As promised by Agriculture Secretary Sonny Perdue, USDA released details on how aid payments were calculated on Thursday.
The details, which were released by the office of USDA Chief Economist Robert Johansson, explain how payment rates for the Market Facilitation Program (MFP) were determined. USDA used an approach often used in adjudicating trade dispute cases. They developed an estimate of gross trade damages to set commodity payment rates and purchase levels, according to the methodology report released on Thursday. In the report, USDA cited the U.S. Country of Origin labeling dispute case in the World Trade Organization (WTO) as an example of using this method.
Step 1: Determine trade value without the retaliatory tariff from a particular country (Exports1).
“We use actual trade in 2017 as a proxy for the expected value of trade without the retaliatory tariff (or Exports1) using import data from Canada, China, the E.U., Mexico, and Turkey,” the report said.
Step 2: Determine trade value with the retaliatory tariff from a particular country (Exports2).
This step was a little bit less cut and dry. Usually when a WTO dispute is filed, time lapses allowing the observation of lower trade following a disputed measure, the report explained. However, to keep the payments for this program timely, USDA did not allow for multi-year data collection. Therefore, they relied on a global trade model to estimate what the value of trade is expected to be after the imposition of the tariffs and that was used for Exports2.
“The model estimates bilateral trade flows for each of the commodities with assessed tariffs,” the report explained. “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. This method 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. Availability of substitute suppliers on the one hand (for the retaliating importer) and substitute demanders on the other hand (for the U.S. exporter) are also reflected in this approach.”
For more information on how the model works, read Annex 1 of the report here.
Step 3: Take the difference of the two as the “trade damage” due to the tariff (Delta). (Delta = Exports1 – Exports2.)
Subtracting Exports 2 from Exports 1, provides a measure of gross trade damage. However, USDA is quick to note that the gross trade damage only reflects direct export losses due to the retaliatory tariff imposed on the U.S. commodity. It does not include indirect or secondary effects from the tariff. For example, cross-commodity effects are not reflected in the gross trade damage estimate.
Final Step. Once they had the gross trade damage estimate (Delta) it was time to determine payment rates for the Market Facilitation Program (MFP). USDA divided the estimated trade damage level for a specific crop by 2017 crop year production to calculate a per unit rate.
“We used 2017 trade and production data because 2018 data are not final and are months away from being complete,” the report explained. “Moreover, the 2018 trade data will show a biased impact because of the tariffs. Because the goal of the MFP is to provide assistance to producers of commodities that have been significantly impacted by the retaliatory tariffs, the MFP per unit rate is applied to a producer’s actual 2018 production levels to generate a producer’s total payment amount.”
“We have pledged to be transparent about this process and how our economists arrived at the numbers they did,” Perdue said in a statement. “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. It was a large and important task, and I thank Chief Economist Robert Johansson and his staff for their hard work.”