Economic Impacts of Trade Agreements

Oct 5, 2018  | 27 min  | Ep 4607 | Podcast

Podcast

On this edition of Iowa Press, Ernie Goss, professor of economics at Creighton University and Chad Hart, associate professor of economics at Iowa State University focus on Iowa and Midwest economic impacts of a trade war with China. Renegotiated NAFTA trade agreements with Canada and Mexico ahead of the 2018 elections will also be discussed.

Joining moderator David Yepsen at the Iowa Press table are Kay Henderson, news director for Radio Iowa, and James Lynch, political reporter for The Gazette.

Program support provided by: Associated General Contractors of Iowa and Iowa Bankers Association.

 

David Yepsen:                   A potential new trade deal with Canada and Mexico is on the presidential agenda, but so is an ongoing trade war with China. All while midwestern farmers and the Iowa economy are caught in the crossfire. We dig into the potential aftermath with economists Ernie Goss and Chad Hart on this edition of Iowa Press.

Voiceover:                          Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are, there is an Iowa banker who is ready to help you get where you want to go. Iowa bankers, allowing you to discover the genuine difference of Iowa Banks.

Voiceover:                          For decades, Iowa Press has brought you political leaders and news makers from across Iowa and beyond. Celebrating more than 40 years of broadcast excellence on statewide Iowa Public Television. This is the Friday, October 5 edition of Iowa Press. Here is David Yepsen.

Yepsen:                                When President Trump announced the last minute trade deal with Canada and Mexico early this week, it raised many questions in farm country. Is this deal NAFTA 2.0? How will it impact corn growers or dairies here in Iowa? And just days later, the Trump Administration renewed its public name calling with a major trading partner, China. As the tariffs mount on everything from soybeans to steel, we've gathered a pair of economists to flesh out the potential impact on the eve of the 2018 elections. Ernie Goss teaches economics at Creighton University, and Chad Hart is associate economics professor at Iowa State University. Gentlemen, welcome back to Iowa Press and Iowa Public Television. It's good to have you here.

Ernie Goss:                         Good to be here.

Chad Hart:                           Pleasure.

Yepsen:                                Across the table. James Lynch is political reporter for The Gazette, and Kay Henderson is news director for Radio Iowa.

Kay Henderson:                News this Friday...the national unemployment rate 3.7 percent, not seen in the country since the 1960s. Mr Goss, as an economist, how do you interpret that?

Goss:                                     So it's good. How's that? It is a good signal, but it's also a signal that the economy is heating up a bit and it to be most economists we always see the gray lining around the silver cloud. And so, so the, the, what we're going to see is more rate hikes in the Federal Reserve to be on the negative side anyway. Uh, this, in other words, the economy is getting a bit what we call sometimes called overheated. We were in a said goldilocks economy. We're not too hot, not too cool. Now it's getting on the hot side I would argue. Now, there's some disagreement. Maybe Chad disagrees with that assessment, but I think it was a good rating. But in this part of the country we've been through this...the finding and hiring qualified workers for a couple of years now has been the number one impediment to growing this economy. To growing the Iowa economy, the Nebraska economy, South Dakota. That is it. So this is just another signal that's getting tight.

Yepsen:                                We want to get to that later. But Professor Hart, what's your reaction to that report?

Hart:                                      Well, I definitely do agree with Ernie. The idea is that this is showing that the economy has continued to still grow. We have, if you will, built it up to where we are probably overheating now. When you're looking here, like say the challenge regionally, has been the idea of that we've been under low unemployment now for quite some time. We haven't seen that wage growth that we typically see here. We're beginning to see that now and that's the signal that the Fed has been waiting for in order to really start to ratchet up interest rates.

James Lynch:                     Let's localize that a little bit more of the Iowa economy. Uh, people say it's strong. The Iowa Business Council this week said their in confidence index is at an all time or a 10 year high. And we have historic low unemployment that you alluded to. There's some wage growth. Is it time to pop the cork on the champagne, Professor Hart, or should we be preparing for the next recession, the next downturn?

Hart:                                      Well, I'll go back to something Ernie alerted to. You know, economists, you know, the, you know, when you study economics, it's the dismal science. So we're always looking for the next downturn and I think that's the deal here. We've been in the longest sort of recovery run after the great recession that, you know, this economy seen in quite some time. And so we're starting to look for what are those signs that the economy will slow down, that we could turn this thing around?

Lynch:                                   Are you seeing those signs or is it just sort of the cyclical nature of the economy that you know what's going to happen?

Hart:                                      Well, in my case, since I mainly concentrate in agriculture, if you will, we've already seen that segment be down for the past several years. And so typically I look for, okay has ag lead going into what will be the next recession?

