Tariffs leading to ‘point of no return’

Writer(s): 
 The latest round in the trade war between the United States and China has resulted in higher tariffs Americans will pay for goods from China. (Photo: Getty Images)

COLUMBUS, Ohio—Even if the United States eventually reaches a trade agreement with China, the damage done from the ongoing trade war could take years to undo, according to an agricultural economist with The Ohio State University.

It took a while to build a Chinese market for U.S. products, including American soybeans, and it will likely take considerable time to rebuild that market, said Ian Sheldon, a professor with Ohio State’s College of Food, Agricultural, and Environmental Sciences (CFAES).

“Trade negotiations don’t get resolved in months; they take years. It’s not simple. These are the two largest economies in the world, essentially mud wrestling. I think we’ve reached the point of no return,” said Sheldon, who serves as the Andersons Endowed Chair in Agricultural Marketing, Trade, and Policy at CFAES.

China was the second-largest market for U.S. agricultural exports in 2017, and the country was Ohio’s most important soybean export market. But exports of American soybeans to China have crashed.

Since Sept. 1, 2018, American soybean exports to China have declined by 80% of the three-year annual average, said Ben Brown, manager of the Farm Management Program at CFAES.

“Soybeans have had an amazing run. But now we’re sending hardly any soybeans to China compared to what we used to,” Brown said.

The Chinese government announced on May 13 that it would increase tariffs to up to 25% on $60 billion in American goods sold in China. That was in retaliation for the U.S. administration’s decision, days earlier, to raise existing tariffs on $200 billion worth of Chinese products sold in the United States from 10% to 25%.

The U.S. tariffs mean Americans will have to pay more for products that come from China. The revenue from these tariffs, which are taxes, goes to the U.S. federal government. Similarly, the newly raised tariffs the Chinese government is scheduled to put in place June 1 mean its country’s residents will pay more for American products, a move intended to discourage them from buying those items.

Although the U.S. administration began ramping up tariffs in January 2018 on Chinese goods sold in the United States, American consumers have not felt much effect of that yet, said Sheldon who, along with Brown, works for the CFAES Department of Agricultural, Environmental, and Development Economics.

But this most recent round of tariff increases will hurt all U.S. consumers because the tariffs on Chinese goods sold in the United States have more than doubled, he said. Also, on May 13, the U.S. administration announced that tariffs on an additional $325 billion worth of imports are coming, this time on a much longer list of goods from China including electronics, pesticides, and purses.

“Farmers have borne the brunt of this trade war so far, but this recent round is going to hurt all American consumers,” Sheldon said.

With Americans paying more for Chinese goods, the thriving U.S. economy likely will see a dent in its growth, Sheldon said. And farmers can expect to see continued declines in the national average farm income, he said.

Part of the loss in Chinese markets for American soybeans has been made up by an increase in demand from the European Union, but there’s still a void, Brown said.

The vast majority of American soybeans exported abroad is ground into meal and fed to livestock, including pigs. Pigs in China and other parts of Asia have been suffering from African swine fever, a fatal disease among pigs, which has cut China’s demand for soybeans and increased the demand for pork from outside of China, Brown said.

Besides imposing a tariff on soybeans, the Chinese government also has increased tariffs on American corn and pork purchased in China.

The U.S. administration has attempted to make it up to farmers. Government payments earlier this year helped compensate growers for a dip in commodities prices as a result of the tariffs. Another round of payments is expected.  

That assistance, plus last year’s high yields on soybeans and corn, have helped insulate farmers a bit from the dip in prices on both crops, according to a study Brown and Sheldon released last fall.

But Brown said it would be best if farmers make planting decisions based on the market, not on the promise of federal payments for their crop.

“Do not try to guess what the aid package is going to entail. I’m not sure the administration even knows yet,” Brown said.

Despite the trade war, Ohio farmers overall said they intended to plant only 1% fewer soybean acres than they did in 2018, according to a survey from the U.S. Department of Agriculture taken in March.

Growers of corn and soybeans need to cut back on production to bring down the supply and increase the price on both crops so they can at least break even, Brown said.

“As a country, we should be planting fewer corn and soybean acres,” he said.

Ideally, most growers sold off last year’s crop of soybeans before soybean prices took a serious dive in April, Brown said. The future price per bushel dropped from $9.29 on April 1 to $8.67 by the end of the month, Brown said.

As for the 2019 crop, the outlook on soybean prices is grim, Brown said:

  • An abundance of soybeans on the world market is keeping prices for the crop low. A reduction in U.S. soybean supplies would help drive up the price, but for that to happen, fewer acres of soybeans should be planted or there needs to be a reduction in soybean yield from drought, hail, or flood.
  • The risk of African swine fever expansion in Asia or even outside of Asia likely means continued declines in world demand for soybean meal.
  • Large quantities of soybeans harvested in prior years are being kept in on-farm storage facilities. If the price for soybeans goes up a bit and a lot of those supplies get sold off, the increase of those soybeans into the market will, in turn, bring down soybean prices.

 

For more information contact: 
Alayna DeMartini
614-292-9833
Source(s): 

Ben Brown
brown.6888@osu.edu
614-688-8686

Ian Sheldon
sheldon.1@osu.edu
614-292-2194