsidies vary across countries
The incentives to assist businesses using tariffs and subsidies vary across countries. The varied incentives stem from the different paths to elective office. In some countries, political parties win legislative seats in proportion to their share of the national vote. A party that wins 35 percent of the national vote would claim 35 percent of the legislative seats, for example. In some systems like this, party leaders — rather than voters — decide which candidates will fill the legislative seats won by the party.
In this type of “proportional” system, politicians and parties have relatively few incentives to subsidize producers concentrated in select parts of the country. This may explain why targeted tariffs and subsidies tend to be lower, on average, in democracies with proportional systems than in democracies with winner-take-all systems, such as the United States.
How did this play out in the global auto industry?
A good example of these political dynamics comes from the automotive industry. From 2008 to 2014, the U.S. government funded an $80.7 billion subsidy program to assist the domestic auto industry, which is concentrated in a handful of states. U.S. automakers requested assistance in the wake of the global recession, arguing that 1 million auto jobs were at stake.
Auto producers in Sweden are similarly concentrated geographically. But despite the industry’s financial woes, the Swedish government refused to bail them out. Swedish Enterprise and Energy Minister Maud Olofsson said that “voters picked me because they wanted nursery schools, police and nurses, and not to buy loss-making car factories.”
The Swedish government’s position stands in stark contrast with the actions of the Obama administration during the 2008 bailout and Trump’s idea to impose 25 percent tariffs on foreign-made cars. The variation in government support for business across countries is a result, in part, of the rules stipulating how they elect their politicians.
The rules governing elections and the geographic distribution of producers shape politicians’ incentives to provide subsidies and tariffs. In the United States, the rules governing national elections may make politicians especially responsive to geographically concentrated groups — such as U.S. steel manufacturers and farmers. Trump may hope to appeal to both farmers and steelmakers by implementing tariffs on steel and funding subsidies for farmers — which suggests the trade war is far from over.