Lynch:                                   Professor Goss?

Goss:                                     In our surveys, we do two surveys. Rural areas of Iowa and urban, more urban, areas of Iowa of 10 states in one survey, nine in the other. And as the economy is looking very good. If you look at what's going on in Iowa, you see wage growth better than what we've seen in the US. As Chad said, the AG sector has not performed as well. But overall, the economy is doing well in Iowa.

Henderson:                        Let's shift

Yepsen:                                Is that, excuse me, just a quick followup. Is that even, I mean, there are people watching this show who are saying, you say it's great. It's not too great around here where I live. I'm not feeling it. Is it an uneven sort of?

Goss:                                     It is uneven, and it's in the ag areas and particularly of course as Chad said, the farms and those businesses and industries are tightly linked to the farm have not been doing as well. But when you put it all together, I mean it is, you know, you do have the, you have one hand in the fireplace and one in the refrigerator on average you're doing okay. Well it's, that's how it is and there are parts of Iowa there are the hand in the refrigerator, no doubt.

Henderson:                        Mr Hart, I want to ask you about what Mr Yepsen mentioned at the start of the show. NAFTA. Do we call it new NAFTA? NAFTA 2.0? Or maybe the USMCA. Overall, what's your impression?

Hart:                                      Overall, when we're looking at the USMCA, you know, you can call it NAFTA 2.0. Roughly 70 percent of the agreement is carry over from the old NAFTA. And so when we're looking at this agreement, what it did was it updated some things after 24 years. Any agreement sort of needs a refresh here. And it geared it more towards, let's call it the digital economy. When I'm looking at the changes in agriculture, they were relatively small with dairy being the one exception to that rule. And so when I'm looking here, I can see if you will, reasons for both camps to say whether it's a revamp or you know, just a renaming. The idea is it's a little both.

Goss:                                     It provides certainty in the sense as a 16 year kind of a agreement and that's very strong. And what the Trump Administration was seeking five years, which was not good. We need a long term stability, that's what we need, particularly in agriculture. And what, you know, for Iowa I'll say this, you know. What goat, what happens on the farm, uh, it, it, it happens later on for the rest of, of Nebraska, for Nebraska and Iowa. And that's certainly an issue. So, uh, I, I think it provides more stability, more certainty, and we've got to get something done on China. That's even more critical. But this is nice to get it done. Let's get on, get on, move on and move ahead. And that's what I think was the best part. You saw the markets respond very positively to this news.

Lynch:                                   Professor Hart, the new NAFTA, whatever we call it, the president certainly selling this as a big win for the US. But for Iowa, is this a victory for Iowa? And especially Iowa farmers. You mentioned dairy farmers. They gained some access to Canadian markets. Is it enough to make a difference?

New Speaker:                   It's enough to make a little difference, but I'm going to argue for the most part,I'll go back to Ernie's comment. What this created was certainty for our corn, our soybeans, our pork, our beef producers out there. The idea is the rules did not change whether it was NAFTA or USMCA. In that sense, it's the certainty of the 16 years that matters mostly to the Iowa ag economy. We will gain a little in dairy, but not a great deal there. You're talking about a relatively small dairy market when you're looking at Canada. And we're getting a small amount of access into it. So in the grand scheme of things, the certainty, if you will, is worth more than the gains we're going to see.

Lynch:                                   Actual access to the market.

Hart:                                      Yes.

Lynch:                                   And do you agree, Professor Goss, that uh, the certainty is more important than the actual access to the market and sales?

Goss:                                     Absolutely. There's not much of a change except in dairy where there's... Even there, the changes aren't that significant. I know when you're a political politician, you have to say, yes, this is the greatest thing ever. But we economists, we see trade is a win win. And politicians sometimes see it, well a winner and a loser. When this, this, in this case, we all won. We're winning. Maybe maybe Mexico won more than we did, but still we, win.

Lynch:                                   We always focus on agriculture, but there's a lot of insurance in Iowa. For those folks in the financial and insurance industries is there any gain or loss here?

Goss:                                     I think it's more of a, it's a certainty, and it's not changing much. There's not much in there, uh, of changes from NAFTA. The real change of course is instead of saying NAFTA, I guess we have USMCA, I think. That's just doesn't roll off your tongue. So.

Henderson:                        Switching gears to China, it seems as if there may be some pass through sales of US grain to a foreign country and then that country sells it to China. How big of an issue is that, Professor Hart?

