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Economy

American Agriculture Struggles with the Trade War

May 31 , 2019

The U.S.-China trade war is heating up yet again, with new rounds of tariffs being proposed by the Trump administration. This is bad news for American farmers and the U.S. agriculture industry as a whole, which has already taken a serious beating since the onset of the struggle last year. With new negotiations breaking down and little progress being made, American agriculture will have to brace for more trying times ahead. Crop prices have already taken a significant hit, along with much of the rest of the industry, but U.S. farmers will also have to worry about losing valuable Chinese markets over the long term as the conflict drags on. 

The ongoing trade war began in 2018 with the U.S. unilaterally placing tariffs on a wide range of foreign imports. The Trump administration quickly started targeting China, using Section 301 to apply tariffs to large numbers of products on the grounds of ‘unfair trade practices.’ China retaliated in kind, placing tariffs on a series of American exports. In particular, China focused on the U.S. agricultural sector, taxing pork, soybeans, fruit, nuts, and other products. These tariffs were aimed at an important target – U.S. agricultural exports to China in 2017 were valued at almost $20 billion, and agriculture is one of the only sectors where the U.S. maintains a consistent trade surplus. 

Prior to the trade war, China was the destination for more than half of the soybeans exported from the United States. Soy is the U.S.’s second largest cash crop, trailing closely behind corn. Even with concessions as part of previous negotiations, in 2018 China purchased only a mere fraction of what it did in previous years. Chinese imports fell to zero that November. As a result, soybean prices for American farmers have cratered and are likely to drop by over 10% from 2018 to this year. Last year already saw the beginning of a new wave of farm failures and bankruptcies. As more farms struggle, their ability to invest in equipment and seed declines, which has already led to losses in the wider agricultural industry. 

Some farmers have also raised concerns that lost markets are not easy to recover once customers have found new suppliers. In an earlier era, Austria-Hungary enacted an embargo on Serbian pork in order to dissuade it from developing independent economic and foreign policy. But Serbia ended up finding new economic partners in France, Russia, and Bulgaria, ultimately reducing its dependence on Austria-Hungary. Today’s Chinese consumers are already finding substitutes for U.S. products, both from others exporters like Brazil and from domestic producers spurred by the Chinese government. This means that even a clean resolution to the U.S.-China trade dispute – which looks rather unlikely – might not bring U.S. crop prices back to previous levels. The potential long-term loss of the U.S.’s single largest export market can only spell disaster for American farmers. 

Despite the pain inflicted on both sides of the Pacific, neither government shows any sign of backing down anytime soon. The Trump administration is threatening to raise its existing 10% tariffs on many Chinese products to 25%. China has followed suit by hiking its own tariffs. Trade talks earlier in May collapsed, and no new talks appear to be scheduled. For its part, the Trump administration has pledged $16 billion in new aid to farmers on top of $12 billion dispersed last year. The administration will do what it can to protect U.S. markets and minimize the political damage of continuing to prosecute the trade war. But most farmers are clearly worried about the medium-to-long term future of the industry as a result of that war’s continuation, with almost three quarters of surveyed farmers saying now is a “bad time” to make major investments

As we have already discussed, the prospects for any near-term resolution of the trade war are bleak. This, despite the fact that the trade war is having a major negative impact on a significant part of Trump’s political base. Farmers in Midwestern states like Iowa, Ohio, Michigan, and Wisconsin played an important role in propelling Trump to the White House 2016. Today, many of those farmers are hurting as a result of the trade war, flooding, and other environmental challenges. This would seem to suggest that the politically rational move would be to seek an end to the trade war in order to shore up support in a crucial segment of Trump’s base. However, I expect we are unlikely to see much political rationality on display in the near future. 

The global economic fallout of the U.S.-China trade war is already significant and shows no signs of ending. American farmers and the wider agricultural industry will have to make do as best they can with the farm aid on offer as low crop prices stabilize or even continue to decline in the near future. Continuing to prosecute the trade war is a dangerous gamble for the administration. Tariffs may have temporarily benefited a small segment of voters in the Rust Belt, but they are causing serious pain to an equally important constituency spread throughout the United States. Even the much-vaunted U.S. steel industry is facing difficulties due to overproduction in expectation of a larger increase in demand than that which materialized. But the sting of admitting defeat in an already year-long struggle appears like it will outweigh the numerous pressures to negotiate a reasonable solution. Analysts may take some comfort in the constancy and predictability of self-destructive and irrational decision-making from this administration.

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