Hart:                                      It is an issue. Um, but you know, it's not the vast majority of the trade that we're seeing. What we're seeing are a lot of what I'll call replacement sales. For example, when I look at the soybean market right now, one of the things I'm noticing is Argentina right now is our third largest export market for soybeans. They are also one of our major competitors when it comes to soybeans. What's happening there? Well, in talking with folks on the ground there in Argentina, what they basically told me is they're farmers sold to the export market, sold to China, and that left their soybean crushing plants running a bit short. What do they do? They turn around and look at the global market, say where can we find the cheapest source of soybeans, buy from us. And so you're seeing a lot more of those replacement sales going on.

Henderson:                        So what's the price impact? Is it, is it better for an Iowa farmer to have that bean go directly to China, or is it better for it to go to a place like Argentina?

Hart:                                      I think you can see that in the marketplace right now. It'd be better if we could get that going directly to China. When you look at what prices have done over the past four months, we have watched soybean prices sink by roughly 20 percent. And so you've seen a sizable cut in farm revenues due to that. Yeah. Farmers would be much better off with direct sales.

Henderson:                        Professor Goss, there's been an emphasis on bilateral deals rather than unilateral deals. This past week, Taiwan announced it's buying a bunch more Iowa soybeans, US soybeans rather, over the next two years. As an economist looking at bilateral versus unilateral, what are your thoughts?

Goss:                                     Oh, I'm multilateral. I think it serves us better. Uh, but the president approaches it in some ways, and I, I don't argue against what a lot of what he's done. But there's a winner and there's a loser. So if you engage them one on one, then if you fight that way and you're going to multilateral, then you don't have that same leverage. And I was arguing for TPP. I still think one of the best things for, uh, Iowa and this part of the country would be getting back in or getting into TPP, Transpacific Partnership. That's not going to happen. We may call it some other name and get into TPP. But, multilateral. Absolutely. And the energy that goes into, the uncertainty that goes into these, these one-on-ones. Europe, US. I just think the multilateral where we give a lot of certainty and understanding that you're not gonna necessarily be the big winner always. But we, we all win. Some wins and others win just maybe not as much.

Lynch:                                   Moving beyond the US-Mexico-Canadian agreement here, there's still a lot of concern with China and trade with China. And one of the concerns, uh, has to do with theft of intellectual property. And do trade deals protect us against the theft of intellectual property, or is that just part of the nature of a very competitive business culture that nations and industries are always going to be looking for that sort of advantage, Professor Goss?

Goss:                                     Well, it's, it's absolutely the case that it hasn't worked thus far. And I, I would say in terms of the China agreement, if they're wanting to reach it, intellectual property is going to be front and center on that. We've just seen recently that the embedding of, of hardware to steal industrial secrets, that's been a huge, huge deal. And copyright infringements, stealing copyrights and so on. That's got to be front and center and that will be done. But you know the odd thing when we do our surveys each month that most of the public out there support what the president's done. In our surveys, the bank CEOs, they support what he's done. In fact, they argue in some cases, let's get tougher. Let's get... And they believe in that tough approach to that very issue. The intellectual property.

Lynch:                                   More tariffs, higher tariffs?

Goss:                                     Higher tariffs. Continuing tariffs. And I'm sitting there thinking, wow, this is. They're not. They're not on the same page as most economists and that doesn't mean they're wrong and we're right.

Hart:                                      Well, I think you go back. When you look at the Ag community, they support President Trump and it does go back to this idea of intellectual property rights. They are definitely concerned about that as they look not only within agriculture but across the broader economy. And as you think about the new things in the USMCA, one of the things that was tightened up in there was intellectual property rights. And the rules by which we play with there. And I would argue that was not a, you know, just to set an agreement between the US, Canada and Mexico on that, but that was the send a signal to China. These are the type of rules we want to see when we talk about these rights.

Yepsen:                                I want to switch gears to the minimum wage. Professor Hart, Amazon raised it's base pay to is the minimum wage, $15 an hour. What do you think of that? What's your reaction to that? What's the effect going to be? And furthermore, should Iowa now raised its minimum wage? State?

Hart:                                      Well, in this case, when you're looking at the minimum wage, it's always a challenging thing because you're talking about, okay, bringing the wage up for some folks. But the idea is how do businesses adjust to taking on that higher cost for that higher wage? And what we have seen is the results are mixed when you look across the countryside. For example, I know in Seattle they raised it to $15 an hour and what we saw there was that, if you will, hours were cut back to sort of compensate for the increase in wage. Well was there a true gain to the labor because of that? And so I think that's the challenge as we look here and setting sort of a, you know, a higher minimum wage here as we go forward.

Yepsen:                                Professor Goss, how do you feel about that? You get this argument over the minimum wage, it happens every time. You need to raise the minimum wage because people can't live on that. But if you do that, then there's a fear that you're going to destroy job opportunities, particularly for younger people maybe getting their first job. And other people say those kids ought to be in school. How do you come down on this debate?

Goss:                                     Well, and back to the Bezos, the Amazon. That's a strategic decision. In other words, he's putting pressure on one of his reta,il competitors which would be Walmart and Target. They're at $11 and $12 an hour. But what's going to hurt is some companies that can't compete. The smaller companies that ultimately going to go away because of what Amazon's done. But in terms of what we need, if we're going to have a minimum wage, it needs to be broader. What you have, if you have a city minimum wage, a county minimum wage, those do not work. You force companies out of the minimum wage and into other areas. And Iowa had that problem, not, you know, in terms of having county minimum wages. Those don't, don't work.

Yepsen:                                Should Iowa raise the minimum wage or not?

Goss:                                     It doesn't really make much difference right now except for some companies. The actual equilibrium wage, what we call equilibrium wage is well above the minimum wage. You will not get employees at the minimum wage. In Nebraska, the minimum wage $10 an hour. The equilibrium wage is well above that. So it means, it does mean something for younger workers. So that's where it really hits. The younger workers and those who need to get their foot in the door. The real problem in terms of, of uh, getting workers in terms of, is the gap between what we pay for not working and working. There's too, far too much incentive to just not work. And we're seeing in the numbers that came out. You spoke earlier about the numbers that came out today. The labor participation rate is still at rates we haven't seen since the 1970s. But why is that the case? Because we incentivize workers to not work but instead remain out of the labor force. So that's a bigger problem.

Henderson:                        There's a debate in Iowa's governor's race about state tax credits. Um, Mr Goss, you've talked about this issue before on the program. So I'll ask Professor Hart to weigh in here. Can the state unilaterally disarm? Doesn't it have to offer some level of business tax credits?

Hart:                                      It has to offer some. It has to have some balance though. I mean it's one of these deals of you want to offer enough incentive to bring business in, but not so much that you're giving away the store when you do that. And I think that's always the challenge when you look at those tax credits. The idea is you're looking to bring in enough business investment to stimulate the economy, while at the same time too, not giving away those precious tax dollars, which every state is searching for here. And in a case of the economy where it's sitting right now with the growth that we've got going on right now, you could argue, do you need that sort of incentive or not? The idea is you're already looking at incredibly low unemployment. You're looking at fairly substantial growth when we're looking at at least, you know, the general economy. And so do you need that hot button tax credit in order to create that business investment?

Henderson:                        Mr Goss, during the spring time legislative session, there was a debate among Republicans about tax credits versus, you know, reducing the corporate income tax rate. Which is the best economic strategy?

Goss:                                     I think in general, it's better to have a lower corporate rate and not engage in this special treatment of certain businesses. And what happens of course, is politicians, I mean, you're in office today and you grant them hoping that you'll be in another office higher up later on when the burden of those tax cuts hit. So that's, and that's, you see that. And unfortunately, that's what happens. I mean, and we economists like to see, I think a lower tax, overall tax, transparency. The problem with a lot of these, lack of transparency. We don't know what's in some of those packages. And then when it hits, then you've got the problems. But also, the fundamentals of infrastructure. I mean we need, and Iowa needs, Nebraska needs, all the na...We need stronger infrastructure. And that's more fundamental to a business growth than these tax credits, I would argue.

Henderson:                        So, gas tax increase?

Goss:                                     I argued on this program, and your governor said I was a wacky guy from Nebraska. I think that's how he termed me. It might not have been quite that way. And he might be right there as well. But nonetheless, I find a lot of support for a user tax, like a gasoline tax, to support not just the roads but the ancillary activities that go along with the roads.

Lynch:                                   We're gonna try and get you guys in trouble with the political debate here. And another issue that's been in the political debates this fall is workforce issues. And uh, we talked about the low unemployment rate and how that pressure's wages and everything. And I guess the question is, is there a labor shortage, Professor Goss, or is there a shortage of cheap labor?

Goss:                                     I think there's a shortage of both. But primarily though the shortage that we track in our surveys is more of skilled workers. The trained skill workers. In many cases it's a worker who when they say skilled, they mean, or trained, they mean someone who shows up in the morning at 8:00 when the job begins. So the level of that we're not getting and what's happening in our high schools and our community colleges and our universities, we're not doing a very good job of producing men and women that can go out there and take these jobs.

Yepsen:                                Professor Hart, what do you think?

Hart:                                      No, I definitely agree. When I talk to farmers through the agricultural sector, they're searching for skilled labor. And when it comes down to it, the idea is that, you know, knowing something about agriculture, as you say, showing up at 8:00 in the morning or even before that, working that job.

Yepsen:                                Professor Hart, why don't you, why don't these people pay more? I mean, if businesses are looking for cheap labor, yeah, people aren't going to want to do these awful jobs for not very much money. So why doesn't business pay more? I thought the marketplace was a wonderful thing.

Hart:                                      The marketplace is a wonderful thing. But it's also a challenge in that the marketplace has to balance what are consumers willing to pay for the goods that we offer them versus the cost to produce them. And so labor is always caught in that squeeze of getting here going, how do we produce the goods at a price that that consumer's willing to pay?

Goss:                                     And they are paying more. And it's not necessarily showing up today. The number again today, the number came out two point eight percent growth year over year. Well, what about, bonuses are not included in there. We're talking about healthcare costs, not included in there. We're talking about lots of other things that aren't in there. So the workers are getting maybe not wage increases, but they're getting lots of other benefits that

Hart:                                      You hear 'em talk a lot more about benefits. You also see,

Goss:                                     Yeah, benefits.

Hart:                                      I would say, we've seen a change in the way the labor force approaches employment. I would say, you know, my generation and older, we looked at, you got that job and that was the career you were looking to build. Now when you look at our younger folks, when they get out into the labor force, you know, I would say my average student five years out is probably on their third employment opportunity. Where they're bouncing more and more through the job force.

Yepsen:                                James.

Lynch:                                   As people look for workers who will show up. And especially we've seen this in agriculture. A lot of them are turning towards immigrant labor. Many of them undocumented workers. Um, what's an employer to do? I mean, if you need somebody to milk your cows and somebody shows up and... Do you just hire them?

Hart:                                      Well I think you're seeing a mix out there, you know. And talking with, um, some dairy folks throughout the state, the idea is that we have some that have, if you will, very stable labor force. You know, the idea is that they've had their employees for 10, 15, 20 years. And they've, they've worked them into the business, if you will. Where others, it's yeah, a constant churn of bringing folks in, getting them trained. And so we're seeing all sorts of approaches to how do you handle this labor situation. The idea is if I want to keep that labor force, yeah, I'm having to invest more in 'em. I have to invest more, not just salary, but like I say, you know, the benefits package. Looking at health insurance. What are the possibilities, if you will, for the employee to become more of a employee owner as we go forward here? These are the types of side benefits that you're looking to do in order to stabilize that labor force.

Yepsen:                                I realize you're economists, but let me ask you a psychological question, I guess. Are Iowans being a little bit hypocritical here? We vote. We object to illegal immigration. It shows up in all the polls. Donald Trump carries the state by 10 points. And yet the little secret is off on the side, those same, a lot of those same businesses in rural Iowa, in fact need undocumented workers. Professor Goss, a little hypocrisy there?

Goss:                                     We don't need just undocumented, we need documented workers, I mean, in other words, I think we as a nation, if you look at the real out, I was with the Congressional Budget Office for awhile. And if you're looking out in future years, labor is one of the chief constraints. We have to be welcoming to Vietnamese, to others that come into our country legally and provide. And I, it's a real concern. I hear the Trump Administration getting tougher on not just illegal, but legal immigration. And Iowa and Nebraska, we have to be more welcoming to these women and men that are coming into our nation that are going to be very prod, I consider it a real issue going forward.

Yepsen:                                Kay, quickly.

Henderson:                        Fifteen seconds left. Professor Goss, what are bankers telling you about turning down loans from farmers?

Goss:                                     They're turning down more of those loans right now. Of course, farm income is down for 2018 from '17 and it's looking like it's getting tougher out there, not better. And this trade deal will be a positive for it. Sorry.

Yepsen:                                I have to cut this off here. Thank you both for being here. We'll have you back.

Goss:                                     Thank you.

Hart:                                      Thank you.

Yepsen:                                And thank you for joining us. We'll be back Thursday night with a special live debate for Iowa's Third Congressional District. Congressman David Young and challenger Cindy Axne join us live at IPTV studios Thursday, October 11th at 7:00 PM. The one-hour Iowa Press debate will rebroadcast Friday night at 7:30 and Sunday morning at 11:30 on IPTV's main channel. We hope you'll join us for a spirited conversation ahead of the 2018 midterm elections. For all of us here at Iowa Public Television, I'm David Yepsen, and thanks for joining us today.

Voiceover:                          Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are, there is an Iowa banker who is ready to help you get where you want to go. Iowa bankers, allowing you to discover the genuine difference of Iowa banks.

 

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